Global and Spanish Outlook 3T14

Third quarter 2014

Global and Spain Outlook

Global and Spain Economic Outlook / Third quarter

Takeaways

Page 2

1

2

3

Global growth will continue, although the recovery is slower than others in the

past

The likelihood of a hard landing in China is low and the Fed is handling the recovery

well, but the geopolitical risks and probability of lower activity in the EMU are

increasing

In Spain, growth is moderating in 3Q14 and will accelerate again in 2015, due to

more expansive monetary and fiscal policies, although with risks around the

composition of growth and the current account

The reforms are having a positive effect on the economy. However, more effort

can and should be put into making the recovery more intense, sustainable and long-

lasting

4


Page 3

Section 1

The global economic recovery will continue in a complex environment of more asymmetric risks

Section 2

Spain: the recovery will accelerate in 2015 but with risks of a less balanced composition

Section 3

It is crucial to continue with the reform effort

Index


Section 1

Geopolitical risks have not raised financial stress globally…

Page 4

BBVA Research financial stress index Source: BBVA Research

BBVA Research map of financial tensions Source: BBVA Research

Czech Republic

Hungary

Poland

Russia

Turkey

USA

Sep-1

4

EMU

LatAm

Asia

Eastern Europe

Jun-1

4

Jul-14

Aug-1

4

Very high Low

Jan-1

4

Feb-1

4

Mar-

14

Apr-

14

May-1

4

High Very low

Neutral Not available

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

-0.7

-0.4

-0.1

0.2

0.5

0.8

1.1

1.4

1.7

Dec-1

1

Ma

r-1

2

Jun-1

2

Sep

-12

Dec-1

2

Ma

r-1

3

Jun-1

3

Sep

-13

Dec-1

3

Ma

r-1

4

Jun-1

4

Sep

-14

Developed Emerging (rhs)


Section 1

… nor have they aborted, at least until June at any rate, the ongoing recovery of global trade

Page 5

Goods trade in emerging economies, export volumes, % QoQ Source: BBVA Research based on CPB

-2.5

0.0

2.5

5.0

Jun-1

0

Dec-1

0

Jun-1

1

Dec-1

1

Jun-1

2

Dec-1

2

Jun-1

3

Dec-1

3

Jun-1

4

Emerging Eastern Europe Africa & Middle East

46

48

50

52

54

56

58

60

62

-1.5

0

1.5

3

4.5

Jun-1

0

Dec-1

0

Jun-1

1

Dec-1

1

Jun-1

2

Dec-1

2

Jun-1

3

Dec-1

3

Jun-1

4

Exports PMI (rhs)

Merchandise world trade and PMI (export volumes, QoQ %; new export orders) Source: CPB, JPMorgan and BBVA Research


Section 1

… a necessary condition for maintaining favourable growth outlooks

Page 6

Manufacturing confidence and financial volatility indicators are consistent with continued improvement in world GDP

growth

Global growth based on BBVA-GAIN (QoQ %) Source: BBVA Research

0.0

0.2

0.4

0.6

0.8

1.0Ju

l-1

4

Cu

rren

t E

st

Ju

l-1

4

Cu

rre

nt

Est

3Q13 4Q13 1Q14 2Q14 3Q14

Current Forecast


Page 7

China: confidence and manufacturing activity Source: Haver Analytics and BBVA Research

Section 1

Some risks are melting away: China …

External demand and the support of fiscal and monetary policy measures drive the short-term

outlook in China

The reforms put in place (financial sector and investment promotion) ought to reduce the risk

of a hard landing

The government will continue to take supportive measures, even though it is not managing to

reduce the dependence on credit

3.0

6.0

9.0

12.0

15.0

18.0

21.0

36

40

44

48

52

56

60

Dec-0

6

Sep

-07

Jun-0

8

Ma

r-0

9

Dec-0

9

Sep

-10

Jun-1

1

Ma

r-1

2

Dec-1

2

Sep

-13

Jun-1

4

PMI GVA (rhs)


Page 8

Section 1

Some risks are melting away: USA …

In the US, the GDP fall in 1Q14 was due mainly to transitory factors

The economy is expected to grow 2.0% in 2014 and 2.5% in 2015

US Weekly activity index (% week on week) Source: BBVA Research

-2.5

0.0

2.5

5.0

7.5

10.0

24

Ma

y-1

3

5 J

ul-13

16

Au

g-1

3

27

Se

p-1

3

8 N

ov-1

3

20

Dec-1

3

31

Jan-1

4

14

Ma

r-14

25

Ap

r-1

4

6 J

un-1

4

18

Jul-14

29

Au

g-1

4


Page 9

US: monetary policy rate (%) Source: BBVA Research and Federal Reserve

Section 1

… but others remain: the global impact of monetary tightening on the horizon in the USA

The Fed’s balance sheet expansion is ending in October 2014 and rate hikes may be in store by

mid-2015

The pace will be determined by the improvement in the labour market and

economic activity in general

The Fed’s communications policy on its exit strategy will be increasingly important

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

BBVA forecast Fed funds

Implicit rate (Aug-14) Implicit rate (Sep-14)


Page 10

EMU: unemployment and inflation (%) Source: BBVA Research

Section 1

…and others harden: activity and disinflation in the EMU

Recovery in the EMU ought to continue, underpinned by the improvement in the external

environment and a favourable policy mix

However, there is a growing risk of unanchoring inflation expectations…

… which could make recovery more difficult in highly indebted countries which need to gain

competitiveness

AT

DE

LU FI

EE

BE

SI

MT

NL

FR

IT

LT IE

PT

SK ES

EL

CY

EMU (EQ)

Inflation expectations

0.6%

EMU (August)

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

5 10 15 20 25 30

Infl

ati

on

, Ju

ly 2

014,

Yo

Y (

%)

Unemployment rate, July 2014 (%)

0.5/4


Page 11

Eurozone: impact on growth and inflation of credit increase as a result of TLTRO (pp) Source: BBVA Research

• Negative deposit rate

• LTROs to be extended

• TLTRO

• No sterilisation of open-market operations

• Announcement that additional measures are being analysed: ABS purchases and quantitative easing

ECB measures

The measures strengthen the ECB’s guidelines on interest rates and monetary

policy transmission mechanisms

Section 1

… and others harden: activity and disinflation in the EMU

Recent activity data on activity and prices,

together with Draghi’s speech, confirm that

risks continue to the downside

0.0

0.1

0.2

0.3

0.4

0.5

0.6

GDP INF GDP INF

Avge. Impact per annum 2014-15 Avge. Impact per annum 2014-16

TLTRO Stock TLTRO Flow

Partial pass-through Full pass-through


Page 12

Section 1

In any event, the pace of economic recovery is relatively slow

US, comparison of economic recoveries GDP per capita Source: BBVA Research

US, comparison of economic recoveries GDP growth per capita Source: BBVA Research

Recessions in US: 1954, 1974, 1980, 1991, 2001, 2008

94

96

98

100

102

104

106

108

110

112

t-1 t t+1 t+2 t+3 t+4 t+5 t+6

average from 1954-2001 recoveries 2008

0.00

0.50

1.00

1.50

2.00

2.50

2009-14 2010-14

Current recovery

Average from 1954-2001

Average, less one standard deviation


Page 13

Deleveraging in the private sector is happening slowly and total debt (public + private) is still

high

The adjustment of agents’ balance sheets, still pending, could put a brake on recovery in the

medium term

US: potential growth, real rates of interest and total debt Source: BBVA Research

Section 1

In any event, the pace of economic recovery is relatively slow

0

1

2

3

4

5

6

60

110

160

210

260

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

US total debt, public and non-financial private sector, % GDP

Potential growth (rhs)

10-year real yield; 3-year centered moving average (rhs)


Page 14

1

2

GDP global growth (%) Source: BBVA Research

Global growth will continue with improvements in developed economies, the US and the eurozone, but we can expect a gentle slowdown in China

The risk of a hard landing is small and the Fed is keeping financial volatility anchored, but geopolitical risks are arising, and activity risks in the EMU

The adjustment of agents’ balances, still pending, may put a brake on the recovery in the medium term

3

Section 1

Snapshot

2.8

-0.4

5.2

4.0

3.23.0

3.3

3.8

-2

-1

0

1

2

3

4

5

6

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

Developed Emerging Baseline Jul-14


Page 15

Section 1


Section 2


Section 3


Index


Section 2

Growth forecasts have been revised to the upside

There is growing consensus about the improving growth outlook for the Spanish

economy

We have revised our GDP growth forecast upwards, to 1.3% in 2014 and 2.3% in 2015

The improvement represents an aggregate 0.6pp in 2014 and 2015

Page 16

Spain: growth forecasts for 2014 (%) Source: BBVA Research based on Consensus Forecasts

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Fe

b-1

3

Ma

r-1

3

Apr-

13

Ma

y-13

Jun-1

3

Jul-1

3

Aug

-13

Sep

-13

Oct-

13

Nov-1

3

Dec-1

3

Jan-1

4

Fe

b-1

4

Ma

r-1

4

Apr-

14

Ma

y-14

Jun-1

4

Jul-1

4

Aug

-14

Consensus (1,2%) National Forecasters (1,2%)

Foreign Forecasters (1,1%) BBVA Reseaech (1,3%)


Section 2

Expansion stretches into the third quarter …

In 2Q14, GDP grew for the fourth consecutive quarter …

… thanks to increased domestic demand, particularly private, and despite the stagnation

in net exports

The trend in the 3Q14 figures is towards a moderation in the expansion rate, to 0.4% or

0.5%

Page 17

Spain: GDP growth and MICA-BBVA forecasts Source: BBVA Research

-1,5

-1,0

-0,5

0,0

0,5

1,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

jun

-09

sep-0

9

dic

-09

ma

r-1

0

jun

-10

sep-1

0

dic

-10

ma

r-1

1

jun

-11

sep-1

1

dic

-11

ma

r-1

2

jun

-12

sep-1

2

dic

-12

ma

r-1

3

jun

-13

sep-1

3

dic

-13

ma

r-1

4

jun

-14

sep-1

4 (

e)

IC al 60% IC al 40% IC al 20% PIB (%t/t)

-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

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

(f)

CI at 60% CI at 40%

CI at 20% GDP (%QoQ)


Better fundamentals, less uncertainty, some fiscal stimuli and more credit account for the

increase in private consumption

Investment in machinery and equipment has grown for six quarters in a row …

… while the economy is moving closer to reaching the public deficit target

Page 18

Section 2

… supported by domestic demand

Spain: effect of the PIVE vehicle purchase incentive programme on private consumption (quarterly growth rate, pp) Source: BBVA Research

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

Over the quarterly growth rate Cumulative effect

PIVE comes into effect:Oct-12


Section 2

2015: crucial that exports grow

Domestic demand’s contribution will tend to fall in the next few quarters …

… therefore, to sustain growth, it is crucial that exports recover

The recovery in external demand and a more depreciated real exchange rate will support

growth in the short term

Page 19

Spain: additional exports growth in 2015 due to

changes in fundamentals (pp) Source: BBVA Research

0,0

0,5

1,0

1,5

2,0

2,5

Mayor crecimiento mundial Mejora TCERGreater world growth Improvement in TCER


Section 2

2015: investment in M&E set to grow faster

Page 20

Spain: investment in machinery and equipment (M&E) (Real ratios at 2008 prices) Source: BBVA Research based on INE

While investment in M&E has grown 8.0% in Europe since bottoming out in 2Q09, in Spain it

has leapt 22.6%

Today it makes up 45% of total real investment and over 8% of real domestic demand

(record high) …

… which is consistent with the change in the productive model, directed towards the external

sector 4

5

6

7

8

9

10

Dec-8

1

Dec-8

3

Dec-8

5

Dec-8

7

Dec-8

9

Dec-9

1

Dec-9

3

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9

Dec-1

1

Dec-1

3

Dec-1

5

% of GDP % of national demand


Section 2

2015: more expansive monetary policy

Page 21

Spain: estimated impact on private sector credit, excluding mortgages (accumulated difference vs. latest forecasts in EUR bn) Source: Eurostat and BBVA Research

The ECB’s actions are designed to reduce the cost of bank funding, conditional on an increase

in credit

In Spain, lower rates will increase credit demand …

… by as much as another EUR50bn (when compared with a scenario of no policy changes) if our forecasts of lower differentials on interest

rates are confirmed 0

10

20

30

40

50

60

1st year 2nd year 3th year 4th year 5th year

Lower risk-free rates

Lower risk-free rates + lower differential rate


Page 22

Simplicity

Transparency

Efficiency

Neutrality

Progressiveness

• Moves such as reducing the number of tax brackets, reducing direct taxation and steps towards greater neutrality in saving instruments are welcomed

• Nevertheless, too many deductions remain in place and the system is still complex and opaque

• There is still a lot of room for improvement in incentivising growth and the change in the productive model

Section 2

2015: a more expansive fiscal policy


In total, the tax cut will reduce revenue by

EUR9bn between 2015 and 2016 …

… which will increase internal demand, and

with it imports, thus softening the impact on

GDP

The cyclical improvement in revenue and

expenses, together with meeting 2014 targets,

makes the fiscal impulse easier

Section 2

2015: a more expansive fiscal policy

Page 23

Spain: impact of the tax cut on income tax (IRPF) and corporation tax (IS) (deviation from a scenario without reform, pp) Source: BBVA Research

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1,0

2014 2015 2016 2017

GDP Private consumption Imports


Lowered financial stress and the better position in the cycle have impacted on economic agents’

expectations

who have modified their consumption, investment and savings decisions

slowing the rate of correction of external imbalances

Section 2

Domestic risks: adjusting the current account

Page 24

Spain: current account balance forecasts for 2014 (EUR bn) Source: BBVA Research based on consensus forecasts

0

5

10

15

20

25

Fe

b-1

3

Ma

r-1

3

Apr-

13

Ma

y-13

Jun-1

3

Jul-1

3

Aug

-13

Sep

-13

Oct-

13

Nov-1

3

Dec-1

3

Jan-1

4

Fe

b-1

4

Ma

r-1

4

Apr-

14

Ma

y-14

Jun-1

4

Jul-1

4

Aug

-14

Market consensus BBVA Research


Although significant progress has been made in improving competitiveness and exports …

… with more employment creation, there has been a deterioration in the current account

balance …

… that must be avoided in the medium- and long-term by forging ahead with the reforms

Section 2

Domestic risks: adjusting the current account

Page 25

Spain: Current account and unemployment rate (% of GDP and %) Source: BBVA Research

-15

-10

-5

0

5

10

5

10

15

20

25

30

Jun-9

0Jun-9

1Jun-9

2Jun-9

3Jun-9

4Jun-9

5Jun-9

6Jun-9

7Jun-9

8Jun-9

9Jun-0

0Jun-0

1Jun-0

2Jun-0

3Jun-0

4Jun-0

5Jun-0

6Jun-0

7Jun-0

8Jun-0

9Jun-1

0Jun-1

1Jun-1

2Jun-1

3Jun-1

4

Cu

rren

t a

cco

un

t b

ala

nce (

%)

Un

em

plo

ym

en

t ra

te (

%)

Unemployment rate

Current account

balance (rhs)

Unemployment rate

compatible with

foreign balance


Section 2

Macroeconomic Forecasts

Page 26

Spain and Europe: macroeconomic forecasts Source: BBVA Research based on INE and Eurostat

Spain EMU Spain EMU Spain EMU Spain EMU

Households final consumption expenditure -2,8 -1,4 -2,1 -0,6 1,9 0,7 2,0 1,4

General government final consumption exp. -4,8 -0,6 -2,3 0,1 0,1 0,4 0,6 0,7

Gross fixed capital formation (G.F.C.F.) -7,0 -3,8 -5,1 -2,8 1,2 2,5 4,9 4,6

Equipment and machinery -3,9 -4,3 2,2 -1,9 8,5 3,3 7,3 6,4

Housing -8,7 -3,3 -8,0 -3,4 -3,5 1,7 4,9 3,3

Other constructions -10,6 -4,7 -10,9 -4,1 -4,9 0,9 1,1 2,5

Changes in inventories (*) 0,0 -0,5 0,0 0,0 0,0 0,0 0,0 0,0

Domestic Demand (*) -4,1 -2,1 -2,7 -0,9 1,4 1,0 2,2 1,7

Exports 2,1 2,7 4,9 1,5 4,7 3,0 6,5 4,6

Imports -5,7 -0,8 0,4 0,4 5,1 3,2 6,4 4,6

External Demand (*) 2,5 1,5 1,5 0,5 0,0 0,1 0,2 0,2

GDP mp -1,6 -0,6 -1,2 -0,4 1,3 1,1 2,3 1,9

Pro-memoria

GDP excluding housing -1,2 -0,5 -0,9 -0,2 1,6 1,0 2,2 1,9

GDP excluding contruction -0,4 -0,2 -0,1 0,0 2,0 1,0 2,3 1,8

Total employment (LFS) -4,3 -0,7 -2,8 -0,8 1,0 0,5 2,1 0,8

Unemployment rate (% Active pop.) 24,8 11,3 26,1 12,0 24,5 11,7 23,1 11,4

Current account balance (% GDP) -1,2 1,2 0,8 2,3 0,3 2,2 1,1 2,1

Public debt (% GDP) (**) 86,0 93,0 93,9 95,2 99,8 95,9 101,3 95,5

Public deficit (% GDP) -6,8 -3,7 -6,6 -3,0 -5,5 -2,6 -4,5 -2,1

CPI (average) 2,4 2,5 1,4 1,4 0,1 0,6 0,9 1,1

CPI (end of period) 2,9 2,3 0,3 0,8 0,4 0,7 1,2 1,2(*) Contribution to GDP Growth

(f): forecast

(**) Excluding aid to the banking sector in Spain

2012(% YoY)

2013 2014 (f) 2015 (f)


Our growth forecasts for the autonomous communities remain heterogeneous

Differing levels of exposure to external demand …

Section 2

Forecasts by autonomous communities

Page 27

… and progress made in the fiscal consolidation process are still the main factors

accounting for the differentials in growth

GDP growth by AC Source: BBVA Research based on national statistics institute (INE)

AND

ARA

AST

BAL

CAN

CNT

C&L

CLM

CAT

EXT

GAL

MAD

MUR NAV

BASQ

RIO

VAL

SPA

1,50

1,75

2,00

2,25

2,50

2,75

3,00

0,50 0,75 1,00 1,25 1,50 1,75 2,00

GD

P g

row

th in

201

5

GDP growth in 2014


Page 28

Section 1


Section 2


Section 3


Index


Section 3

The outlook for the labour market looks brighter …

Page 29

Spain: employment and unemployment rate Source: BBVA Research based on INE

Growth and greater labour market efficiency will

contribute to increasing employment in the

private sector, reducing the unemployment rate

Employment figures revised upwards: 2014: 170k (45k forecast in May) 2015: 360k (235k forecast in May)

… and the unemployment rate downwards: 2014: 24.5% (25.1% forecast in May) 2015: 23.1% (24.2% forecast in May) 08

11

14

17

20

23

26

29

-1500

-1200

-900

-600

-300

0

300

600

2008 2009 2010 2011 2012 2013 2014 2015

Unemployment rate (% active pop, rhs)

Employment (‘000s of people, lhs)


Section 3

… but the imbalances are still weighty

Page 30

Progress

Designed for a group that has been hit particularly hard by the crisis

It tries to improve young people’s employability and stop the current unfavourable circumstances having permanent repercussions on their working lives

It will combine multiple “activation” strategies (tax relief for employers, training, public-private cooperation, etc.) supported by a personalised roadmap

Limitations

The budget (EUR2.4bn) is significantly lower than that allocated by the countries where the Youth Guarantee is already in place and less than the ILO recommendation

Progress in the dualisation of the training system would be desirable, as in the introduction of professional career programmes and job search advice

For this reason, we welcome the introduction of the National Youth Guarantee Scheme


Spain: unemployment rate and Public Administrations’ deficits Source: BBVA Research

It does not endanger the prospect of meeting the public deficit target in the next two years …

… but neither does it make structural changes in the system. The budget balance will only be

corrected by the better position in the cycle

Thus, uncertainty continues about the necessary process of reducing public debt in

the medium term

Section 3

The tax reform: progress, but with room for improvement (1)

Page 31

80

81

82

83 84

85

86

87 88 89

90 91 92

93 94

95

96

97

98

99 00 01 02 03 04

05

06 07

08

09

10 11

12 13

14

15

16

17

-12

-10

-8

-6

-4

-2

0

2

4

7 9 11 13 15 17 19 21 23 25 27

Budget

bala

nce (

% G

DP

)

Unemployment rate (%)*

14%

(2006)

18%

(2013)


EU15: Unemployment rate and social security payments, divided by indirect taxes Source: BBVA Research based on Boscá, Doménech and Ferri (2013)

Greater distribution of the tax burden, from direct to indirect taxation, would be desirable

The evidence shows that if social security contributions were reduced relative to indirect

taxes …

… the impact on employment and growth would be greater, as well as contributing to an

improvement in the CA and reducing income inequality

Section 3

The tax reform: progress, but with room for improvement (2)

Page 32

BE

DK

DE IE

EL

ES

FR IT

LU NL

AT

PT

FI SE

UK

y = 9,0157x - 0,4185 R² = 0,644

4

7

10

13

16

19

0,5 0,7 0,9 1,1 1,3 1,5 1,7

Unem

plo

yment

rate

(%

), 2

007

- Jan.2

014

Social Security contributions/Indirect taxation, 2011


Section 3

The need to dig deeply with the reforms

1. Reduce debt, improve the Spanish economy’s lending capacity and attract foreign direct investment

3. Reforms which help to improve productivity, the size of companies, competitiveness and Spain’s capacity to attract physical, human and

technological capital from abroad

4. Going further with reforms which improve the efficacy of active employment policies, reduce the two-tier reality of the labour market and improve how it

works -> more employment, and of higher quality

2. The Public Administrations Reform, fiscal consolidation and long-term sustainability of public finances, with an efficient fiscal system which incentivises

growth and job creation -> report by the Steering Committee

Page 33


Takeaways

Page 34

1

2

3

Global growth will continue, although the recovery is slower than others in the past

The likelihood of a hard landing in China is low and the Fed is handling the recovery

well, but the geopolitical risks and probability of lower activity in the EMU are

increasing

In Spain, growth in Spain is moderating in 3Q14 and will accelerate again in 2015,

due to more expansive monetary and fiscal policies, although with risks around the

composition of growth and the current account

The reforms are having a positive effect on the economy. However, more effort can

and should be put in to make the recovery more intense, sustainable and long-lasting 4

Third quarter 2014

Global and Spain Outlook

Date post:	12-Nov-2014
Category:	Economy & Finance
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Global and Spanish Outlook 3T14

Economy & Finance