But there are other factors contributing to the recovery: the fall in oil prices, which is translating into a boost to household incomes and into a reduction in firms’ production costs; the very significant depreciation of the euro; and the favourable economic activity figures of some of our trading partners within the Monetary Union. Turning to prices, the annual rate of inflation has been negative in the first three months of 2015, running at –1.3%, –1.1% and –0.7%, respectively, although the non-energy CPI and the core inflation index have been more stable, posting positive figures. In particular, in March, on preliminary figures, the annual rate – though still negative – is estimated to have stood at –0.7%, an increase of 0.4 pp on February, which largely stemmed from the correction in oil prices. Following several quarters of sluggish growth, a recovery is discernible in the euro area. Most member countries are posting positive GDP growth rates, although there are significant differences. Among the major economies, the pace of economic activity is highest in Spain and Germany. In 2014, euro area GDP grew by 0.9%, compared with a decline of 0.4% in 2013. Driving this recovery has been the increase in private consumption, in a setting of improved household confidence and income. Other favourable factors have been the contribution of exports and gross fixed capital formation, the latter due to the pick-up in construction.
The hoped-for higher returns could not be maintained. Again with the benefit of hindsight, it is possible to identify a number of structural weaknesses in the mechanisms for financial resource allocation in the recipient countries. There was, for example, a general lack of reliable financial information, and a lack of transparency in relation to the financial position, of both public and private sectors. Complex and opaque links between government, financial institutions and non-financial companies made it difficult for outsiders to understand the real nature of their exposures. Financial markets were not well developed, leaving the system heavily dependent upon the banks. There was inadequate regulatory or supervisory oversight. There was widespread, often informal, government influence over BIS Review 36/1998  -4-  financial flows, which importantly also contributed to a perception that much of the borrowing was implicitly under-written by the government. The list could go on. The problem was compounded by the absence of any real perception of exchange rate risk. Borrowers were evidently confident that governments would maintain their exchange rate pegs against the dollar, even when it began to strengthen, so that unhedged foreign currency debt, much of it at short-term, appeared to be a cheap alternative to domestic currency borrowing. The result was a build-up of short-term foreign currency liabilities, by banks and non-banks, which was not fully appreciated, and which left the Asian economies especially vulnerable to a flight of capital in the event of a change in sentiment.