A turbulent start to the year in the financial markets

Share prices and oil begin the year with sharp drops. Risky assets have started 2016 the same way as they ended 2015: highly volatile and with considerable losses in share prices, especially in advanced and emerging stock markets and in the oil market. The seriousness of this episode, which represents one of the worst starts to the year in several years, surprised investors and analysts. Although the trigger for this adjustment in prices wasthe bad performance by China's stock market, the real underlying concern is the genuine state of the largest emerging economy and, in general, uncertainty regarding the outlook for world growth. Are such fears well-grounded? Or is it one of those situations to which we can apply Paul Samuelson's statement that the stock market predicts nine out of every five recessions? Withthe macroeconomic figures in our hands, the hypothesis of financial over reaction seems plausible. Regarding the main suspect, China, GDP figures for Q4 (6.8%year-on-year, similar to the 6.9% achieved in Q3) point to the process of rebalancing growth (moving from a focus on investment to an increasingly larger role played by consumption) is progressing steadily and in line with intentions (the government set an annual target of 7%for 2015, just 0.1 pps more that the actual figure recorded). If, moreover, we also add the fact that China still has ample leeway to act via economic policy, then this should moderate any doubts, something that cannot be said of other emerging economies (in particular Turkey, Russia, Brazil and South Africa) whose macroeconomic imbalances do warrant the concern they cause among investors.

Growth in the US and the euro area is maintaining a reasonable cruising speed, suggesting that thesharp drop in their respective stock markets may bedue to a rather negative interpretation of the current macroeconomic situation. Although growth slowed down at the end of year, in 2015 the US economy grew by 2.4%, a figure somewhat higher than its potential growth and which will be repeated in 2016 (the growth forecast is 2.3%). Given this situation, the Federal Reserve (Fed), as would be expected, kept its benchmark rate intact and confirmed its strategy of a monetary policy with gradual hikes. Nonetheless we should note that the Fed used a cautious tone in its communication, underlining the need to continue monitoring developments in the financial situation. In the euro area the most recent data confirm that the expansion, although not extraordinary, has consolidated over the last few months and maintained its rate at the end of 2015. Although some economic sentiment indicators have pointed to increased uncertainty in the economic environment and have fallen to some extent at the beginning of 2016, their current levels suggest the euro area's economy has started the year in an expansionary phase. The ECB did not alter its monetary policy in January but, unlike its US peer, appeared to be more sensitive to the current economic and financial uncertainty and opened the door to relaxing its monetary policy even further in March.

Favourable outlook for the Spanish economy. Growth figures for Q4 confirmed that Spain recorded its highest growth in GDP since 2007, namely 3.2%. According to available indicators, in the final part of the year the driving force for this expansion was still domestic demand and particularly consumption. This is benefitting from the absence of inflation, which is surprisingly still falling, and the notable expansion in employment (525,000 jobs were created in 2015, a number not seen since 2006). It is also worth noting that the different processes undertaken to sort out and adjust balance sheets have ended or at least are now coming to an end. The latest figures show that the real estate sectoris picking up. Moreover, the process of private sector deleveraging is almost complete: in 2015 Q3, household and corporate debt reached a figure close to the euro area average, something that has not been seen since early in the first decade of 2000. In this brief review of 2015 one relatively discordant element is the trend inthe public accounts. Although the public deficit fell last year, particularly thanks to a better performance by revenue than initially expected, this improvement may not be enough to meet the public deficit targets set. Nevertheless the overall result of 2015 in economic terms is clearly positive while the prospects for 2016 are also encouraging. In spite of the greater uncertainty at the beginning of the year, the factors supporting the economy's good performance in 2015 (low oil prices, the euro's depreciation, tax cuts and expansionary monetary policy, fundamentally) look like continuing this year, albeit to a lesser extent than in the last. As a result, growth will reach 2.8% annually, a little lower than the expansionary 2015 but clearly above that of our neighbours in the euro area.