Macroeconomic and Market Situation

The Global Economy

The global economy has withstood a number of shocks in 2011 that clearly stunted growth of a world economy still recovering from the global financial crisis of 2008-2009. The uprisings in the Middle East and North Africa destabilized governments in the region and disrupted economic growth and oil supply. On March 11, the earthquake in Japan disrupted not only the Japanese economy but the global manufacturing supply chain, particularly in the electronic and automotive sectors. Europe’s sovereign debt crisis intensified throughout the year as tight fiscal policy across the region depressed consumer spending, constraining both economic growth and expectations for its recovery.

World GDP Growth, Annual % Change

Source: IHS Global Insight, December 2011

The impact of these shocks has been to depress global growth to 3.0% in 2011 following a recovery of 4.3% in 2010. In the mature economies, growth edged upwards by only 1.5% in 2011, as sustained unemployment depressed real incomes in both Europe and the United States, and confidence was undermined by the debt crisis. The Japanese economy contracted instead by 0.7%.

Emerging market growth moderated but still remained robust in 2011 offering a key source of support for the global economy. The Asia-Pacific region expanded by 4.5% in 2011, led by a 9.2% rate of growth in China. Economic growth was 4.1% in Latin America led by a 7.8% expansion in Argentina, while growth in Brazil, after a rebound of 7.5% in 2010, slowed to 2.9% in 2011 as the lagged effects of tighter fiscal and monetary policy reined in economic activity.

With respect to exchange rates, the Euro was up 5% on the dollar on average in 2011 compared to 2010. It started off 2011 at 1.34 U.S. dollars per Euro and strengthened in the spring to 1.48 U.S. dollars only to slip in the fourth quarter as a combination of weaker European growth, a cut in the policy rate and continued turbulence related to the sovereign debt crisis weighed on the exchange rate.

€ / US $

In Asia, the Japanese yen continued its appreciation against the dollar in 2011, starting out the year at 82 yen per U.S. dollar and closing out 2011 at 77 yen per U.S. dollar. The Chinese renminbi appreciated by close to 5% with respect to the U.S. dollar during 2011.

The Brazilian Real appreciated steadily against the U.S. dollar for the first half of 2011 and hit a high of 1.54 against the U.S. dollar at the end of July. In September, market turbulence and a shift by the government to growth supporting policies produced a 14% depreciation in the Real and by end 2011, the exchange rate was trading at 1.86 Real per U.S. dollar. The Argentina currency averaged 4.13 pesos per U.S. dollar in 2011, an 8% depreciation with respect to its 2010 average exchange rate. Venezuela maintained its peg with the U.S. dollar in 2011.