The Stabilization of Economic Growth
The latest date reported of the Chinese economy shows contradictory signs for one of the world’s most complex economies. During the second quarter of 2017, economic activity in the Asian Giant has continued to emphasize its dual personality. Economic activity, internal and external, seems to have strengthened its growth and the increase of certain credit segments reinforces this trend for the coming months. The greatest danger for China continues to be the excessive accumulation of debt. The country seems to be fighting against this threat with various tools, such as the extension of medium-term loans by the central bank and an increase in debt-to-equity swaps that help improve the quality of assets in bank balance sheets, although hurting the overall liquidity of the system. In this report we have introduced new sections on economic growth, the domestic market, and corporate debt, as well as the real estate sector.
Read MoreCan Banxico Control Inflation?
Inflation has made the news once again in Mexico, as the purchasing power of the Mexican currency doubled the central bank’s inflation forecasts. The effects of the peso’s depreciation in 2015 and 2016 are being transmitted to consumer prices. Banxico responded to the normalization of the Fed’s monetary policy in December 2015 by increasing the Interbank Interest Rate. Since then, Banxico has increased the rate ten times, and has yet to lower inflation. Has the rate increase worked? Or has it been too modest?
Read MoreSlowdown in 2017? Spain’s Economic Expansion Continues to Beat Expectations
Once again, the Spanish economy brings positive news. Growth accelerates in the first half of the year, in a context where the banking sector has yet to expand its assets and inflation remains low. The expectations of economic agents are very positive, fueling rises in the stock market. But the current optimism shouldn’t lead to complacency. There is still much to be done to strengthen the Spanish economy in the face of future shocks.
Read MoreThe Threat of Italy’s Banking Crisis
The Eurozone has sustainable economic growth without the aid of credit increases, the public deficit is under control in most Eurozone countries—except Spain—and there is a large current account surplus.
Despite these positive indicators, the Italian banking crisis episode sent different signals about the European banking system. Fortunately, the European banking system is in a more solid position than it was two years ago, increasing the chances of successfully facing a crisis. The Italian and Portuguese banking systems are concerning: both are undercapitalized compared to their European counterparts and have profitability problems that make private recapitalization unfeasible. The Spanish banking system, which is also undercapitalized, has enough revenue to autonomously increase the capital ratio.
Read MoreUnderneath the Hood, the US Economic Engine Is Faltering
Contrary to what many think, the underlying data show that the US economy is heading for trouble. Commercial, industrial and consumer credit growth is weakening. Delinquency rates on commercial and industrial loans are rising. Car sales have peaked and the auto industry is heading for trouble. Stock markets are at all-time highs (and overvalued). Unemployment is reaching cyclical lows. Banks have been increasingly engaging in maturity mismatching over the past few years, but are now scrambling to recover liquidity. In other words: the US economy has passed a tipping point. Pressures are building beneath the surface after years of near zero interest rates, precisely when the Fed is raising interest rates.
Read MoreMonetary Intervention Plus Monetary Expansion Equals Risk
With the aim of stimulating and maintaining the economy “competitive,” the Bank of Guatemala has increased the monetary base at a faster rate without any response from the economic agents, since growth in monetary aggregates continues to be low and decelerating. This is not the only hopeless intervention, as the Bank of Guatemala also decided to intervene to counter the alleged excess supply of dollars, evidenced by the “outrageous” appreciation of the quetzal. This high level of intervention and the scant response from the broader economy are beginning to signal a deterioration of the integrity of the economy.
Read MoreThe Growing Threat of a Banking Risk
Undoubtedly, China is one of the most complex economies in the world; understanding it requires not only patience, but also humility when arriving at nineteenth-century conclusions. During the last quarter of 2016 and the first quarter of 2016, changes in the economy of the Asian giant have been dual: Consumption per capita and industrial activity have been increasing—particularly in this last quarter. Yet the financial sector is beginning to experience liquidity tensions in the short-term and greater regulatory pressures that can constrain the refinancing of products offered by shadow banking, the great majority of which are linked to an inseparable maturity mismatch.
Read MoreHow US Shale Will Prevent Oil Prices from Rising in 2017
The economics of the oil industry have shifted. Outdated supply and demand curves no longer suffice. The US shale revolution has had a profound impact on the oil industry. Whereas before supply was rather inelastic, as the cost of temporarily closing a major oil field was enormous, oil supply now adjusts more rapidly to changes in demand.
Read MoreMore Public Debt, More Taxes, and Little Growth
There was some improvement of the Mexican economy in the last few months of 2016. Car sales closed at record levels, unemployment is low, and the Bank of Mexico attempted to bypass the Fed’s rate hikes, although without avoiding further depreciation.
What awaits Mexico? The country’s growth is not enough to generate the desired economic performance. Inflation threatens to return as the impact of the peso’s depreciation has been transferred to the Producer Price Index. The government managed to increase tax collection in the last three years, but the public debt has increased as a result of the fall in oil prices. Mexico’s economy has more pending subjects to solve than achievements to boast about.
The Spanish Inflation Threat
The growth outlook of the Spanish economy is positive, against the backdrop of a healthy deleveraging of the banking sector which has not yet run its full course. New credit is increasing, yet the ceaseless repayment of home mortgages is canceling out this increase in new credit. A strong rise in the price inflation rate is one of the novelties. Will the first indication of inflationary pressures put the recovery of the Spanish economy in danger?
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