2014 02 17 Spain Economic Outlook

8/12/2019 2014 02 17 Spain Economic Outlook

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Global and Spanish

Economic OutlookFebruary 2014


2/34

Global and Spanish Economic Outlook, February 2014

Main messages

The global economic cycle is improving and we expect a moderate acceleration

in growth in 2014-15 supported by the developed economies

Some economic policy uncertainties have been resolved but there are still

risks, although not of a systemic nature, as was the case in the past

For the first time since the beginning of the crisis the risks to our forecasts

for the Spanish economy are to the upside. The recovery is being driven by

exports, import substitution and the recovery in new lending. In addition, both

financial tensions and fiscal consolidation are less intense

The scope of the reforms needs to be expanded if they are to underpin arobust and sustained recovery, and reverse the jobs destroyed within a

reasonable period

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Main Messages

Global GDP growth (%)Source: BBVA Research1

2

The global expansion willcontinue in 2014-15this timearound with higher contributionsfrom advanced economies

Growth risks are more balancedwith upward risks in the USanddownward risks that remain:

the exit from QE and flows toemerging markets,

the uneven recoveries andvulnerabilities in EM, and

the eurozone

3.92.8

-0.4

5.2

4.0

3.22.9

3.6

-3

-2

-1

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013

(e)

2014

(f)

2015

(f)Adv. Economies Emerging economies

Baseline Jan14 Baseline Oct-13

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The global momentum is improving

Manufacturing PMIsSource: BBVA Research based on Markit Economics

Industrial production (%,yoy)Source: CPB Netherlands

BBVA Financial Stress IndexSource: BBVA Research

46

48

50

52

54

56

58

60

Sep10

Feb11

Jul11

Dec11

May12

Oct12

Mar13

Aug13

Jan14

GlobalAdvanced economies

BBVA Eagles

-0.12

-0.08

-0.04

0.00

0.04

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

-0.50

-0.10

0.30

0.70

1.10

Emerging Markets, left axis

Developed Markets, right axis

-2

0

2

4

6

8

10

12

14

16

Ma

y-10

No

v-10

Ma

y-11

No

v-11

Ma

y-12

No

v-12

Ma

y-13

No

v-13

Global Advanced Emerging

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FEDs forward guidance and ECBs roomof maneuver should anchor the global financial scenario

US: Fed funds futures and long term yields (%)Source: Bloomberg

EMU: Future of the EONIA rate and long term yieldsSource: Bloomberg and BBVA Research

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

1.10

1.30

1.50

1.70

1.90

2.10

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

10-Year Bund Yield at Constant Maturity (Avg, %)

EONIA Implied by the 12-Month Futures Price (% )

Taperingtalks

September FOMCmeeting

2 3

Taperingtalks

September FOMCmeeting

1 2

Realtapering

Realtapering

0.05

0.10

0.15

0.20

0.25

0.30

0.35

1.2

1.6

2.0

2.4

2.8

3.2

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

10-Year Treasury Note Yield at Constant Maturity (Avg, %)

Federal Funds Rate Implied by the 12-Month Futures Price (%)

31

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The tightening of liquidity conditions is impacting on EM;anyway, differentiation remains

EM: economic cycle and financial tensionsSource: BBVA Research

BRACHL

MEX

TUR

CHI

IND

KOR

MASYA

PHI

TWN

THA

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

-10.0 0.0 10.0 20.0 30.0

Funding

Gap(CA+FDI,avg.2Q13-2Q'12,%G

DP)

FX depreciation (Febr-14 vs. avg.Dec'12, %)

EM: exposure to short-term capital flows andexchange rate vs USDSource: BBVA Research

-0.12

-0.09

-0.06

-0.03

0.00

0.03

0.06

0.0948

49

50

51

52

53

54

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

Jan-14

BBVA EAGLEs PMI

BBVA Research Emerging Markets Financial Tension Index,right axis

Financial tensions

stop their

Cycle confidence

stops itsimprovement

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US: the sustained recovery and the fiscal agreementbias upwards our scenario for the US

US: GDP growth (y/y)Source: BBVA Research, BEA

US: private-sector payroll growth (monthly change,3-month average, thousands)Source: Bloomberg

0

50

100

150

200

250

300

0

50

100

150

200

250

300

Apr-10

Sep-10

Feb-11

Jul-11

Dec-11

May-12

Oct-12

Mar-13

Aug-13

Jan-14

QE2 QE3Twist

2.8

2.5

1.8

2.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015

Baseline Jan-2014 Baseline Oct-2013

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China: Growth momentum supported byrecent stimulus measures and improving external demand

The to-do list of the Third Plenum meetsour view about the needed reforms; lack of

details introduces uncertainty

The objective of the Communist Party of Chinais to give markets a decisive role asmechanism of allocating resources

Efforts to curtail financial fragilities could leadto somewhat lower momentum in 2014H2 asthe traditional engines of growth cannot be

used extensively any more

China: GDP Growth (%, y-o-y)Source: BBVA Research

7.7

7.77.6

7.5

6.0

6.5

7.0

7.5

8.0

8.5

2012 2013 2014 2015


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The eurozone: positive growth with an increasing role ofdomestic demand

Exports will remain as the main driver ofgrowth in both 2013 and 2014

Domestic demand has weighed on growth in2013, but will contribute to the recovery in

2014-15

Overall: lower financial tensions, higher globalgrowth, lower fiscal drag, ECBs loosening bias

and Banking Union

Eurozone: GDP growth (y/y)Source: BBVA Research

-0.6

1.1

-0.4

1.9

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2012 2013 2014 2015


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In the eurozone, the double-dip in the period 2008-13 andweak money growth have prompted inflation to fall

EZ: core inflation and demand pressure,% y/y and % potential GDPSource: Eurostat, Haver and BBVA Research

EZ: core inflation and M3,% y/ySource: Eurostat , Haver and BBVA Research

0.5

0.8

1.1

1.4

1.7

2.0

2.3

2.6

2.9

3.2

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Output gap, 6-Month ahead (LHS) Core CPI y/y (RHS)

0.5

0.8

1.1

1.4

1.7

2.0

2.3

2.6

2.9

3.2

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

M3, % y/y (LHS) Core CPI y/y (RHS)

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In the most likely scenario, the risk of deflation is low; yet itincreases under more extreme situations

Baseline scenario

InflationProb. ofdeflation

Monetary restriction(M3 growth = 0.9%)

1.0% 7.5%

0.8% 14%

Monetary restriction +shock(M3 growth = 0.9%; growth


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Expansin econmica con diversidad de ritmos y de riesgos

Interconnected risk events with potential to impact onglobal growth

(*) Heterogeneous developments among countries

QEs exit and disruptive

effects of portfolio rebalancing

Adjustment in Chinaand other EM (*)

The Eurozone

Banking union, political instability

and deflation risk

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In sum, economic growth at diverse paces and withdifferent risks

Growth cycle strengthens, mainly inadvanced economies and in some emerging

economies. Economic policy remains as asupportive factor for growth in 2014-15

To reinforce the baseline scenario, policy-makers have to tackle domestic

vulnerabilities: banking issues and disinflationrisks in the Eurozone, financial vulnerabilities in

China, and private domestic demand inemerging economies

The impact of FEDs tapering over globalfunding conditions, in the US and beyond,remains as a factor of uncertainty

GDP growth (%yoy)Source: BBVA Research and IMF

3.22.9

3.63.9

2.8

1.8

2.52.5

-0.6-0.4

1.1

1.9

5.0 4.85.2 5.4

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2012

2013

2014

2015

2012

2013

2014

2015

2012

2013

2014

2015

2012

2013

2014

2015

World US EMU BBVA-EAGLES

Baseline Nov-13

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Index

Section 1

Global economy: a gradual acceleration supported by the developed economies

Section 2

Spain: upside risks for the first time since the beginning of the crisis

Section 3

Commitment to the reforms is crucial to consolidate the improvement in the markets and increase potentialgrowth

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The recovery of the Spanish economy is confirmed

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

After three years in recession, domesticdemand started to make a positive contribution

to growth again in the second half of 2013

as a consequence of improved fundamentals,less restrictive fiscal policy, reduced

uncertainty and increased import substitution

The available information points to growth ofat least 0.4% in 1Q14-1.5

-1.0

-0.5

0.0

0.5

1.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14(f)

CI at 20%

CI at 40%

CI at 60%

Data (f: MICA-BBVA Research forecast)

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Public sector: breakdown of the public deficitexcluding aid to the financial sector(% GDP)Source: BBVA Research based on MINHAP

and, in spite of the uncertainty regarding the deficit in2013

The significant fiscal consolidation efforts in2012 and 2013

have resulted in containment of the publicdeficit at around 7.0% of GDP

The wider the deviation from the target deficitfor 2013, the greater the effort that will have

to be made in 2014

9.1

3.0

5.2

6.8

1.8 1.6

7.0

-0.3 0.9

5.8

-0.7

0.0

5.1

0

2

4

6

8

10

12

14

De

ficit

20

11

Passivefiscalpo

licy

Fiscaleffort

Deficit2012

Passivefiscalpo

licy

Fiscaleffort

Deficit2013

Passivefiscalpo

licy

Fiscaleffort

Deficit2014

Passivefiscalpo

licy

Fiscaleffort

Deficit2015

2012 2013 (e ) 2014 (f) 2015 (f)

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the risks are to the upside for the first time

Spain: GDP growth forecasts, 2014(% YoY)Source: BBVA Research based on Consensus Forecast Inc.

Economic policy decisions have eliminated therisk scenarios

The differential performance of the Spanisheconomy confirms this improvement in the

trend

If these trends are confirmed, growth could beeven stronger than we are forecasting

0

5

10

15

20

25

30

35

40

45

50

(< -1,2 ) ( -1,2;-0,8) ( -0,8;-0,4) ( -0,4;0 ) (0;0 ,4) (0,4 ;0,8) (0,8 ;1,2) (>1,2)

Relativefrequenc

y

GDP Growth forecast

July-2013 (mean: 0,2%) Feb-2013 (mean:0,3%)

Jan-2014 (mean: 0.7%)

BBVA Research(Jan-14)

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Upside risks:1. Exports will continue to expand

Spain: growth and breakdown of goods exports bybroad geographical areaSource: BBVA Research based on Datacomex

We expect the recovery to continue driven bythe increase in exports

The deceleration in exports is a temporaryphenomenon and will reverse in a scenario of

stronger global growth

The slowing momentum in EMs has been offsetby the recovery in the EMU

0

10

20

30

40

50

60

-24

-18

-12

-6

0

6

12

EMU EAGLEs

Nominal growth, average % yoy 1Q13 (LHS)

Nominal growthl, Oct-Nov 2013 average % yoy (LHS)

Share over total exports (%, RHS)

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Upside risks:1. Exports will continue to expand

Regions: average annual growth in exports of goodsdue to diversification (2009-2012)(%, Spain: weighted average)Source: BBVA Research Export growth is based on improvements in

competitiveness, and above all, ondiversification

On average, 75% of the growth in exportsduring the crisis was due to product and

geographical diversification

This export diversification prevented evengreater negative GDP growth

Box 3

-5

0

5

10

15

20

GAL

C&L

BAL

ARA

EXT

RIO

SPA

NAV

VAL

CLMB

C

CAT

MAD

CANT

AST

AND

MUR

CAN

Geographical diversification Product diversif ication

Combined effect

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Upside risks2. An increase in savings and financial wealth

Spain: net real household financial wealth(Deflated by the private consumption deflator; seasonally adjusted data)Source: BBVA Research based on Bank of Spain and INE

The increase in corporate and householdsavings has been an essential part of the

recoveries in Spain

that has helped in the deleveraging processand in the improvement in the financial

situation of the private sector

and these, together with the stabilisationand improvement in the value of wealth, has

driven an increase in consumption andinvestment

600

700

800

900

1000

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Real net financial wealth (billion )

2Q12-3Q13:

+24.8%

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Spain: 10Y bond yield(Difference vs. our November 2013 forecast in bp)Source: BBVA Research

Upside risks3. More certainty and fewer financial tensions

-128

-126

-124

-122

-120

-118

-116

-114

-112

-110

-108

2014 2015

Improved international perceptions of theSpanish economy have allowed Spain toreduce its dependence on ECB funding

Reduced financial tensions are reflected in theeconomy with a lag of 6-9 months

A permanent 100bp drop in sovereign interestrates implies up to one percentage point more

growth for the economy

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Upside risks4. More dynamic investment

Spain: exports and investment in equipment andmachinery (2008=100)Source: BBVA Research based on INE

The recovery we expect in the EMU and thecontinuing export growth

should translate into an increase in private-sector investment

In fact, the investment in equipment andmachinery had grown 6.3% by 4Q13

60

70

80

90

100

110

120

130

140

Dec-99

Sep-00

Jun-01

Mar-02

Dec-02

Sep-03

Jun-04

Mar-05

Dec-05

Sep-06

Jun-07

Mar-08

Dec-08

Sep-09

Jun-10

Mar-11

Dec-11

Sep-12

Jun-13

Mar-14

Dec-14

Sep-15

Goods and services exports

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Upside risks5. Improvement in new lending flows

Spain: new lending and credit to households,NPISHand non-financial entitiesSource: BBVA Research based on Bank of Spain (February 2014)

The Spanish economy is going through anevitable deleveraging process

that is compatible with new lending forfinancially viable projects

There has been a turning point and animprovement in corporate lending, which we

expect to consolidate in 1H14-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Yoy%

change

Total Tendencia Tendencia corregidaTotal Trend Corrected trend

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Spain: LFS employment(Variation in annual average, %)Source: BBVA Research based on INE

Upside risks6. Changes in the labour market

Net job-creation has started sooner than weexpected, partly as a reflection of wage

moderation

Had labour institutions been in better shape atthe beginning of the crisis, millions of job

losses could have been avoided

In 2014 employment will be created for thefirst time since the beginning of the crisis

-3.1

0.0

1.1

-3.1

0.4

1.0

-3,5

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2013 2014 2015

Spai n Out look 4Q13 Spai n Out look 1Q14

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Gl b l d S h E O l k F b 2014


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

In 2014 all the regions will return to positivegrowth

The progress made in correcting theimbalances and the exposure to external

demand

are the key to explaining the difference inthe speed at which the different regions will

start growing

2014: the start of the recovery

AND

ARA

AST

BAL

CAN

CNTC&L

CLM

CAT

EXT

GAL

MAD

MUR NAV

BASQ

RIO

VAL

SPA

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

Growthin2015

Growth in 2014

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Gl b l d S i h E i O tl k F b 2014


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IndexSection 1

Global economy: a gradual acceleration supported by the developed economies

Section 2

Spain: upside risks for the first time since the beginning of the crisis

Section 3

Commitment to the reforms is crucial to consolidate the improvement in the

markets and increase potential growth

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Global and Spanish Economic Outlook February 2014


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The need to broaden the scope of the reform agenda

GDP growth and job-creationSource: BBVA Research and Lebergott (1964)

Assumptions for the USA and the EMU are consistent with BBVA Research s scenario. The Spanish scenario

has been built assuming both that producvity per worker rises 0,6% (as it was the case between 1992 and

2007) and that GDP grows on average 2,5.

The recovery in employment will be verysensitive to economic growth

The objective should be to introduce thenecessary reforms to increase economicgrowth to close to or more than 2.5%

Unless this happens, job-creation will be limitedand the recovery slow

80

85

90

95

100

105

Pico 2 4 6 8 10 12 14 16 18aos

Levelofemploymentatthe

beginningof

thecrisis=100

Spain, 2007-2025EMU, 2007-2017USA., 2007-2014

USA 1929-1940

Peakyears

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The ECB must ensure it achieves its inflation target

Spain and EMU: inflation trend(% YoY)Source: BBVA Research based on INE y Eurostat

The ECB needs to converge with its inflationtarget more quickly, which would help Spain

deleverage

while the Spanish economy needs tocontinue to improve competitiveness

The reforms that improve competitiveness andfacilitate internal devaluation in Spain need to

continue

Box 1

-1,0

0,0

1,0

2,0

3,0

4,0

dic-02

jun-03

dic-03

jun-04

dic-04

jun-05

dic-05

jun-06

dic-06

jun-07

dic-07

jun-08

dic-08

jun-09

dic-09

jun-10

dic-10

jun-11

dic-11

jun-12

dic-12

jun-13

dic-13

Spain (Trimmed mean) Europe (core CPI)

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Spain: unemployment and public deficitSource: BBVA Research based on INE and MINHAP

An efficient tax system and fiscal sustainability

Box 2

Tax revenues dropped sharply in Spain as aconsequence of the recession

and the fiscal consolidation process requiressufficient resources to ensure that Spainsfinances remain in good health

but with a structure that drives economicgrowth and job-creation, two key factors for

reducing the deficit

80

81

8283

84

85

86

878889

9091 92

9394

95

96

97

98

990001 020304

05

0607

08

09

1011

12 13

-12

-10

-8

-6

-4

-2

0

2

4

7 9 11 13 15 17 19 21 23 25 27

Budgetdeficit(%G

DP)

Unemployment rate (%)

14%

(2006)

18%

(2013)

-1.8%

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The need to broaden the scope of the reform agenda

1. To continue the deleveraging and improvement in the finances of theSpanish economy: finalising the restructuring of the financial sector and

attracting foreign direct investment

3. Reforms to improve competitiveness, increase the attraction of Spaininternationally in terms of physical, human and technological capital

4. To continue with the reforms that reduce the duality in the labour market,improve the way it functions and increase employability

-> more and better-quality jobs

2. Public-sector reform, fiscal consolidation and long-term sustainability ofpublic finances, with an efficient tax system that incentivises growth and job-

creation

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Global and Spanish

Economic OutlookFebruary 2014



33/34

Macroeconomic scenario

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Current disinflation in some advanced economies iscomparable to the Great Recession episode

Core inflation in some advanced economies (% y/y)Source: Haver and BBVA Research

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

US Japan Eurozone UK

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2014 02 17 Spain Economic Outlook

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Transcript of 2014 02 17 Spain Economic Outlook