Why the Current State of the Economy Matters

The analyses on the state of the economy, both worldwide and by regions, which are based on the study of immediate and fundamental causes in a given moment, are useful for making rational decisions in the matter of investing the assets at the disposal of a family or a person. Will it be in corporation shares? Of which region or country? Fixed-income securities? In emerging or traditional markets? Should one veer towards realty investments? For how long? Since the landscape in this subject is very dynamic, and therefore generates important changes in the short term, it is necessary for the interested parties to maintain constant and current information.

Currently, the main indicators are Europe and the United States, the details of which we will see later on, and who are recuperating from the 2007 to 2009 crisis. They will have moderate growth, while China and India will reduce their high rates of growth, and other emerging economies, like Brazil, Mexico and Colombia will have to make an effort so that the depreciation of their currency and the decline in dividends that this causes to transnational investors does not discourage local and international investors. Basic supplies and commodities will have lower prices, oil will maintain similar prices, and the cost of money will be higher in emerging markets.

Unless there is a last minute revision in the estimates for the growth of the US economy for the year 2014, which should go down from 2.8% to 2.5%, due to the new numbers that show that the last trimester of 2013 was not as good as had been estimated, there is a consensus in the sense that there will be accelerated growth this year. Fundamentally, there are many indexes that point to this: The average familiar assets have improved (almost to pre-crisis levels), which will induce bigger consumption; the real estate market has improved; the federal and state budgets are improving because tax collection is increasing; there is no expectation of any confrontation regarding the public debt ceiling because this is a congressional election year; The Fed has declared that it will maintain the federal funds rate to almost zero levels until the unemployment rate falls to under 6.5%; and the reduction of the so called “quantitative easing,” which consisted in the purchase of Treasury Bonds by the Fed to help the recuperation, is diminished at a rhythm of $10 billion a month without any deleterious effect on the economy. This proves that it is at a level of solidity or maturity that makes it viable without this help. Also, high corporate earnings and consumption growth due to the improvement in family finances will improve the investment levels on the part of private enterprise.

On its part, in Europe the sensation that maybe the worst of the crisis is behind takes root. The awareness that an in depth revision of the European financial (banking) system is present. Many of the great European banks possess enormous amounts of government bonds emitted by countries whose payment ability remains in doubt. If those countries don’t pay, the banks would fail. This risk has paralyzed the lending action of those banks. Without a flowing system of loans favoring economic agents, the economy doesn’t grow, tax revenue decreases and countries don’t comply with bond payments. This vicious circle will only stop if the banking industry is stabilized. With this objective, the first step has been taken to empower the Central European Bank with the authority to supervise the biggest 130 banks in the Eurozone, and it will begin by putting them under a stress test to learn their ability to survive a crisis. The next step is to coordinate a governmental financial assistance policy with the requirement of acquiring additional owned capital. What is interesting about this situation is that now there is the belief that the foundation of the problem has been detected and adequate measures will be taken to give the European financial system the stability required by depositors. On this basis, it is calculated that in the Eurozone (18 countries) growth there will be a 1.2% this year and a 1.8% in 2015. And it is calculated that in the more ample 28 country European Union growth will be somewhat better (1.5% this year and 2% in 2015). Spain leaves behind two years of recession and 26% unemployment rate and even beleaguered Greece gets predictions of coming out of the negative numbers and will have a slight growth (0.6%) this year and that it will be able to lower its unemployment rate below 26%.

This month, the stock exchanges around the globe show a lowering tendency in the sovereign bonds yields, which means that the emitting governments are obtaining better prices for their fixed yield securities, news that coincide with the expected improvement on the economic growth and solvency of countries. On the same tack, answering to the confidence in the economic growth of countries reflected in corporate earnings reports, the month of February has seen an improvement in stocks almost all over the world: In the United States around 6%; in Europe between 5% and 8%; in Asia an average of 5%; and in Brazil 2%.

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