Quarterly Report on the Spanish Economy

Q2 2015

Círculo de Empresarios Madrid, July 2015

2

GLOBAL

USA 2.7%

Brazil -1.3%

Latin America and the

Caribbean 0.4%

UK 2.6%

Sub-Saharan Africa

2%

India 7.5%

China 7.1%

Russia -2.7%

Japan 1.1%

Indonesia 4.7%

Australia 2.8%

Eurozone 1.5%

GDP predictions 2015

3 Source: Global Economic Prospects, The World Bank -June 2015

Divergent growth

Turkey 3%

Emerging countries: Moderated growth

CHINA continues desacelerating although its more flexible financial policy Real GDP growth rates stabilized in emerging countries except India Increased economic dynamism in developed countries Source: World Economic Outlook, IMF- 2015

4

4.6%

1.8%

-5

0

5

10

15

2007 2008 2009 2010 2011 2012 2013 2014 2015China IndiaEmerging Developed

GDP growth and forecasts(%)

China´s tendency

2007

4.6%

2ooo 7,1%

2007 10,9%

2014* 16,3%

Economies weight in global GDP

China’s weight in global GDP

Developed countries

BRICS

Source: World Economic Outlook, IMF- 2015

5

20,8%* 26,6%*

* IMF Forecast

43%

57%

0

10

20

30

40

50

60

70

80

90

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Developed economies Emerging countries

2008 Emerging countries reached

developed economies in terms of GDP share

GDP share (% of total world GDP PPP)

%

Divergence across Latin America economies

POTENTIAL CHALLENGES Public Administration reforms Enhance institutional credibility

Real GDP growth and forecasts

6

-6

-4

-2

0

2

4

6

Peru Chile Colombia Mexico Argentina Brazil Venezuela

2014 2015*

•Forecasts Source: Global Economic Prospects, The World Bank -June 2015

POTENTIAL OBSTACLES USA monetary policy Rising public expenditure

Inflation

Commodity prices

May* : 62,5$

Lower commodity prices Negative impact on commodity exporting developing countries

Source: IMF, may- 2015 * Average Petroleum Spot Price (APSP)

Changes in commodity prices YoY %, May-2015

7

-40,8 %

-30,2 %

-17,8 %

-8,7 %

-25,6 %

-27,5 %

Petroleum

Natural Gas

Coal

Copper

Sugar

Cereals

Latin America and Caribbean: commodity prices

-6,8%

0,9%

1,9 %

5%

-8 -6 -4 -2 0 2 4 6

Belize

Brazil Mexico Paraguay

Bolivia Colombia Ecuador Trinidad and Tobago Venezuela

Net negative effects >1,5% GDP

Net positive effects >1,5% GDP

Source: Inter-American Development Bank, 2015

Barbados Costa Rica El Salvador Guatemala Guyana Honduras Jamaica Nicaragua Panama Dominican Republic Suriname

Impact on trade balance of terms of trade changes associated with lower commodity prices (%GDP)

8

USA: Labor market and growth

GDP CHANGE Q1-2015: - 0.2 %

Contribution to percent change in GDP growth (pp)

Labor force participation rate at lowest level since 1978 Unemployment rate at pre- crisis level Dollar appreciation shrinks external demand

Labor force and unemployment rate (%)

Source: Bureau of Economic Analysis, 2015

Source: Inhouse based on Bureau of Labor Statistics, 2015

9 -2,5 -2 -1,5 -1 -0,5 0 0,5 1 1,5 2

Personal consumption expenditures

Gross private domestic investment

Net exports of goods and services

Government consumption expenditures and gross investment Q1-2015

2007

0

2

4

6

8

10

12

58

59

60

61

62

63

64

65

66

67

68

Unemployment rateLabor force participation rate

Europe: Effects of the ECB’s quantitative easing

Changes in stock markets from January to june %

Borrowing costs -7% Eur/usd (Jan-jun) Market capitalization

Effects of QE (ECB) (Quantitative Easing)

Source: World Federation of Exchanges,2015

10

3,5%

2,3%

4%

9,5%

IBEX 35

DAX

CAC 40

FTSE MIB

0 2 4 6 8 10 12

237,531December

2009160,285December

2014 129,918May2015

Europe: Greece

Evolution of private sector deposits stock in Greece (€, millions)

January 2015: Syriza wins Greek elections

Source: Bank of Greece, 2015

11

Private sector deposits fell by 108 billions since december 2009 (60% of 2014 GDP)

June 29th: -“Corralito” - Referendum announcement July 1th: - Greece “in arrears”: 1,600 M€ unpaid to the IMF - Greek government accepts bailout conditions

Europe: Greece Bank exposure to Greece ($, millions)

Eurozone Governments

62% ECB 8%

Private sector 17%

IMF 10%

Others 3%

Greece main creditors %

Source: Bloomberg, 2015

Source: BIS, 2015

Bank exposure to Greek sovereign debt have declined sharply Eurozone governments are the largest creditors of Greek debt

0

20.000

40.000

60.000

80.000

100.000

120.000

Eurozone UK USA

Significant exchange rate movements Currencies depreciations against U.S. dollar Jun14- Jun15

Source: Bloomberg, 2015

13

-4

-3

-2

-1

0

1

2

3

1,05

1,1

1,15

1,2

1,25

1,3

1,35

Perio

d to

per

iod

cha

nge(

%)

Eur/

usd

Eur/usd Period to period change

QE announcement by the ECB

Source: ECB, 2015

The euro continue depreciating against the U.S dollar Volatility is raising in exchange rates since QE (ECB) started

-7,4%

-18,2%

-21%

-28%

-41%

-62%

Pound

Euro

Yen

Turkish lira

Brazilian real

Russian ruble

Risks

14

Source: inhouse

15

SPAIN

Predictions revised upwards

16

Source: INE (April 2015) and FUNCAS (June 2015)

* FUNCAS forecasts

4.3

-3

-6.2

3.2

-2.5

0.5

-4.3

3

-8

-6

-4

-2

0

2

4

6

2015

Q2*

2015

Q1

2014

Q4

2014

Q3

2014

Q2

2014

Q1

2013

Q4

2013

Q3

2013

Q2

2013

Q1

2012

Q4

2012

Q3

2012

Q2

2012

Q1

2011

Q4

2011

Q3

2011

Q2

2011

Q1

2010

Q4

2010

Q3

2010

Q2

2010

Q1

2009

Q4

2009

Q3

2009

Q2

2009

Q1

2008

Q4

2008

Q3

2008

Q2

2008

Q1

Q/Q (annualized) Y/Y

%

Annual average2015*

3.3

Growth

17

Predictions Q2 2015 - Private consumption supports most of growth

• Private consumption = 3.8%

• Public consumption = 1.2%

• GFCF = 5.8%

• Exports = 4.2%

• Imports = 5.2%

Domestic demand

0.2 pp 3.4 pp

External demand

contribution to growth

contribution to growth

Source: FUNCAS (June 2015)

Tail winds and Obstacles to growth

18

EXTERNAL demand - Monetary policy (ECB): depreciation of the euro - Eurozone growth has been revised upwards - Fall in the price of oil and commodities

DOMESTIC demand - Fiscal policy: fall in tax rates - Reduced energy bills - Recovery in the labour market

Political uncertainty

Disruptions in structural reforms

Prices: CPI and underlying CPI

19

Source: INE, June 2015

The annual general Consumer Price Index returns to positive values

Leading CPI June0.1%

UnderlyingMay0.5%

-2

-1

0

1

2

3

4

5

6

2015

M06

2014

M06

2013

M06

2012

M06

2011

M06

2010

M06

2009

M06

2008

M06

2007

M06

Annual development of general CPI and underlying CPI

Interest rates

20

The risk premium is around 150 basis points

Source: Bank of Spain, June 2015

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

Return on 10-year bonds in Spain and Germany

Spain

Germany

Risk premium

Possible Grexit

Situation of public accounts (I)

21

The Spanish public debt has doubled since the beginning of the crisis

Total PPAA debt in Spain has slightly reduced to 96.7% of GDP in April

Source: Eurostat, June 2015

30,0

40,0

50,0

60,0

70,0

80,0

90,0

100,0

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

Consolidated gross public debt Q1 2007 - Q4 2014

Spain

France

UK

Germany

43.6

37.8

0,0

10,0

20,0

30,0

40,0

50,0

60,0

Germany Spain France Portugal Sweden UK

2014Spending Income

Income EU2845.2%Spending EU28

48.1%

22

Income and public spending % GDP

Situation of public accounts (II)

Source: Eurostat, June 2015

41.4

44.9

39.6

48

38.9

34.1 38.4

39.7

2014Q1 2014Q2 2014Q3 2014Q4

Q1 2014 - Q4 2014

23

Labor market

Job creation improves in Spain, although the unemployment rate doubles the European average

Source: Eurostat, June 2015

25.422.7

13 12.4 11.1 10.5 9.7 9.77.7 7 6.3 6.1 5.4 4.7

Unemployment rate, April 2015%

Productivity

24

Source: OECD, June 2015

Slight increase in unit labour costs since Q4 2014

90

92

94

96

98

100

102

104

106

108

110

Q1-

2007

Q2-

2007

Q3-

2007

Q4-

2007

Q1-

2008

Q2-

2008

Q3-

2008

Q4-

2008

Q1-

2009

Q2-

2009

Q3-

2009

Q4-

2009

Q1-

2010

Q2-

2010

Q3-

2010

Q4-

2010

Q1-

2011

Q2-

2011

Q3-

2011

Q4-

2011

Q1-

2012

Q2-

2012

Q3-

2012

Q4-

2012

Q1-

2013

Q2-

2013

Q3-

2013

Q4-

2013

Q1-

2014

Q2-

2014

Q3-

2014

Q4-

2014

Q1-

2015

Development of unit labour costs, Q1 2007 - Q1 20152010 = 100

Germany

France

UK

Spain

25

Exports

Internationalization (I)

January - April 2015

▲ 3.4% year on year variation (89,668.1 M€) Imports

▲ 4.9% year on year variation (81,891.1 M€)

Trade balance

DEFICIT (7,777.1 M€) ▼ 10.1% y/y

Due to ▼ 34.8% in energy deficit

Geographic distribution

SECTORS: TOP 3

Ex

ports

Im

ports

EU Rest of Europe 5.5%

65%

EU Rest of Europe

55.5%

5.5%

China 8.3%

Source: Ministry of the Economy, June 2015 Source: Ministry of the Economy, June 2015

Exports % total Imports % total

Capital assets 19.6 Capital assets 19.4

Automobile 16.9 Chemistry 16.1

Food, beverage and tobacco

16.6 Energy 14.5

26

Internationalization (II)

Leadership in tourism

27

Between January and May: 5.1% more tourists than in 2014 (22.5 millions).

First place in the ranking of the Travel & Tourism Competitiveness Report 2015, World Economic Forum (141 economies).

Internationalization (III)

28

Spain´s position in international rankings

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