Global and Spanish Economic Outlook - 2nd quarter 2014

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


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


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


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


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

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EM

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eriphery

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EM

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ing,

May

201

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ece, 2

01

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EM

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EM

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12

Fed

taper

ing,

May

201

3

US EMU Emerging Markets


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


…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%


“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

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-0.5

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07

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EMU US Japan


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

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11

Mar-

12

Mar-

13

Mar-

14

90

110

130

150

170

190

20

02

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08

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20

10

20

11

20

12

20

13

20

14

All sectors (banking sector and non-intermediated)

Domestic banks


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


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


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 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

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5.2

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3.23.0

3.4

3.8

-3

-2

-1

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1

2

3

4

5

6

2008 2009 2010 2011 2012 2013(e) 2014(f) 2015(f)

Developed Mkts Emerging Mkts


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



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

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Jun-1

4 (

f)

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


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

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Mar-14

Jun-14

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GD

P g

row

th i

n Q

(Q

oQ

, %

)

Perspective in t-1 for t(balance of extreme responses, %)


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

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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


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

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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)


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

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% of GDP % of national demand


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

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-50

0

2014 2015

Jul-13 Oct-13 Jan-14 Apr-14


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

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06

Sep

-06

Mar-

07

Sep

-07

Mar-

08

Sep

-08

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-09

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-10

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11

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-11

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% Y

oY v

ari

atio

n

Data Trend


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

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Fis

cal eff

ort

Defici

t 2015

2012 2013 2014 2015


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


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



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


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

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Avf. effect: 18%


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


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)

Date post:	06-May-2015
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Global and Spanish Economic Outlook - 2nd quarter 2014

Economy & Finance