Global economic growth appears to have accelerated slightly in the first quarter of 2012 after economic momentum had slowed in the preceding quarter, which, in particular, had resulted from the decline in economic output in the eurozone and Japan. This is reflected by the results of purchasing manager surveys (PMI surveys), which improved slightly in the first quarter compared to low levels at the end of 2011. In the U.S., the PMI survey and the more positive developments in the labor market point to sustained economic momentum with an (annualized) growth rate of just under 3 % in the first quarter. In Japan, we expect growth to have recovered significantly thanks to improved foreign trade and the start of reconstruction measures after the catastrophe in March 2011. By contrast, economic output in the eurozone is likely to have declined again in the first quarter of 2012 – albeit at a slower pace than at the end of 2011. Within the eurozone, Germany’s GDP probably stagnated at the start of the year, with French GDP falling slightly. By contrast, the southern economies of the EU probably contracted again noticeably due to the consolidation of public and private finances in these countries. Global economic growth continues to benefit from high, stable growth rates in the emerging markets and in developing countries, which are providing moderate momentum for world trade.
The slightly improved sentiment among purchasing managers is probably largely due to the liquidity measures by the European Central Bank, the fiscal pact agreed by the EU countries and initial agreements on structural reforms especially in Italy and Spain, all of which have considerably reduced the risks of an escalation of the European sovereign debt crisis. Accordingly, risk premiums on government bonds from the peripheral countries declined from their record levels and stock markets around the world rose markedly.
Overall, the banking sector had a better start into 2012 than had been expected. In the U.S., economic recovery and the decline in unemployment continued, strengthening lending both to corporates as well as households. In Europe, growth forecasts at least did not fall further. As a result, lending slowed and volumes stagnated but did not drop significantly – large differences across individual countries notwithstanding.
The most important factor behind the calming of sentiment was the ECB’s two three-year refinancing operations which supplied banks with a gross € 1 trillion in medium-term liquidity at favorable conditions. This eased pressure in private funding markets and enabled many banks to place bonds with investors at better conditions than in the second half 2011. Italian and Spanish banks used much of the additional funds to buy domestic sovereign bonds, thereby relaxing their governments’ tight refinancing situation. In these circumstances, the unprecedented haircut forced on holders of Greek debt did not lead to the feared major market disruptions, although long-term consequences remain unpredictable.
The slightly improved sentiment benefited investment banking; capital issuance except M&A rose substantially compared with the last few months of 2011 even though volumes in most cases remained below the high pre-year level. Overall the profitability of European banks may have recovered at least somewhat, but they remain far behind their U.S. peers.