A positive end to the year

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December 8th, 2015

2015 looks like it might end on a positive note. As the year comes to a close, the macroeconomic situation seems to be stronger. Among the emerging economies all eyes are still focused on the bloc's most systemic country, namely China. The figures provided by indicators for the Asian giant have been mixed but analysts and investors believe the situation is more stable than in previous months, a diagnosis that is also due to the country's central bank continuing to take accommodative monetary measures. But China is not the only country to ease fears regarding the emerging economies with Mexico and Chile also posting more acceleration than expected in Q3, demonstrating their capacity to grow in spite of an international environment of contained commodity prices. Another important emerging economy, India, also exceeded the forecasts, growing by a dynamic 7.4% year-on-year in Q3. However, there are certainly contrasting cases to these success stories and here we can mention Brazil, whose recession has worsened, and Turkey, under pressure from the combination of a slump in activity and greater geopolitical risks. Nevertheless, the emerging bloc as a whole has managed to dissipate the worst fears arising in the complicated summer months.

Among the advanced economies, the US is growing strongly while Japan has entered a technical recession. The world's first and fourth economies are once again at opposite ends of the spectrum. While the US is growing at a comfortable rate (2.2% year-on-year in Q3) thanks to robust domestic demand, the Japanese economy has entered its fifth recession since 2008. This is a salutary reminder that Japan's growth problem is unlikely to be resolved solely via policies to stimulate demand and that the time has come to decisively tackle what is known as the third pillar of Abenomics. This pillar consists of reforms, repeatedly announced but not implemented, which need to improve agricultural productivity, ease the tax burden of companies and improve women's participation in the labour market. For the time being, however, a new round of fiscal and monetary stimuli are expected, whose effectiveness is uncertain given the recent track record of such measures. While the Bank of Japan is preparing to extend its bond purchase programme, in December the Federal Reserve will raise the federal funds rate for the first time since 2004, a key step in the full normalisation of its monetary policy.

The euro area is accelerating but the ECB is preparing further stimuli. The euro area grew by 1.6% year-on-year in Q3 thanks to the improvement shown by its main economies. Although the rate of growth is relatively moderate (especially compared to exits from previous recessions yet not so much when we consider that growth is already at a level that is even slightly higher than the potential growth figure), it is also true that growth is sustained and looks like continuing as the full impactof several support factors has yet to be felt, such as the euro's depreciation and the expansion of the ECB's quantitative easing. In fact, one of the surprises over the last few months, taking into account the context of recovery, is precisely in the monetary area with the ECB announcing possible additional expansionary measures, for which further details will be announced in December. Given that the recovery is firmly on track (as confirmed by the Q4 figures which point to an acceleration in activity), these measures are unlikely to be very extensive and will probably be aimed more at reaffirming the ECB's commitment to fulfilling its mandate. For the time being, and reflecting these expectations of greater monetary expansion, yields on European bonds fell and the euro depreciated.

Spain continues to grow at the end of the year. Activity figures for the beginning of Q4 suggest that the rate of growth will remain at similar levels to Q3; i.e. around 0.8% quarter-on-quarter. The underlying trends supporting the Spanish economy's momentum have not changed substantially from those we have seen over the last few quarters. Domestic demand is still the main engine for activity, fuelled by an increase in household purchasing power (in turn boosted by the good rate of job creation and the drop in energy prices). The ECB's monetary expansion and healthier banking sector are also helping credit to get back to normal. One of the sectors where the effects of improved financial conditions can be observed is real estate, with demand for housing recording a significant recovery. Regarding the foreign sector, the notable rise in imports resulting from higher consumption driven by domestic demand is preventing this from making a positive contribution to growth. Nevertheless, this should not detract from the good performance of real exports whose rate of growth in Q3 more than doubled the average rate observed over the last few decades. A remarkable result, especially as it has occurred during a slight slump in world trade.