Global and Spanish Outlook
May 2014
Global and Spanish Outlook, May 2014
Key messages
1
2
3
The global economic cycle is improving, although growth is not accelerating as expected, particularly in emerging economies
Some economic policy uncertainties are being dispelled but some risks remain, although they are no longer systemic as in previous years
Spain confirms the biases to the upside in growth, which will be above 1% in 2014. Uncertainties such as those associated with the deceleration in export growth and non-compliance with the deficit target, with its impact on GDP, are being resolved positively
Reforms are having a positive effect on the economy. However, the effort can and ought to be greater if the recovery is to strengthen. A more efficient tax system, which includes a fiscal devaluation, or an ambitious reform of the services sector might raise exports noticeably
4
Page 2
Global and Spanish Outlook, May 2014
Section 1
World economy: the recovery continues, but is not accelerating Section 2
Spain: the biases to the upside are confirmed
Section 3
Commitment to the reforms is essential in consolidating the improvement in markets and increasing growth potential
Index
Page 3
Global and Spanish Outlook, May 2014
World GDP growth (% QoQ) Based on BBVA-GAIN Source: BBVA Research
Global cycle: growth remains robust at a quarterly 0.8% in the first half of the year
Overall, higher growth in developed economies is partly offsetting lower growth in
emerging economies
Growth is still robust and financial conditions have also eased in emerging economies, but incoming information reveals no acceleration
of global growth in the first half of 2014
0,0
0,2
0,4
0,6
0,8
1,0
1,2
Last MC Current Last MC Current
Q2-13 Q3-13 Q4-13 Q1-14 Q2-14
Actual Estimates
Page 4
Global and Spanish Outlook, May 2014
US: GDP growth (% YoY) Source: BBVA Research, BEA
US: growth is in line with our baseline scenario
We maintain our baseline scenario for growth. The 1Q14 slowdown should be short-lived (bad
weather related)
The balance of risks remains slightly biased to the upside
The Fed will end tapering by the end of the year, and will start increasing rates in the
second half of 2015
2,8
1,9
2,5 2,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
2012 2013 2014 2015
Baseline Apr-2014 Baseline Jan-2014Page 5
Global and Spanish Outlook, May 2014
Exchange rate volatility in May-June 2013 and external financial needs Source: BBVA Research
Monetary return to normal in the US is an event of global impact in financial markets
Financial tensions vs. Lehman BBVA Research’s Financial Tension Index vs. Lehman=100% Source: BBVA Research
In May 2013 markets perceived that the end to the Fed’s balance-sheet expansion was near, which increased global volatility, especially in
emerging markets
Exchange rate volatility was higher in emerging economies with larger external
financial dependency
ARG
BRA
BUL
CHL
CHN
COL
HUN
IND
IDN
KOR
MYS
MEX
PER
PHL POL
ROM
RUS
THA TUR
VEN
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
-6.0 -4.0 -2.0 0.0 2,0 4.0 6.0
Foreign funding gap as % GDP (Current accout balance plus FDI)
Exch
ange r
ate
vari
ation in
May 2
013
FED
's t
aperi
ng e
vent
Page 6
0%
10%
20%
30%
40%
50%
60%
Gre
ece, 2
01
0
EM
U p
eriphery
, 2
011
EM
U O
MT, 20
12
Fed
taper
ing,
May
201
3
Gre
ece, 2
01
0
EM
U p
eriphery
, 2
011
EM
U O
MT, 20
12
Fed
taper
ing,
May
201
3
Gre
ece, 2
01
0
EM
U p
eriphery
, 2
011
EM
U O
MT, 20
12
Fed
taper
ing,
May
201
3
US EMU Emerging Markets
Global and Spanish Outlook, May 2014
Eurozone: economic growth is consolidating, as expected …
Page 7
Domestic demand will contribute to the recovery in 2014, especially in investment
The euro’s strength will slow down the contribution of external demand to growth
Banking union, in place through the AQR and the ST, should support the credit recovery in
2015, signaling the end of the crisis
Eurozone: GDP growth (% YoY) 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
2012 2013 2014 2015
Baseline Apr-2014 Baseline Jan-2014
Global and Spanish Outlook, May 2014
…which should favour a decrease in deflation risks
Downside surprises on headline inflation have increased the risk of unanchored expectations
Downward pressures come from the Euro’s appreciation and lower raw-material prices
The current recovery in demand, lower financial stress and improved credit supply
reduce deflation risks
Inflation in the eurozone: baseline scenario (% YoY) Source: BBVA Research
Page 8
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20% 40% 60% 95%
Global and Spanish Outlook, May 2014
“Too low” inflation for “too long” is a risk for the recovery
Inflation pressure in developed economies (% YoY) Trimmed mean of CPI in the eurozone and Japan, and PCE in the US Source: BBVA Research and Dallas Fed
Optimised measures of inflation tensions show the lack of upside inflation pressures as a whole
Decreasing inflation in the eurozone makes it vulnerable to additional negative shocks
The ECB seems ready to take further action if needed. Even if not very likely, a QE is being
considered
Page 9
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Mar-
07
Mar-
08
Mar-
09
Mar-
10
Mar-
11
Mar-
12
Mar-
13
Mar-
14
EMU US Japan
Global and Spanish Outlook, May 2014
China: industrial production, YoY % Source: Haver and BBVA Research
Chinese growth weakens in the beginning of 2014
China’s indicators are losing momentum …
China: debt in the non-financial private sector Total debt as % GDP Source: BBVA Research, BIS and OECD
… as the authorities are more focused on reducing vulnerabilities with less room for
manoeuvre in the short term
Page 10
2.0
6.0
10.0
14.0
18.0
22.0
Mar-
07
Mar-
08
Mar-
09
Mar-
10
Mar-
11
Mar-
12
Mar-
13
Mar-
14
90
110
130
150
170
190
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
All sectors (banking sector and non-intermediated)
Domestic banks
Global and Spanish Outlook, May 2014
The government will continue with economic reforms, and will implement measures to
reduce financial risks
China: the baseline scenario has been revised downwards due to the recent moderation and new targets on economic policy
Page 11
We expect a greater adjustment in investment than in consumption
In case of higher-than-expected deceleration in the economy (below 7%), there is room for
public intervention (investment in infrastructure, fiscal stimulus)
China: GDP growth (% YoY) Source: BBVA Research
7.77.7
7.27.0
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
2012 2013 2014 2015
Baseline Apr-2014 Baseline Jan-2014
Global and Spanish Outlook, May 2014
Roughly every pp of lower growth in China reduces global growth by 0.4, mainly
through the trade channel (lower foreign demand from China)
If, in addition to this channel, lower Chinese growth would cause higher global financial volatility, the impact in world GDP could
double to almost 1.0
All in all, differences will remain in the impact expected between geographical areas
GDP growth, impact of an adjustment in China’s growth. Ranking from higher to lower impact Source: BBVA Research
What could be the impact of lower growth in China on other economic areas?
Ranking Economic area
1 Latin America
2 Japan
3 Eurozone
4 US
Page 12
Global and Spanish Outlook, May 2014
All in all, heterogeneity characterises the impact of deceleration in China or an interest rate rise in the US
Page 13
Emerging Markets’ exposure to China’s slowdown and foreign funding needs The size of the circle is proportional to the exchange rate volatility in the Fed’s tapering episode, May 2013 Source: BBVA Research
BRACOL
ARG
BUL
THA
CHL
IND
IDN
KOR
MYS
MEX
PER
PHL
POL ROM
RUS
HUN
TUR
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
-1 1 3 5 7 9 11 13
Fundin
g G
ap (
CA
B+
FD
I, a
vg.
20
12
, %
GD
P)
Exports to China 2012, % of GDP
Global and Spanish Outlook, May 2014
Global GDP growth (%) Source: BBVA Research
To sum up global growth will continue, with a monetary return to normal ahead
1
2
Global expansion will continue, with China growing less than previously but without immediate risks of a sudden adjustment
The combination of the Fed’s tightening (diverging further from ECB policy) and adjustments in China’s growth will be the dominant drivers in the coming months, with an heterogeneous impact on EM
Page 14
2.8
-0.4
5.2
4.0
3.23.0
3.4
3.8
-3
-2
-1
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013(e) 2014(f) 2015(f)
Developed Mkts Emerging Mkts
Global and Spanish Outlook, May 2014
Index
Page 15
Section 1
World economy: the recovery continues, but is not accelerating
Section 2
Spain: the biases to the upside are confirmed Section 3
Commitment to the reforms is essential in consolidating the improvement in markets and increasing growth potential
Global and Spanish Outlook, May 2014
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, a lower need for fiscal adjustment, reduction of some uncertainties and import substitutions
If the favourable start to 2Q13 were to consolidate in the next few months, growth
could accelerate again
Page 16
-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-0
9
Sep
-09
Dec-
09
Mar-
10
Jun-1
0
Sep
-10
Dec-
10
Mar-
11
Jun-1
1
Sep
-11
Dec-
11
Mar-
12
Jun-1
2
Sep
-12
Dec-
12
Mar-
13
Jun-1
3
Sep
-13
Dec-
13
Mar-
14
Jun-1
4 (
f)
CI at 60% CI at 40% CI at 20% GDP (% QoQ)
Global and Spanish Outlook, May 2014
The Spanish economy’s recovery accelerates
Spain: BBVA Economic Activity Survey (Balance of extreme replies, %) Source: BBVA Research Box 1
This expansion in activity is confirmed by data from the BBVA Economic Activity Survey …
… which is highly correlated with activity in those regions with a wide response base …
… and the results of which will be presented quarterly from now onwards
Page 17
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
-60 -40 -20 0 20 40 60
GD
P g
row
th i
n Q
(Q
oQ
, %
)
Perspective in t-1 for t(balance of extreme responses, %)
Global and Spanish Outlook, May 2014
Spain: GDP growth by region (%YoY) Source: BBVA Research
The regions continue to be heterogeneous
We have revised 2014 growth upwards, from 0.9% to 1.1%, and maintain our 1.9% forecast
for 2015
Heterogenous progress in correcting imbalances and exposure to foreign demand …
… are key to explaining the regions’ different growth rates
Page 18
AND
ARA
AST
BAL
CAN
CNT
CYL
CLM
CAT
EXT
GAL MAD
MUR
NAV
BASC
RIO
VAL
SPA
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
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
Global and Spanish Outlook, May 2014
Some uncertainties have been positively resolved: 1. Exports continue to grow
Spain: growth and composition in goods exports by geographic areas Source: BBVA Research based on Datacomex
Note: data to February 2014
Deceleration in goods exports at the end of 2013 seems to have been temporary
Services exports continue to grow, although more modestly than in 2013
Improved global perspectives will enable exports to continue growing in coming months
Page 19
0
10
20
30
40
50
60
70
-15
-10
-5
0
5
10
15
20
European Union North America EAGLEs Rest of theworld
Nominal growth, 4Q13 Avg. % YoY (LHS)
Nominal growth, 1Q13 Avg. % YoY (LHS)
Weight of exports in total, % (RHS)
Global and Spanish Outlook, May 2014
Some uncertainties have been positively resolved: 2. Investment gathers pace
Spain: investment in machinery and equipment (M&E) (Real ratios at 2008 prices) Source: BBVA Research based on INE
Whereas investment in M&E has grown by 8.3% in Europe since it touched bottom in
2Q09, in Spain it has grown by 17.6%
Today it already represents 45% of total investment and over 8% of real domestic
demand (all-time high) …
… which is consistent with the change in the productive model, oriented more towards the
foreign sector
Page 20
4
5
6
7
8
9
10
Dec-
81
Dec-
83
Dec-
85
Dec-
87
Dec-
89
Dec-
91
Dec-
93
Dec-
95
Dec-
97
Dec-
99
Dec-
01
Dec-
03
Dec-
05
Dec-
07
Dec-
09
Dec-
11
Dec-
13
Dec-
15
% of GDP % of national demand
Global and Spanish Outlook, May 2014
Spain: 10-year bond interest rate (Difference over earlier forecasts in bp) Source: BBVA Research
Some uncertainties have been positively resolved: 3. Lower financial tensions
Better perception from abroad has reduced dependency on the ECB and improved access
of large companies to wholesale markets
Lower financial tensions are felt in the economy with a six to nine month time lag
A permanent drop of 100bp in sovereign interest rates implies up to 1% more growth
for the economy
Page 21
-250
-200
-150
-100
-50
0
2014 2015
Jul-13 Oct-13 Jan-14 Apr-14
Global and Spanish Outlook, May 2014
Some uncertainties have been positively resolved: 4. Flows of new credit operations are improving
Spain: new credit retail operations (% YoY) Source: BBVA Research based on BoS
The Spanish economy is going through an unavoidable process of debt reduction …
… which is compatible with credit provision for solvent projects
A turning point is already visible, together with an improvement in credit flows to
households and SMEs, which will be strengthened in 1H14
Page 22
-35%
-25%
-15%
-5%
5%
15%
25%
Mar-
04
Sep
-04
Mar-
05
Sep
-05
Mar-
06
Sep
-06
Mar-
07
Sep
-07
Mar-
08
Sep
-08
Mar-
09
Sep
-09
Mar-
10
Sep
-10
Mar-
11
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
% Y
oY v
ari
atio
n
Data Trend
Global and Spanish Outlook, May 2014
Regions: breakdown of public deficit, excluding aid to the financial sector (%GDP) Source: BBVA Research based on MINHAP
Some uncertainties have been positively resolved: 5. GDP growth and meeting fiscal targets
Fiscal adjustments made at the end of 2013 and the recovery both significantly increase the
likelihood of compliance in 2014,…
… although doubts remain over the response of public revenue to economic growth and the
impact of the local authorities’ reform …
… as well as the tax reform and the regions’ budgetary measures for 2015
Page 23
9.1
3.1
5.3
6.8
1.8 2.0
6.6
-0,4 0.3
5.8
-0,9
0.2
5.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Defici
t 2
011
Pasi
ve f
isca
l polic
y
Fis
cal eff
ort
Defici
t 2012
Pasi
ve f
isca
l polic
y
Fis
cal eff
ort
Defici
t 2013
Pasi
ve f
isca
l polic
y
Fis
cal eff
ort
Defici
t 2014
Pasi
ve f
isca
l polic
y
Fis
cal eff
ort
Defici
t 2015
2012 2013 2014 2015
Global and Spanish Outlook, May 2014
99
100
101
102
103
104
99 100 101 102 103 104
Pro
ductivity o
f la
bo
ur
FTE Jobs
Since 1Q94 = 100 Since 3Q13 = 100 (f)
Although some uncertainties persist
Spain: labour productivity and job creation (Onset of the recovery =100) Soure: BBVA Research
1. Employment response to growth: how will productivity of labour behave in the recovery?
2. Fundamentals do not account for all the growth in private consumption
3. Export prices have offset the appreciation in the exchange rate. Can exports continue to
hold up?
More
Employment
More
productivity
Page 24
Global and Spanish Outlook, May 2014
Index
Page 25
Section 1
World economy: the recovery continues, but does not accelerate
Section 2
Spain: the biases to the upside are confirmed
Section 3
Commitment to the reforms is essential in consolidating the improvement in markets and increasing growth potential
Global and Spanish Outlook, May 2014
The need to go further with the reforms
Spain: potential effects after a year of the flat contribution to Social Security paid for indefinite contracts Source: BBVA Research)
Despite some weaknesses (it is not permanent and savings to the employer increase in step
with the contribution base) …
… we forecast a positive effect on employment (0.6 - 0.7%) and on GDP (0.2 – 0.3%), with a
net fiscal cost of 0.12% of GDP
New measures: fiscal devaluation, incentivising open-ended contracts, improving active
employment policies
Box 2
1.0
0.8
0.6
%
0.4
0.2
0.0
Employment GDP
Page 26
Global and Spanish Outlook, May 2014
The need to go further with the reforms Spain: effect on exports of adopting best regulatory practices, large corporations (accumulated variation %, 1992-2008) Source: BBVA Research based on Correa-López & Doménech (2014)
Thanks to the process of deregulation in the services sector since 1990, manufacturing
exports are 50% higher
Had international best practices been adopted, exports would have been a further 18% higher
So, there is still scope for continuing to eliminate obstacles which make it difficult for
companies to become more international
Box 3
Page 27
0
5
10
15
20
25
No
n-m
eta
l m
inera
ls
Ch
em
icals
Text
ile
Fo
od
Paper
ind
ust
ry
Ru
bb
er
& p
last
ics
Basi
c m
eta
ls
Tra
nsp
ort
mate
rial
Ele
ctri
c eq
uip
ment
Oth
er
manu
factu
red
goo
ds
Avf. effect: 18%
Global and Spanish Outlook, May 2014
The need to go further with the reforms
1. Reduce debt and improve financing in the Spanish economy: complete the restructuring of the financial sector and attract direct foreign investment
3. Reforms with which to improve productivity, the size of companies, competitiveness and Spain’s perception abroad, to attract inward physical,
human and technological capital
4. Going further with reforms that improve the efficiency of active employment policies, reduce the two-tier nature of the labour market and make it work
better -more employment, and of higher quality
2. Public administrations 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
Page 28
Global and Spanish Outlook
May 2014
Global and Spanish Outlook, May 2014
Macro-economic scenario
Spain and Europe: macro-economic forecasts Source: BBVA Research based on INE and Eurostat
Page 30
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) -10.5 -3.7 -7.1 -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)
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