2014 starts off on the right foot

The new year has started with an air of renewed hope. The belief that economic activity will build up steam at a global level is based on three broad factors. Firstly, the improvement in macroeconomic conditions, solidly in the USA and Japan, incipient in the euro area and tentative in the emerging countries. Secondly, this recovery in confidence is also supported by the reduction in the many different tail risks posing a serious threat to the world's financial stability in recent times (the euro area crisis, the start of tapering, fiscal dispute in the USA, capital outflows from emerging economies, etc.). Thirdly, but by no means less importantly, it is also based on the ultra-lax monetary policies of the block of developed countries. Albeit with some provisos, we expect these favourable conditions to continue over the coming year.

The solidity of the US recovery provides arguments for the Fed to begin tapering. It will start to reduce its rate of bond purchases in January albeit very gradually at a rate of 10 billion dollars per month (so far the monthly injections of liquidity have totalled 85 billion dollars). Financial markets have received the Fed's announcement constructively, in contrast to the atmosphere of high uncertainty and volatility that reigned for months regarding when and how tapering would be started. Most assets reacted positively with gains in the stock markets and highly contained increases in yields on US government bonds. The yield on US ten-year bonds has remained close to 3% while the two-year reference stands at 0.4%. Along the same lines, the implied volatility indices of the S&P 500 and of the treasuries fell (slightly) after the Fed's announcement.

However, we should remain cautious given the presence of some weak links. The start of the Fed's exit strategy is due to a benign reason: the US economy's growth looks solid and self-sustaining, it is not due to visible inflationary pressures or any suspicion of bubbles having been formed in financial assets although there are some signs of overheating in the US bond markets which would be advisable to cool down. In this respect, tapering is welcome. However, and as monetary normalisation progresses, we cannot rule out possible upsets in investor expectations and sentiment that might bring about sharp upsurges in interest rates, as happened in the summer. The list of candidates for those countries that could be most severely affected is headed by some emerging economies with large external imbalances and great dependence on foreign capital. In India and Brazil, for example, inflationary tensions refuse to diminish, leaving monetary policy little leeway to stimulate the economy. In China, however, business indicators are still robust, within a model of growth in which consumption is gradually taking over as the driving force.

In the euro area, Germany leads the economic revival, with France lagging behind. The latest confidence figures continue to point to recovery and the region's major risks are gradually fading. In the institutional sphere, European authorities continue to make progress towards the banking union, which is helping to reduce financial fragmentation between the periphery and the core, a crucial ingredient for credit to flow more freely. The periphery countries are making good headway with their fiscal consolidation and correction of macroeconomic imbalances and international investors are gradually starting to see them as an attractive destination in terms of returns and risk. All this within a context of expansionary monetary policy that is helping to maintain an accommodative financial environment.

The Spanish economy took its leave of 2013 with data that invite optimism. High frequency indicators for 2013 Q4 confirm the growth starting in the previous quarter and, in fact, point to a certain acceleration in economic activity's rate of growth in the final part of the year. Our forecast is along these lines: we expect GDP to grow by 0.2% quarter- on-quarter, 0.1 percentage points above the figure for the previous quarter. This forecast could even be bettered due to the dynamism shown by domestic demand over the last few months. The significant improvement in the growth forecasts provided by most international investors in the last few months and the falling risk premium are good examples of how, little by little, the reforms undertaken over the last few years are managing to revive investor appetite. This is therefore an encouraging scenario. 2014 promises to be a crucial year to underpin the pillars required to support Spain's future economic growth.