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US Regional Watch

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2nd Quarter 2009

Tue, Jun 23 2009, 07:34 GMT
by BBVA Bancomer Team

BBVA Bancomer

In this issue you'll find:

• Global Outlook
• U.S. Outlook
• BBVA Compass Sunbelt Region Outlook
• The Evolution of Employment in the BBVA Compass Sunbelt Region
• University Spinouts: Opportunities from Technology Commercialization
• Advanced Technology and Innovation in Colorado
• Taxonomy of Exports in the BBVA Compass Sunbelt Region
• Banking Trends and the Sunbelt Region
• Fact Sheet
• Forecasts

Global Outlook

The economic situation is improving in the second quarter, with falling financial market tensions and an apparent reduction in the pace of deterioration of real activity.

Global economic growth in the first months of 2009 was characterized by persistent tensions in the financial markets, which began to recede in the second quarter. In May the spread of banks’ credit default swaps1 in the U.S. reached its lowest level since the demise of Lehman Brothers, while for European banks it attained its lowest value since November 2008. Moreover, there have been important corrections in interbank markets, as the 3-month OIS spreads2 have reached their lowest levels in the U.S. and the European Monetary Union (EMU) since the beginning of 2008. However, both variables are still at very adverse levels in comparison with those registered in the pre-crisis period and also those of the first phases of the crisis.

The continuation and deepening of global economic contraction in the first months of 2009 have lagged the high levels of risk aversion observed. Data from the first quarter of 2009 still showed GDP in the U.S. contracting at -1.6% on a quarterly basis, a pace very similar to that of the previous quarter. In Europe, growth maintained an exceptionally negative tone, with GDP contracting in the first quarter by 2.5%. However, the general tone of recent economic indicators is less negative according to the data available to date (corresponding to April and May). This change suggests that the pace of the recession may be mitigating, although it is likely that activity will still see declines in the short term. Financial markets reacted positively to this possible inflection in the economic situation, but the continuity of this improvement is still subject to a high degree of uncertainty, as the final duration of the crisis remains the key unknown in the global outlook.

Public policies to stabilize the financial system and stimulate the economy are broader in the U.S.

In the first half of 2009, given the persistence of financial tensions and continued contraction of the global economy, governments have accelerated the adoption of economic measures to stabilize the financial system and return to a positive growth path. The U.S. government has been the most proactive in the adoption of these policies, especially after the new administration implemented new programs to stabilize its financial system. Overall, the evaluation of the U.S. financial stabilization program is positive, because it has a global perspective of the problem with credible stress scenarios accounting for both sides of the bank’s balance sheet and because it involves the private sector in the solution. Nevertheless, the implementation of these approved programs is very difficult, and if both of these elements are not well articulated or the potential synergies are not properly realized, its impact could be reduced.

In Europe, the policies to stabilize the financial system continue to be adopted at the national level, with diverging initiatives among countries.

The European Central Bank (ECB) cut its official rate to 1%, while deciding to maintain its weekly auctions of liquidity under the “full allotment” system until at least December 2009, and has extended the maturity of its loans to 12 months. Moreover, the ECB announced in May that it will eventually acquire €60 billion of covered bonds, however the details of this plan have not yet been made public.

Emerging countries are affected by the global crisis, but are receiving important support.

Emerging countries have also been affected by the global financial crisis and the abrupt fall in international trade, and some of them will probably fall into recession this year. However, the biggest emerging economy, China, has launched programs to stimulate the economy through a massive fiscal plan and an exceptional easing of bank credit. As a result, the Chinese economy, which showed a substantial reduction in its rate of growth in the last quarter of 2008, began to justify the expectations that it may reach a growth rate of 8% for 2009. Furthermore, it is remarkable that the impact of the global crisis in emerging economies has been, at this point, limited to real activity, without producing a financial crisis in main developing countries. However, it is true that some regions are especially vulnerable. In particular, Eastern European countries are exposed to elevated risks, given the characteristics of their financial systems.

Regarding financial variables, the negative mood in the financial markets, which predominated in the beginning of the year, was reversed at the end of the first quarter. Especially important to emerging markets has been the G-20 meeting held on April 2, in London. In this meeting, the leaders of the main economies decided to augment the resources of the International Monetary Fund (IMF) by $750 billion and allow the issuance of an additional $250 billion of Special Drawing Rights. This increase in IMF resources allows financing the Flexible Credit Line, a new program of the IMF that aims to help those countries with solid fundamentals but which are experiencing temporary financial troubles. Currently, Mexico, Poland and Colombia have agreed credit lines through this program. Recently, the emerging economies have benefited from the increase in risk appetite registered in global financial markets. Hence, there have been recent net inflows of capital to Asian and Latin American countries.

In spite of the recent stabilization and policy measures, the intensity and beginning of the recovery is still uncertain.

The combination of the effectiveness of policies to put the financial system on a more solid footing and the fiscal policies to stimulate demand will attract attention over the next months. Their final impact will determine when the recovery will start, its rhythm and which will be the most dynamic areas. While recent data suggest that the pace of economic deterioration is slowing, the exit from the recession will be under very modest growth rates, well below potential growth. Moreover, it is probable that the exit from recession will not be simultaneous in major economies. In particular, it might occur later in Europe than in the U.S., given the slower pace of adoption of policies to stabilize the financial system, the smaller fiscal impulse and less support from non-conventional monetary policy.

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Published on  Tue, Jun 23 2009, 07:59 GMT