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Monthly Report - Executive Summary

Activity is picking up worldwide but uncertainty is still high. In the January update of its forecasts, the International Monetary Fund recorded the stage at which the world economy finds itself: after growing by 3.3% in 2014, the Fund predicts two years of acceleration (3.5% in 2015 and 3.7% in 2016). Nonetheless, these figures are lower than the ones given in autumn and the downside risks are greater. Most economic analysts assume a similar scenario and the figures at the end of 2014 and beginning of 2015 seem to be confirming this scenario. In the first month of the year, stock markets were highly volatile and geopolitical uncertainty (Ukraine) and electoral uncertainty (Greece) got worse. But in the same month the leading economies closed 2014 reasonably on track for expansion: in Q4 the US grew by 2.5% year-on-year (barely lower than the figure in Q3) while China advanced over the same period by 7.3%, the same rate as the previous quarter.

Given this mixed bag, central banks have played a central part. Although the role played by central banks, with their ultra-expansionary monetary policies, has been significant since the 2008-2009 recession, a new phase of monetary activism began in the last few months of 2014. In November the Bank of Japan announced an ambitious bond purchase programme while in January it was the turn of the European Central Bank (ECB), which has enlarged its asset purchase programme. Specifically, monthly debt purchases will total 60 billion euros and will be made up of sovereign and also private debt. This is an ambitious measure, as can be seen both in its size (1.1 trillion euros) and its potentially long duration (in principle until September 2016 although it could be extended if necessary). In the case of the ECB, in addition to the relatively modest outcome of the extraordinary liquidity injections of previous months, the drop in inflation expectations has been decisive in its decision to make a move. Although the situation is not deflationary, at least in the strict sense of the term, the ECB wants to prevent such a risk from developing. But these are not the only central banks to take action. The Federal Reserve has spent several months adapting its message in the direction of confirming an interest rate hike in the near future, although also stating that it will have the necessary patience to wait until the right moment. Given this situation, and just a few days before the (already expected) announcement by the ECB, the Swiss central bank decided to no longer peg the Swiss franc to the euro, sharply pushing up the value of the Swiss currency. Emerging central banks have also taken steps, each one attempting to handle the consequences of the monetary policies implemented by the large central banks and their own domestic circumstances: Russia cut its reference rate, abandoning previous attempts to contain the rouble's depreciation, Brazil tightened up its monetary policy in the face of inflationary pressure while India lowered its interest rates, taking advantage of the good performance by prices.

Europe is in the spotlight. For several months now the euro area's combination of a slow recovery and low inflation has stood out as a global risk factor. The ECB's strong monetary expansion should help to limit concerns thanks to its positive effects by reducing the risk premia of periphery countries and depreciating the euro. But in addition to its macroeconomic effects, the confirmation of QE has also occurred at a beneficial time as the political change in Greece had increased uncertainty, which the ECB has now helped to diminish. Although our diagnosis is that Greece's political about-turn does not have the contagion potential of 2011 or 2012, given the smaller presence of Greek debt on the balance sheets of private investors and the institutional progress made by the EMU in the last few years (in particular, European banking union), the confidence inspired by the ECB is certainly advantageous.

Spain registers its sixth consecutive quarter of expansion. The Spanish economy grew by 0.7% quarter-on-quarter in Q4, 0.1 pps more than expected, and has now enjoyed one and a half years of positive growth. This performance is being supported by the recovery in domestic demand, resulting from good consumption and investment figures (probably including, and this is new, growth in investment in construction). The forecasts being given suggest that the recovery will improve in 2015 thanks to a favourable combination of temporary factors: the foreign sector, which had lagged somewhat in 2014, will benefit from the euro's depreciation caused by the ECB's monetary expansion and the sharp fall in oil prices will particularly benefit the Spanish economy as it has a relatively high dependence on energy. We can also expect one of the factors of concern, namely negative inflation rate, to get back to normal as oil stops dragging down inflation as from the second half of 2015.