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Economic activity in Spain will continue showing the momentum expected, allowing the growth forecast for 2014 to remain at 1.3%. But lower growth expectations in Europe as a whole than forecast three months ago and greater uncertainty have biased growth forecasts for 2015 slightly to the downside, to 2.0%.
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November 2014
Spain Economic Outlook
Spain Economic Outlook, November 2014
Page 2
Section 1
Global recovery, sluggish and with risks to the downside Section 2 Spain: the recovery continues, faster than the EMU as a whole, although this will put a limit on acceleration
Section 3 It is crucial to carry on with the reform drive
Contents
Spain Economic Outlook, November 2014
1
2
GDP, global growth (%) Source: BBVA Research
Global growth will accelerate in 2015 despite the downward correction of Eurozone GDP and lower growth in LatAm
The risk of a hard landing in China is low and the Fed is managing the recovery skilfully, but geopolitical risks are rising, as are those associated with activity in the EMU
The correction of imbalances among agents is still hindering recovery
3
Section 1
World economy: baseline scenario
Page 3
3.0
0.0
5.4
4.1
3.4 3.2 3.23.7
-4
-3
-2
-1
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013 2014 2015
Developed Emerging Baseline scenario Nov 14
Spain Economic Outlook, November 2014
Section 1
World economy: current outlook and risk map
• Signs of acceleration in international trade • Asia: No shocks. Mixed data in China. Deceleration in Japan • Latin America: downward correction in all countries, apart from Mexico (=) and Colombia () • Risks: geopolitics in the Middle East, the Fed, correction in China, EMU stagnation
• 3Q consistent with our baseline scenario, unemployment under 6% • Forward guidance: rate hike in mid-2015 • Risks: fiscal (high public debt) and long-term stagnation
• GDP stagnation in 2Q and 3Q, low inflation expectations for the long term • Interest rates and premia going downwards, EURUSD depreciation < 1.22? QE in public debt? • Risks: geopolitical in Ukraine and sanctions on Russia, exhaustion of demand-side policies • AQR/ST: major progress in transparency and SSM. Solvency is not a problem
World economy
(3.6%)
USA (2.5%)
EMU (<1.5%)
Page 4
Spain Economic Outlook, November 2014
Page 5
Section 1 Global recovery, sluggish and with risks to the downside
Section 2
Spain: the recovery continues, faster than the EMU, although this will put a limit on acceleration Section 3 It is crucial to carry on with the reform drive
Contents
Spain Economic Outlook, November 2014
Section 2
Expansion continues as expected
GDP has already clocked up five consecutive quarters of growth (0.5% in 3Q14) …
… because of the improvement in domestic demand, particularly from the private sector,
and in spite of virtual stagnation in net exports
The trend in 4Q14 data is bending towards a stabilization of the rate of expansion at 0.5%
Spain: GDP growth and MICA-BBVA forecasts Source: BBVA Research
Page 6
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Jun-
09S
ep-0
9D
ec-0
9M
ar-1
0Ju
n-10
Sep
-10
Dec
-10
Mar
-11
Jun-
11S
ep-1
1D
ec-1
1M
ar-1
2Ju
n-12
Sep
-12
Dec
-12
Mar
-13
Jun-
13S
ep-1
3D
ec-1
3M
ar-1
4Ju
n-14
Sep
-14
Dec
-14
(f)
CI at 60% CI at 40% CI at 20% GDP (%QoQ)
Spain Economic Outlook, November 2014
Section 2
Although 2015 growth forecasts have been corrected to the downside …
Given the sound long-term economic performance, we are keeping to our GDP
growth forecast of 1.3%
However, the 2015 forecast has been reduced from 2.3% to 2.0%
The principal reason for the revision is lower-than-expected growth in the EMU
Spain: 2015 growth forecasts (%) Source: BBVA Research based on Consensus Forecasts
Page 7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
Jan-
14
Feb-
14
Mar
-14
Apr
-14
May
-14
Jun-
14
Jul-1
4
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Consensus (1.9%) National Forecasters (2.0%)
Foreign Forecasters (1.7%) BBVA Reseaech (2.0%)
Spain Economic Outlook, November 2014
In the past, a 1% reduction in the EMU’s GDP passed through to Spanish GDP almost entirely
The trade channel (exports) will be the main vehicle for transmission, but others cannot be
ruled out (investment, financial etc.)
This time, the impact may be lower
Section 2
… because of the weakness in the EMU’s recovery …
Spain: estimated impact on GDP of a 1% fall in the EMU’s GDP (pp) Source: BBVA Research
Box 1
Page 8
AND ARA
ASTBAL
CAN
CANT
CAT CLM
CYL
EXT
GAL
MAD
MUR
NAVPVA
RIO
VAL
ESP
-1.4
-1.3
-1.2
-1.1
-1.0
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
0 20 40 60 80
Impa
ct o
n G
DP
(pp)
Weight of exports to EMU (% of total)
Spain Economic Outlook, November 2014
… GDP will accelerate in 2015 as a result of diverse factors
• Euro depreciation • Improvement in international trade • Slight acceleration in the eurozone, helped by the reduction in oil prices and other factors
• Investment in machinery and equipment now represents 45% of total real investment and more than 8% of real internal demand (all-time record)
• Consistent with the change in production model to target the external sector
• More expansive monetary policy, which has brought interest rates to historic lows • Increase in demand for credit (EUR50bn) over the next few years and in GDP (+0.5% in
2015) • New credit flows (YoY 7M 2014): +12.4% (corporate<EUR1m) +12.1% (individuals)
Exports (>5%)
Investment M & E (>7%)
ECB and credit
• The tax cuts will cost EUR9bn between 2015 and 2016 • This will increase domestic demand and imports, attenuating the effect on GDP: +0.3% (2015) • The cyclical improvement and compliance with 2014 targets make fiscal consolidation easier
to achieve
Fiscal policy
Baseline scenario in which risk factors do not materialise
Page 9
Spain Economic Outlook, November 2014
Exports continue to grow: average growth of 1.4% QoQ is expected in 2Q14 and 3Q14
In the past, other factors have enabled exports to continue to grow despite a recession in the
EMU
Greater diversification, competitiveness gains and increased investment in recent quarters will
support exports
Section 2
Factors which will keep the economy growing A. Greater diversification and competitiveness of exports
Spain: exports and GDP in the EMU (% var., YoY) Source: BBVA Research
2013
2012
1993
Page 10
-2
0
2
4
6
8
10
12
14
16
18
-2 -1 0 1 2 3 4 5EMU growth (% var., YoY)
Spa
in's
exp
ort
grow
th (
% v
ar.,
YoY
)
Spain Economic Outlook, November 2014
Section 2
Factors which will keep the economy growing B. Looser monetary policy: euro depreciation
Another factor which will help competitiveness will be a greater-than-expected depreciation of
the euro
We expect an exchange rate of around USD/EUR 1.2 next year, 10% below the 2014
average
This will strengthen the increase in exports and imports substitution
Spain: impact on GDP of a 10% depreciation in the euro over the dollar (pp) Source: BBVA Research
Box 1
Page 11
PVA GAL
CANT CAT
NAV
CLM MURESPRIO
CAN
VAL
ARAMADAND
CYLBAL
ASTEXT
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0 20 40 60 80 100
Impa
ct o
n G
DP
(pp)
Trade openness in 2013 (% of GDP)
Spain Economic Outlook, November 2014
Section 2
Factors which will keep the economy growing B. Looser monetary policy: lower interest rates
Spain: forecast impact on GDP of a 100bp fall in banking credit spread as a result of the TLTRO (pp) Source: BBVA Research
Box 3
The ECB’s actions are designed to reduce the cost of bank lending, conditional on an increase
in credit
In Spain, lower rates could contribute to GDP growth of around 0.5pp in 2015 …
… although the uncertainty is large
Page 12
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
2014 2015 2016 2017 2018 2019
Spain Economic Outlook, November 2014
Section 2
Factors which will keep the economy growing C. The improvement in the cycle means less fiscal tightening is needed …
Between 2011 and 2013, reducing the public deficit from 9.2 to 6.3% of GDP required measures of
about 7% of GDP, given the cyclical position
In 2014, there has been an improvement in the cycle and grater responsiveness of revenues a
and expenditure to that recovery
This will give the public sector room to introduce expansionary policies and still meet
its budgetary targets
Spain: discretionary fiscal measures (pp of GDP) Source: BBVA Research
Page 13
2.1
5.4
2.1
0.0
-0.2
-1
0
1
2
3
4
5
6
2011 2012 2013 2014 (f) 2015(f)
Spain Economic Outlook, November 2014
Section 2
Factors which will keep the economy growing C. … and make more expansive measures possible
The tax reform can reduce effective average rates to a significant degree
This ought to help underpin domestic demand, at a time when certain incentives are winding
down
We estimate the tax reduction could add around 0.3pp to GDP in 2015
Spain: Income tax, expected effective average rate over the net tax base (pp) Source: BBVA Research
Box 2
Page 14
17.2
17.5
18.8
17.4
16.6
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
2010 2011 2014 2015 2016
Spain Economic Outlook, November 2014
= .
Section 2
Factors which will keep the economy growing E. Progress in reducing imbalances
Real interest rate
Building permits
Financial wealth
Prices
External demand
Residential investment Around zero in 2Q14
Variables that lead the
recovery .
= . Lagging
variables
-330bp since 3Q12
+38% since 2Q12
+15.5% since 2Q13
+72% since 1Q10
Around zero in 2Q14
Box 4
Page 15
Spain Economic Outlook, November 2014
The reduction in trade costs could be an important factor for exports competitiveness
Likewise, as the price reduction is transferred to households, this may boost private
consumption
It is critical to diagnose the factors behind the downward pressure: if it is a response to
increased supply and is permanent, the impact may be relevant
Section 2
Bias to the upside: lower oil prices
Spain: estimated impact on GDP and CPI of a 20% fall in the oil price (pp) Source: BBVA Research
Page 16
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2014 2015 2014 2015
GDP (% YoY) CPI (% YoY)
Oil supply shock Global demand shock
Spain Economic Outlook, November 2014
Growth forecasts remain heterogeneous by region
Each region’s different level of exposure to external demand …
Section 2
Forecasts by Spanish regions
… and the progress made in fiscal consolidation continue to be the main factors
accounting for growth differentials
Spain: GDP growth forecast by region Source: BBVA Research based on NSI
Page 17
AND
ARA
AST
BAL
CAN
CNT
CYLCLM
CAT
EXTGAL
MAD
MUR
NAV
PVAS
RIO
VAL ESP
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2
GD
P gr
owth
in 2
015
GDP growth in 2014
Spain Economic Outlook, November 2014
Although major progress has been made in improving competitiveness and exports …
… the increase in job creation has brought with it a deterioration in the current account balance
…
… which has to be avoided in the medium and long-term by continuing the reform drive
Section 2
Internal risks: correction in the current account
Spain: current account and unemployment rate (% of GDP and %) Source: BBVA Research
Page 18
-15
-10
-5
0
5
10
5
10
15
20
25
30
jun-
90ju
n-91
jun-
92ju
n-93
jun-
94ju
n-95
jun-
96ju
n-97
jun-
98ju
n-99
jun-
00ju
n-01
jun-
02ju
n-03
jun-
04ju
n-05
jun-
06ju
n-07
jun-
08ju
n-09
jun-
10ju
n-11
jun-
12ju
n-13
jun-
14
Cur
rent
Acc
ount
Bal
ance
(%
)
Tasa
de
dese
mpl
eo (
%)
Unemployment rate compatible with external balance
Unemployment rate
Current account balance (rhs)
Spain Economic Outlook, November 2014
Page 19
Section 1 Global recovery, sluggish and with risks to the downside Section 2 Spain: the recovery continues, faster than the EMU, although this will put a limit on acceleration Section 3
It is crucial to carry on with the reform drive
Contents
Spain Economic Outlook, November 2014
Section 3
The need to go deeper with reforms
1. To reduce debt, improve the Spanish economy’s financing capacity and attract foreign direct investment
3. Reforms to improve productivity, the size of companies and the Spanish’s external competitiveness and attractiveness: its physical, human and
technological capital
4. Building on reforms to improve the efficacy of active employment policies, reduce duality in the labour market and improve how it works -> more and better
employment
2. Reform of the public sector, fiscal consolidation and long-term sustainability of public finances, with an efficient fiscal system to incentivise growth and job
creation -> experts committee
Page 20
Spain Economic Outlook, November 2014
Section 3
The need to go further with reforms
The reform isn’t comprehensive and it’s far away from what had been proposed by the
experts committee
However, the system might become more transparent and efficient…
… and progressive than in 2010
Spain: income tax, expected variation in the effective average rate, by income bracket (pp) Source: BBVA Research
Box 2
Page 21
-5
-4
-3
-2
-1
0
1
2
0 to 12,000(4.9% taxpayers)
12,000 to 30,000(42.6% tapayers)
30,000 to120,000 (15.1%
taxpayers)
over 120,000(0.4% taxpayers)
2016-10 2016-14
Spain Economic Outlook, November 2014
Macroeconomic Forecasts
Spain and Europe: macroeconomic forecasts Source: BBVA Research based on NSI, Eurostat, central bank and ECB
Page 22
Spain EMU Spain EMU Spain EMUHouseholds final consumption expenditure -2.3 -0.6 2.1 0.7 1.8 1.3General government final consumption exp. -2.9 0.2 1.0 0.9 0.9 0.4Gross fixed capital formation (G.F.C.F.) -3.8 -2.4 0.6 0.6 4.3 1.8Changes in inventories (*) 0.0 -0.1 0.0 0.1 0.0 0.0Domestic Demand (*) -2.7 -0.8 1.6 0.8 2.0 1.1Exports 4.3 2.1 3.7 3.7 5.3 5.1Imports -0.5 1.2 4.8 4.1 5.5 5.2External Demand (*) 1.4 0.4 -0.3 0.0 0.1 0.2
GDP mp -1.2 -0.4 1.3 0.8 2.0 1.3Pro-memoriaTotal employment (LFS) -2.8 -0.8 1.0 0.5 1.8 0.6Unemployment rate (% Active pop.) 26.1 11.9 24.4 11.6 23.1 11.4Current account balance (% GDP) 1.4 2.3 1.2 2.2 2.1 2.1Public debt (% GDP) (**) 92.1 90.9 98.2 94.5 99.8 94.4Public deficit (% GDP) -6.3 -2.9 -5.5 -2.8 -4.2 -2.6CPI (average) 1.4 1.4 0.0 0.5 1.0 1.0CPI (end of period) 0.3 0.8 0.3 0.6 1.2 1.1(*) Contribution to GDP Growth(**) Excluding aid to the banking sector in Spain(f): forecast
2015 (f)2013 2014 (f)(% YoY)
November 2014
Spain Economic Outlook