Presentation “Spain Consumption Outlook. First Half 2014″

1H14

BBVA Research – Madrid, 17 June 2014

Consumption Outlook

Consumption Outlook 1H14 / 17 June 2014

Key Messages

The global economic cycle is improving. Expansion in developed economies is offsetting the slowdown in emerging markets. There are risks, but these are not systemic

Spain: upside bias in growth, which will be above 1% in 2014 and around 2% in 2015 …

… but reforms must continue

Private consumption is undoubtedly recovering, particularly durable goods. Causes: better fundamentals, more financing, less uncertainty and the PIVE programme (incentivising purchase of energy-efficient cars)

Substituting national products for imported goods, as a result of changing preferences, accounts for 60% of the fall in consumption imports during the crisis

Lower-income households are bearing higher inflation because they concentrate their consumption on products whose prices are more rigid to the downside

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Page 2


Section 1

The world economy improves

Section 2

The recovery of the Spanish economy accelerates, but further reforms are required Section 3

Private consumption is undoubtedly recovering…

Section 4

… particularly in (some) durable goods

Section 5

On Spanish households’ consumption habits: import substitution and inflation differentials between households

Index

Page 3


Section 1


World GDP growth (Annualised quarterly % rate based on BBVA-GAIN) Source: BBVA Research

World economic growth remains at over 3%

The expansion of developed economies offsets the slowdown in emerging

markets…

… despite the improvement in their financial conditions

Page 4

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2,0

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Q2-13 Q3-13 Q4-13 Q1-14 Q2-14


Section 1


US: growth in line with forecasts (2.5%) The Fed will end tapering by the end of 2014 and will start to raise interest rates

in the second half of 2015

Emerging economies: the end of QE in the US is an event with global impact in financial markets, but there will still be great differentiation between emerging

markets

China: adjustment to the downside of growth outlook (7.2%) because of recent moderation and the shift in economic policy targets, although with room for

manoeuvre

Banking Union should support credit recovery. The strength of the euro and “too low inflation for too long” are dragging down on

the recovery

EMU: Domestic demand will contribute to recovery in 2014 (1.1%) and 2015 (1.9%), especially investment

Page 5


Section 1

Favourable outlooks, pending risks

Economic growth (%) Source: BBVA Research

Global expansion will continue, with some uncertainty but without immediate systemic

risks

Heterogeneous impact on emerging markets

Risks on the horizon: tightening monetary policy by the Fed and

slowdown in China

Page 6

3,3 3,03,6 3,9

2,8

1,82,5 2,5

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1,9

5,05,4 5,6 5,9

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World US EMU BBVA-EAGLES

Baseline scenario Apr-2014 Baseline scenario Jan-2014


Section 1

Growth drivers in the eurozone

1. The available data are favourable, particularly confidence

2. The financial environment has improved, especially on the periphery

3. Fiscal policy is less restrictive

4. Unprecedented measures by the ECB to re-establish its monetary-policy´s transmission mechanism. ECB ready to offer further support

5. In general terms, banking union is progressing

6. The external environment is favourable, but the euro is very strong

Page 7


Section 1

Risks are bounded

Inflation in the eurozone (% YoY) Source: BBVA Research

Surprises to the downside in inflation have increased the risk of unanchored

expectations

The strength of the euro and the fall in prices of raw materials are exerting

pressure to the downside on inflation …

… but the recovery underway in demand and the improvement in the credit supply

reduce the risk of deflation

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20% 40% 60% 95%Page 8


Section 1


Section 2

The recovery of the Spanish economy accelerates, but further reforms are required Section 3


Section 4


Section 5

On Spanish households’ consumption habits: substituting imports and inflation differentials between households

Index

Page 9


The Spanish economy’s recovery accelerates

Spain: GDP growth and MICA-BBVA forecasts (% QoQ) Source: BBVA Research based on INE

The economy has grown for three consecutive quarters, and more strongly in 1Q14 (0.4%

QoQ) …

… thanks to better fundamentals, less need for fiscal adjustment, mitigation of some uncertainties and import substitution

If the favourable start to 1Q14 were to consolidate in the next few months, growth

could accelerate again, granting a rate above 1% in 2014

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CI at 60% CI at 40% CI at 20% GDP (% QoQ)

Page 10


Spain: GDP growth by region (%) Source: BBVA Research

We have revised 2014 GDP growth upwards, from 0.9% to 1.1%, and we maintain our 1.9% forecast for 2015

… are key to explaining the regions’ different growth rates

Regional growth is heterogeneous. Progress in correcting imbalances and

exposure to foreign demand …

Section 2

The Spanish economy’s recovery accelerates

Page 11

AND

ARA

AST

BAL

CAN

CNT

CYL

CLM

CAT

EXT

GAL MAD

MUR

NAV

BASC

RIO

VAL

SPA

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0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2

GD

P g

row

th i

n 2

01

5

GDP growth in 2014


Section 2

Some uncertainties have been resolved

Spain: growth and composition of goods exports by geography Source: BBVA Research based on Datacomex

Declining activity in emerging markets accounts for the temporary slowdown in goods exports observed in the last two

quarters

On average, three quarters of the export growth during the crisis is accounted for by

geographic and product diversification

Competitiveness continues to improve through decreasing ULCs, which helps both exports and the process of import

substitution

Exports continue to grow 1

Page 12

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EuropeanUnion

North America EAGLEs Rest of theworld

Nominal growth, 1Q13 average % YoY (LHS)



Exports share, % (RHS)


Section 2


Spain: investment in machinery and equipment (M&E) (Real ratios at 2008 prices) Source: BBVA Research based on INE

Whereas in Europe as a whole investment in M&E has grown 8.3% since it bottomed-

out in 2Q09, in Spain it has grown by 17.6%

… which is consistent with the change in productive model oriented towards the

external sector

Today M&E investment represents around 45% of the total and more than 8% of real

domestic demand (all-time high)…

Investment gathers pace 2

Page 13

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7

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9

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1

Dec-1

3

Dec-1

5

% GDP % domestic demand


Section 2


Spain: 10-year bond yield (Difference vs. previous forecasts in bp) Source: BBVA Research

Improved perceptions abroad have reduced dependence on the ECB and also improved access to wholesale markets for

large companies

A permanent drop of 100bp in sovereign yields implies up to 1% more growth for the

economy

Lower financial tensions are felt in the economy with a six- to nine-month time lag

Lower financial tensions 3

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0

2014 2015

Jul-13 Oct-13 Ene-14 Abr-14

Page 14


Section 2


Spain: new retail credit operations (% YoY) Source: BBVA Research based on Bank of Spain

The Spanish economy is going through an unavoidable deleveraging process …

A turning point is already visible, together with an improvement in credit flows to households and SMEs, which will be

strengthened throughout 2014

… which is compatible with credit availability for solvent projects

New credit flows are improving 4

Page 15

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Actual Trend


Section 2


Regions: breakdown of public deficit, excluding aid to the financial sector (% GDP) Source: BBVA Research based on MINHAP

The fiscal effort made at the end of 2013 and the recovery both significantly

increase the likelihood of meeting targets in 2014 …

Meeting the 2015 targets will depend on the impact of the tax reform and the

measures passed with the official budget

… although doubts remain over how public revenues will respond to economic growth

and the impact of the reform of local corporations

Meeting fiscal targets 5

Page 16

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2012 2013 2014 2015


Section 2


Spain: impact of the wage restraint in 2012 on employment (‘000s of full-time-equivalent jobs) Source: BBVA Research

Some of the reforms introduced in the last few years are starting to have a positive

impact …

Structural changes will imply that employment will respond more rapidly to

economic recovery

… such as labour reform. Job-creation has begun earlier than expected

Impact of reforms 6

Page 17

0

200

400

600

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1000

1200

Short term From the third year From the third year

Employment destruction avoided by thewage moderation

Jobs that would havebeen saved had the

process begun in2008


Section 2

The need to go further with the reforms

Employment performance (Employment level at the beginning of each crisis = 100 ) Source: BBVA Research based on Andrés and Doménech (2012)

Urgent short-term goal: reduce the unemployment rate

Wage flexibility to win back productivity (∆ of employment and W) and more competition (margin reduction)

But the labour market’s problems go deeper: collective bargaining, two-tier

system and employment policies

Target for GDP growth: 2.5% to 2025

Page 18

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Spain , 2007-25

EU8, 2007-11 USA, 2007-14

USA, 1929-40


Section 2

The need to go further with the reforms

1. Complete the restructuring of the financial sector and deleverage to improve financing in the Spanish economy and attract FDI

2. Public administration reform, fiscal consolidation and long-term

sustainability of public finances, with an efficient fiscal system that incentivises growth and the creation of employment Experts Committee report

3. Reforms to improve productivity, firm size, competitiveness and the attractiveness of Spain to foreign physical, human and technological capital

4. Going further with reforms that improve the effectiveness of active employment policies, reduce the two-tier nature of the labour market and make

it work better more employment, and of higher quality

Page 19


Section 1


Section 2

The recovery of the Spanish economy accelerates, but further reforms are required

Section 3


Section 4


Section 5


Index

Page 20


Section 3

Private consumption is undoubtedly recovering

Page 21

Spain: growth in private consumption (%) Source: BBVA Research based on INE

Disposable income: change in the labour market cycle

Propensity to consume: less uncertainty

Wealth: Increase in financial wealth

What are the drivers of the improvement in consumption?

Borrowing capacity: Household: increase in financing

Public sector: PIVE

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% YoY Average


Section 3


Spain: employment and unemployment rate (%) Source: BBVA Research based on INE

1. Cyclical change in the labour market

The labour market reform has enabled a readjustment of the balance between quantities (employment) and prices

(wages)

Sustained reduction in the unemployment rate will arrive in 2H14

The economy has started to create employment in 1H14

Page 22

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2008 2009 2010 2011 2012 2013 2014 2015

Employment (% LHS) Unemployment rate (% RHS)


Section 3


Spain: real net financial wealth (Deflated with the consumption deflator, swda data, %) Source: BBVA Research based on Bank of Spain

2. Increase in net financial wealth

Reductions in financial tensions → recovery of share prices and reduction in borrowing costs → ∆ in financial wealth

BBVA Research: ∆ of 1% per quarter in real net financial wealth → accumulated ∆ in private consumption of 0.2% over the

following four quarters

Real net financial wealth: ∆32.2% since 2Q12 → ∆5.5pp of growth in consumption

to 4Q14

Page 23

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EURmn (LHS) %qoq (RHS)

2Q12-4Q13: ∆32.2%


Section 3


Spain: household perceptions of the economic situation (swda data, quarterly averages, balance of answers) Source: BBVA Research based on EC

3. Less uncertainty

On the macroeconomy: the perception of the Spanish economy is at pre-crisis levels

On the microeconomy: perceptions of households’ own financial situation is as high as it has been for the last decade

The reduction in uncertainty is an incentive to consume, at the expense of saving

∆10 points in confidence → ∆ 1.2 points in consumption in the next 3 years

Page 24

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Expectations on the household´s financial situation (12 months)

Expectations on the overall economic situation (12 months)

+22.9 points

+57.9 points


Section 3


Page 25

Spain: new consumer financing operations (3rd order centred moving average. Jan 11 = 100) Source: BBVA Research based on Bank of Spain

4. Improvement in financing (I)

New consumer credit operations have grown at double-digit rates between

January and April …

… driven by the increase in short-, medium- and long-term financing

… in a context of decreasing outstanding credit and high interest rates

Consumer credit/Spain GDP=5.9%=EMU 40

60

80

100

120

140

160

Jan-1

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Apr-

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Total < 1 year 1-5 years > 5 years


Section 3


BBVA business trends survey: perceptions of consumer credit supply and demand (Balance of replies. A value <0 indicates deterioration) Source: BBVA Research

The BBVA Business Trends Survey (BTS) in 2H13 already anticipated an increase in

financing

BTS for 1H14: those surveyed think that credit has performed favourably in all retail

trade activities…

… and that it will continue to do so in the second half of the year

4. Improvement in financing (II)

Page 26

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2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14(f)

Supply Demand


Section 3


Spain: effect of the PIVE car programme on private consumption (pp of the quarterly growth rate) Source: BBVA Research

The PIVE programme has limited the negative and permanent effect on

consumption caused by the increase in VAT in September 2012

∆VAT → a fall of 300k new car registrations between October 2012 and May 2014 if

the PIVE plan had not been approved. The subsidy has meant this fall was restricted

to 53k vehicles

The effect on private consumption is 0.9% since 4Q12

5. Fiscal stimulus: PIVE

Page 27

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Over the quarterly growth rate

Cumulative effect

PIVE comes into effect: Oct-12

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Over the quarterly growth rate Cumulative effect

PIVE comes into effect:


Section 1


Section 2


Section 3


Section 4


Section 5


Index

Page 28


Section 4

Spending on durable goods takes off

Spain: new car registrations, by channel (swda figures, MA3, Jan 09 = 100) Source: BBVA Research based on ANFAC and GANVAM

The private channel is the main responsible for the increase in registrations (2.3x since the 1st PIVE came into force)

…

…together with an increase in demand from car rental firms and, to a lesser

extent, from companies (renting)

The second-hand/new vehicle ratio has fallen: 1.9 to May 2014 vs. 2.1 to May 2013

Cars: sales are still driven by the PIVE programme

… but the country’s total car fleet is still aging (51.7% of cars are 10+ years old);

average age ≈ 11.3 years old

Page 29

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Total Retail Firms Car rental

Plan 2000E End ofPlan 2000E + ∆VAT

∆VAT + PIVE

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Total Retail Firms Car rental

Plan 2000EEnd of Plan 2000E

+ ∆VAT ∆VAT + PIVE


Section 4


Page 30

Spain: forecast new car registrations Source: BBVA Research

2014: 840k units (15.5% more than in 2013)

2015: numbers will depend on whether the subsidy is continued or not

∆2.5% if current conditions are continued through to the first half of the year

Drivers (per capita income, unemployment, relative prices and interest rates) are now

favourable

PIVE extension → rise in car registrations in 2014

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2008 2009 2010 2011 2012 2013 2014 L/T

(% Y

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f ve

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Actual Forecast

actual % YoY (RHS) forecast % YoY (RHS)


Section 4


Spain: new motorbike registrations and estimated fleet (CVEC data, 1Q08 = 100) Source: BBVA Research based on Bank of Spain Anesdor

1H14: double-digit growth

Drivers: improved expectations by potential buyers, increased availability of finance

and the unavoidable renovation of the fleet

2014: 112k new motorbike registrations (∆16.7%)

Motorbikes: the recovery consolidates

Page 31

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4 (f)

Car registrations Estimated car fleet

Moto-EPlan


Section 4


Spain: white goods sales per household (% YoY in unit terms) Source: BBVA Research based on ANFEL

The overall market has halved: -5.2 million appliances since 2006

(-51.8%)

Sales Jan-May 2014: 12.4% YoY (-5.6% in 2013)

Downward trend in prices → more modest ∆ in turnover (6.1%)

All electrical appliances saw positive YoY growth, the majority in double digits

White goods: light at the end of the tunnel

Page 32

-40

-20

0

20

40Refrigerators

Freezers

Washing Machines

Driers

Dishwashers

Cooks

Ovens

Counters

Extractor hoods

Total

2013 Jan-May 2013 Jan-May 2014


Section 4


Spain: actual retail sales of brown goods (swda data, 1Q08 = 100) Source: BBVA Research based on INE

Sales have been weak since the VAT hike in September 2012 …

2Q14: recovery in demand for consumer electronics related to the World Cup

Fall in relative prices and in penetration rates

Exceptions: tablets, laptops & mobile phones

Brown goods: erratic performance

Page 33

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ICT

Consumer electronics

Non-food products -12

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1

Sep

-11

Dec-1

1

Ma

r-1

2

Jun-1

2

Sep

-12

Dec-1

2

Ma

r-1

3

Jun-1

3

Sep

-13

Dec-1

3

Ma

r-1

4

Jun-1

4 (

f)

ICT Consumer electronics Non-food products


Section 4


Spain: turnover of the furniture sector vs. housing investment (Trend. 1Q08 = 100) Source: BBVA Research based on INE

Stable turnover, stable prices … for the fourth consecutive quarter

BBVA Research estimates: ∆ in nominal investment in housing at 1%

QoQ → 0.5% cumulative ∆ in turnover

House purchases will start to recover over the course of 2014, which should drive

consumer demand for furniture starting in 1H15

Furniture: in a context of increasing demand for housing

Page 34

20

30

40

50

60

70

80

90

100

Ma

r-0

8Jun-0

8S

ep

-08

Dec-0

8M

ar-

09

Jun-0

9S

ep

-09

Dec-0

9M

ar-

10

Jun-1

0S

ep

-10

Dec-1

0M

ar-

11

Jun-1

1S

ep

-11

Dec-1

1M

ar-

12

Jun-1

2S

ep

-12

Dec-1

2M

ar-

13

Jun-1

3S

ep

-13

Dec-1

3M

ar-

14

Jun-1

4S

ep

-14

Dec-1

4M

ar-

15

Jun-1

5S

ep

-15

Dec-1

5

Furniture

Nominal housing investment

Real housing investment


Section 1


Section 2


Section 3


Section 4


Section 5


Index

Page 35


Section 5

Are consumer preferences for Spanish-made goods changing?

Spain: private consumption and imports of non-energy consumer goods (Deflated sa data, 1Q09 = 100) Source: BBVA Research based on INE & Customs

Since the beginning of 2009, consumer goods imports have contracted 12%, more than twice as much as private consumption

And the rest? Import substitution by domestic output

Part of the correction is explained by reduced household spending (income

effect)

Box 1

Page 36

70

75

80

85

90

95

100

105

Ma

r-0

9

Jun-0

9

Sep

-09

Dec-0

9

Ma

r-1

0

Jun-1

0

Sep

-10

Dec-1

0

Ma

r-1

1

Jun-1

1

Sep

-11

Dec-1

1

Ma

r-1

2

Jun-1

2

Sep

-12

Dec-1

2

Ma

r-1

3

Jun-1

3

Sep

-13

Dec-1

3

Ma

r-1

4

Private consumption

Imports of non-energy consumption products

-6.2% until 1Q13 (-4.8% until 1Q14)

-25.7% until 1Q13 (-12.0% until 1Q14)


Section 5

Are consumer preferences for Spanish-made goods changing? Yes, they are

Spain: breakdown of the variation in consumer goods imports into their long-term drivers (1Q09-1Q13, pp) Source: BBVA Research

Import substitution could be due to: • Deterioration in competitiveness – price

of foreign-made goods • Change in households’ preferences

towards Spanish-made goods

… particularly in durable goods (substitution effect : 70%)

Results: • Import sensitivity to income and, above

all, to prices has increased during the recession

• Import substitution, cased by changes in preferences, explains two-thirds of the fall in consumer imports …

Page 37

-60,0

-50,0

-40,0

-30,0

-20,0

-10,0

0,0

10,0

Total Durables

Loss (-) / Gain (+) in competitiveness

Income effect

Change in preferences

Total (actual)

Total (LT explained)


Section 5

My CPI isn’t like your CPI: inflation differentials by household

Spain: inflation distribution in 2007 & 2013 (% of households) Source: BBVA Research based on INE

The apparent simplicity of CPI has facilitated its use as a mechanism for

indexing numerous monetary variables (salaries, pensions, etc.)

Outcome: inflation dispersion is significant and has increased during the crisis

Nonetheless, it aggregates prices for millions of household baskets → inflation is

not the same for all households

Box 2

Page 38

Average 2013 Average 2007

0

5

10

15

20

Ho

use

ho

lds (

%)

-2 0 2 4 6 8Headline inflation (%)


Section 5

My CPI isn’t like your CPI: inflation differentials by household

Spain: estimated inflation differentials by income level (in pp vs. the 20% of households with higher equivalent income) Source : BBVA Research

What household characteristics affect the rate of inflation for that household?

• Basic goods (foodstuffs) • Products subject to regulated prices

(alcohol and tobacco) • A combination of both factors (housing

and supplies)

Lower-income households face higher inflation because their consumption is

concentrated on products whose prices are more rigid to the downside:

Page 39

-0,05

0,00

0,05

0,10

0,15

0,20

0,25

1st Quintile(20% with lower

income)

2nd Quintile(20%-40%)

3 rd Quintile(40%-60%)

4 th Quintile(60%-80%)

Marginal effect of the income level on the household´s inflation rate

CI at 90%


Key Messages

The global economic cycle is improving, supported by the expansion in developed economies

Spain is not lagging behind. Growth is accelerating, but more reforms are still needed

Private consumption is undoubtedly recovering, particularly durable goods

Causes: better fundamentals, more financing, less uncertainty and the PIVE programme (incentivising purchase of energy-efficient cars)

Lower preference by Spanish consumers for imported products. The role played by the price in purchase decision making has become more and more relevant

Inflation differentials among household types is significant. Lower-income families are bearing higher inflation

1

2

3

4

5

6

Page 40


Appendix

Baseline Scenario

Spain & Europe: macroeconomic forecasts Source: BBVA Research based on INE & Eurostat

Page 41

Spain EMU Spain EMU Spain EMU Spain EMU

Households final consumption expenditure -2,8 -1,4 -2,1 -0,7 1,4 0,8 1,3 1,3

General government final consumption exp. -4,8 -0,6 -2,3 0,1 -1,6 0,3 1,4 0,7

Gross fixed capital formation (G.F.C.F.) -7,0 -3,8 -5,1 -2,9 1,0 3,1 4,7 5,1

Equipment and machinery -3,9 -4,3 2,2 -1,9 7,9 5,2 6,9 7,0

Housing -8,7 -3,3 -8,0 -3,6 -3,4 1,1 4,9 3,9

Other constructions -10,6 -4,7 -10,9 -4,3 -4,0 0,5 1,1 3,2

Changes in inventories (*) 0,0 -0,5 0,0 -0,1 0,0 0,0 0,0 0,0

Domestic Demand (*) -4,1 -2,1 -2,7 -1,0 0,7 1,0 1,9 1,8

Exports 2,1 2,7 4,9 1,4 6,0 3,1 5,1 4,2

Imports -5,7 -0,8 0,4 0,0 5,4 3,1 5,4 4,6

External Demand (*) 2,5 1,5 1,5 0,6 0,4 0,1 0,0 0,0

GDP mp -1,6 -0,6 -1,2 -0,4 1,1 1,1 1,9 1,9

Pro-memoria

GDP excluding housing -1,2 -0,4 -0,9 -0,2 1,3 1,1 1,8 1,7

GDP excluding contruction -0,4 -0,2 -0,1 0,0 1,6 1,2 1,8 1,7

Total employment (LFS) -4,3 -0,7 -2,8 -0,9 0,3 0,1 1,4 0,7

Unemployment rate (% Active pop.) 24,8 11,3 26,1 12,0 25,1 11,9 24,2 11,4

Current account balance (% GDP) -1,2 1,2 0,8 2,3 1,3 2,2 1,5 2,1

Public debt (% GDP) (**) 86,0 93,0 93,9 95,2 98,4 95,9 100,4 95,5

Public deficit (% GDP) -6,8 -3,7 -6,6 -3,0 -5,8 -2,6 -5,1 -2,1

CPI (average) 2,4 2,5 1,4 1,4 0,3 0,9 0,9 1,3

CPI (end of period) 2,9 2,3 0,3 0,8 0,5 1,1 1,2 1,4(*) Contribution to GDP Growth

(f): forecast

(**) Excluding aid to the banking sector in Spain

2012(% YoY)

2013 2014 (f) 2015 (f)

Economy & Finance

Presentation “Spain Consumption Outlook. First Half 2014″