Recovery, albeit with some reservations

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March 11th, 2014

Consolidating the global economic recovery is a priority. In the last few quarters, the global economy has shown signs of reviving, particularly thanks to the improvement observed in the advanced countries. However, this recovery is not without risk. Firstly, the Fed must take great care in calculating and communicating the speed at which it withdraws the accommodative policies implemented over the last few years. Secondly, there is still the risk of financial tension in the emerging countries. And lastly, in the euro area, expectations of low inflation have once again highlighted the lack of consensus regarding the economic policy that should be followed by European institutions.

The underlying trend of recovery in the United States continues. In spite of the downward revision for growth in 2013 Q4 (from 2.7% to 2.5% year-on-year) and the effect of adverse weather conditions on the latest indicators, we believe the US economy will keep up a good rate of growth in 2014. However, the speed this growth might reach depends on two key variables: job creation and company investment. The political agreement to suspend the debt ceiling until March 2015 will also allow more moderate fiscal adjustment in 2014. But the month of February has undoubtedly been affected by the Federal Reserve's change in Chair. The incoming Fed Chairwoman, Janet Yellen, has suggested she will continue the previous mandate, a message that has been welcomed by investors. However, in order to avoid another upswing in volatility in the markets, it is very important for the Fed's communication policies to be clear and credible.

International markets are going through a moderately turbulent period, originating in the emerging countries. The good news is that there has been no widespread contagion or escalation in volatility. The hardest hit economies have been those with the biggest external imbalances and considerable dependence on foreign capital. Greater discrimination by investors has penalised to a lesser extent those countries more committed to implementing reforms. This would be the case of India, where the Central Bank's decisive action has managed to stabilise inflationary pressures and the current account deficit. The bad news is that the environment is still fragile and there is a notable risk of increased instability.

The euro area's economic recovery has been confirmed. As expected, growth picked up in 2013 Q4 (0.3% quarter-on-quarter compared with 0.1% in Q3). Moreover, the upward tone presented by the periphery economies and the good figures provided by economic indicators for 2014 Q1 allow for optimism. The European Commission has therefore slightly raised its growth forecasts for 2014 and 2015 to 1.2% and the 1.8%, respectively. Of note is the vital role domestic demand is likely to play. However, to guarantee a good rate of growth, it is still essential to continue implementing reforms, particularly in the periphery countries, and to ensure the correct implementation of the banking union.

The rate of inflation in the euro area remains low (0.8% in February), putting pressure on the ECB. The downward slide of the last few months is largely due to pressure from energy prices and from industrial goods and services. Prolonged low inflation hinders both the deleveraging being carried out by the periphery countries as well as their capacity to continue improving their competitiveness. As domestic demand picks up, the downward slide in the rate of inflation should come to an end. However, it is likely to remain at a low level for a relatively long period of time, which should make the ECB react.

Consumption and investment bolster Spain's economic recovery. In 2013 Q4, GDP grew by 0.2% quarter-on-quarter, 0.1 percentage points less than the figure initially announced. In spite of this revision, the trend in the different GDP components is encouraging. Household consumption and investment in capital goods saw notable growth and the improvement in the labour market and the granting of new credit should help this dynamism not to diminish throughout the year. Exports once again contributed positively to growth in Q4 and thereby ended a historical year: in 2013 the current account balance returned to positive terrain, something not seen since 1997. All this is helping the risk premium to remain comfortably below 200 b.p., also boosted by the improved rating given to Spain by Moody's and by continuing to implement reforms. Consequently, during the central government's debate of the nation, the President of the government announced further measures to encourage job creation and new fiscal reforms, such as those earning less than 12,000 euros being exempt from paying Income Tax.