The Global Economic Outlook
and the Spanish Economy
Rafael Doménech
IADS FINANCIAL DIRECTORS MEETING
Madrid, October, 3 an...
Global Economic Oulook – October 2013

Section 1

Global economy: a more balanced contribution to growth
between developed...
Global Economic Oulook – October 2013

The global economy is growing but below its potential
1

Global growth has slowed d...
Global Economic Oulook – October 2013

Progress in the global economic situation…
US: sustained recovery (albeit below pot...
Global Economic Oulook – October 2013

… with significant uncertainties
Worldwide: risk of abrupt deceleration in some eme...
Spain Economic Outlook, September 2013

Developed markets remained resilient to risk events
BBVA financial tensions index
...
Global Economic Oulook – October 2013

EMU recovery is underway but behind the USA
EMU: MICA BBVA and GDP growth, % QoQ

E...
Global Economic Oulook – October 2013

EMU recovery is underway but behind the USA …
GDP per working-age population (2Q200...
Global Economic Oulook – October 2013

… and financial fragmentation is still high
Net balance with the Eurosystem

Intere...
Global Economic Oulook – October 2013

FED’s tapering expectations roiled markets …
Implicit policy rates in fed funds fut...
Global Economic Oulook – October 2013

… impacting especially in emerging economies
BBVA´s Financial Stress Index
Fuente: ...
Global Economic Oulook – October 2013

Transitory global slowdown due to emerging countries?
Emerging economies: PMIs manu...
Global Economic Oulook – October 2013

Global growth slows down slightly and resets across areas
Economic growth (%)
Sourc...
Global Economic Oulook – October 2013

Section 1

Global economy: a more balanced contribution to growth between developed...
Spain Economic Outlook, September 2013

The Spanish economy is bottoming out in 2013 …
Spain: GDP growth and MICA-BBVA for...
Spain Economic Outlook, September 2013

… following previous business cycle stylised facts
Leading .

Exports growth
Gross...
Spain Economic Outlook, September 2013

Exports growth: great performance compared to EMU
Exports (% change, 1Q12-2Q13)
)*...
Spain Economic Outlook, September 2013

The current account balance: from deficit to surplus
EU: cumulative change in Curr...
Spain Economic Outlook, September 2013

The current account balance: from deficit to surplus
Spain: Financing Capacity (+)...
Spain Economic Outlook, September 2013

Investment in equipment and machinery recovering
Spain: exports and investment in ...
Spain Economic Outlook, September 2013

Fiscal consolidation will require smaller efforts
Public administrations: budget d...
Global Economic Oulook – October 2013

The labour market is stabilising
Spain: GDP, employment and productivity
(% qoq)

S...
Global Economic Oulook – October 2013

The labour market is stabilising
Spain: impact of wage moderation in 2012 on
employ...
Spain Economic Outlook, September 2013

A window of opportunity that must be seized
The baseline scenario is highly sensit...
Global Economic Oulook – October 2013

A window of opportunity that must be seized
The ECB is serving as a bridge until th...
The Global Economic Outlook
and the Spanish Economy
Rafael Doménech
IADS FINANCIAL DIRECTORS MEETING
Madrid, October, 3 an...
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Global and Spanish Economic Outlook - fourth quarter 2013

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Global growth will accelerate in 2014 as a result of a higher contribution to
growth from developed economies and despite downside risks
The Spanish economy will start a new cycle of moderate economic growth,
based on exports, import substitution, the reduction of financial stress and a less
contractionary fiscal policy.
Heterogeneity will continue at the regional level due to their different dependence
on foreign demand, to their various needs regarding fiscal adjustment and to the
advances made in correcting their imbalances
Recovery will remain dependent on several factors, among others, structural
reforms both in Spain and Europe. As far as Europe is concerned, reducing financial
fragmentation through the creation of a banking union will be key

Published in: Economy & Finance, Technology
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Global and Spanish Economic Outlook - fourth quarter 2013

  1. 1. The Global Economic Outlook and the Spanish Economy Rafael Doménech IADS FINANCIAL DIRECTORS MEETING Madrid, October, 3 and 4, 2013
  2. 2. Global Economic Oulook – October 2013 Section 1 Global economy: a more balanced contribution to growth between developed and emerging economies Section 2 Spain: the Spanish economy will bottom out in 2013. Growth will resume in 2014 Page 2
  3. 3. Global Economic Oulook – October 2013 The global economy is growing but below its potential 1 Global growth has slowed down slightly due to incoming adjustment in emerging economies World GDP growth (%) Source: BBVA Research 6 5.1 5 4 4.0 3.8 3.3 3.1 2.8 3 2 Financial conditions have tightened in some countries as consequence of FED announcement on the QE exit strategy and the emerging economies adjustment 2 1 0 -1 -0.4 -2 2008 2009 2010 2011 2012 2013 (f) Adv. Economies Emerging economies Baseline Aug-13 2014 (f) Baseline May-13 Page 3
  4. 4. Global Economic Oulook – October 2013 Progress in the global economic situation… US: sustained recovery (albeit below potential), strength in private demand. A careful exit strategy by the Federal Reserve is a must (forward guidance) Emerging economies: resiliency and macroeconomic stability during a prolonged period of crisis in developed economies, but heterogeneity between countries EMU: recovery although with differences among countries. Fiscal targets delayed, advances towards the Banking Union and financial stress reduction Spain: improving outlook and international confidence, lower risk premium, current account surplus and macroeconomic stabilization Page 4
  5. 5. Global Economic Oulook – October 2013 … with significant uncertainties Worldwide: risk of abrupt deceleration in some emerging countries and doubts on their ability to rebalance the economic pattern, effects on capital flows of the monetary normalization in the US and geopolitical risks in the Middle East. US: debt ceiling agreement, long term fiscal uncertainty and risks regarding the exit strategy of the Federal Reserve EMU: political uncertainties in Italy and Spain, new financial assistance to Greece and Portugal, AQR results of European banks, sovereign risk persistence and financial fragmentation Spain: uncertainty about the scope and intensity of structural reforms, potential growth, fiscal consolidation and completion of bank restructuring Page 5
  6. 6. Spain Economic Outlook, September 2013 Developed markets remained resilient to risk events BBVA financial tensions index Source: BBVA Research 3,00 Lehman Brothers Eurozone: political gridlock in Italy; bail-out in Cyprus; Portugal’s Constitutional Court rejection of austerity measures 2,50 Sovereign & banking contagion in the EZ 2,00 Risk of Euro break up 1,50 USA: political deadlock over long-term fiscal policy 1st bail out of Greece 1,00 0,50 China: deeper-than-expected slowdown and increasing risks of local public debt and shadow banking 0,00 USA jul-13 ene-13 jul-12 ene-12 jul-11 ene-11 jul-10 ene-10 jul-09 ene-09 jul-08 ene-08 -0,50 EMU Page 6
  7. 7. Global Economic Oulook – October 2013 EMU recovery is underway but behind the USA EMU: MICA BBVA and GDP growth, % QoQ EMU: GDP growth forecast Fuente: BBVA Research Source: BBVA Research 1.0 Country   Germany   France   Italy   Spain   0.5 0.0 -0.5 -1.0 -1.5 2013   0.5%   -­‐0.1%   -­‐1.8%   -­‐1.4%   2014   1.8%   1.1%   0.8%   0.9%   -2.0 Serie9 CI 20% CI Serie3 40% CI Serie4 60% MICA-BBVA 3Q13 1Q13 3Q12 1Q12 3Q11 1Q11 3Q10 1Q10 3Q09 -3.0 1Q09 -2.5 GDP observed Page 7
  8. 8. Global Economic Oulook – October 2013 EMU recovery is underway but behind the USA … GDP per working-age population (2Q2008=100) Source: BBVA Research 102" 100" The USA has recovered 2/3 of the fall in GDP per working-age population 98" 96" The sovereign debt crisis in EMU put an end to the recovery of 2010 and 1H2011 … 94" … such that the current level of GDP per working-age population is slightly lower than in 2009 92" 90" 88" mar,00" mar,02" mar,04" mar,06" mar,08" mar,10" mar,12" Page 8
  9. 9. Global Economic Oulook – October 2013 … and financial fragmentation is still high Net balance with the Eurosystem Interest rate of new loans to businesses Source: BBVA Research based on Bloomberg Source: ECB (EUR bn) (Up to one million un euros, more than 5 years) 8 900 800 700 7 600 500 6 400 300 200 5 100 0 4 -100 -200 -300 3 -400 Germany Spain Euro Area Spain Germany Italy May-13 Nov-12 May-12 Nov-11 May-11 Nov-10 May-10 Nov-09 May-09 Nov-08 2 May-08 Apr-13 Nov-12 Jun-12 Jan-12 Aug-11 Mar-11 Oct-10 May-10 Dec-09 Jul-09 Feb-09 Sep-08 Apr-08 Nov-07 Jun-07 Jan-07 -500 France Page 9
  10. 10. Global Economic Oulook – October 2013 FED’s tapering expectations roiled markets … Implicit policy rates in fed funds futures US: 10 y Treasury, yield (%) Source: Bloomberg and BBVA Research Source: Bloomberg 1.75 3.2 3.0 1.50 2.8 1.25 2.6 1.00 2.4 2.2 0.75 2.0 0.50 1.8 1.6 0.25 1.4 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Latest 1.2 Jan-12 Jan-16 Sep-15 May-15 Jan-15 Sep-14 May-14 Jan-14 Sep-13 0.00 June 25th (one week after June FOMC meeting) BBVA forecast May 21st (one day before Bernake´s congressional hearing) Page 10
  11. 11. Global Economic Oulook – October 2013 … impacting especially in emerging economies BBVA´s Financial Stress Index Fuente: BBVA Research 0.30 -0.06 0.00 -0.09 -0.30 Emerging Markets, left axis 25-sep-13 -0.03 5-jun-13 0.60 13-feb-13 0.00 24-oct-12 0.90 4-jul-12 0.03 14-mar-12 1.20 23-nov-11 0.06 3-ago-11 1.50 13-abr-11 0.09 22-dic-10 1.80 1-sep-10 0.12 Capital outflow from emerging countries,… …, due to idiosyncratic reasons,… …, which could impact growth prospects if persistent in time. Developed Markets, right axis Page 11
  12. 12. Global Economic Oulook – October 2013 Transitory global slowdown due to emerging countries? Emerging economies: PMIs manufacturing Global GDP growth based on BBVA-GAIN (%,q/q) Source: Haver, BBVA Research Source: BBVA Research 58 0,7 56 56 0,6 54 54 0,5 52 52 0,4 50 50 0,3 48 48 0,2 46 46 0,1 44 44 Mex ic o Brazil J ul-­‐13 J ul-­‐11 China J an-­‐13 58 J ul-­‐12 0,8 J an-­‐12 60 J an-­‐11 60 India 0,0 Q3-12 Q4-12 Actual Q1-13 Q2-13 (1-Aug) Q2-13 (1-Sept) Q3-13 (1-Aug) Q3-13 (1-Sept) Estimates Page 12
  13. 13. Global Economic Oulook – October 2013 Global growth slows down slightly and resets across areas Economic growth (%) Source: BBVA Research, Haver 8.0 8.0 5.2 6.0 4.0 5.6 5.1 3.8 3.3 3.1 6.0 The global economy shows a cyclical downturn, especially in emerging countries, and faces a tightening of financial conditions 4.0 2.8 2.3 1.8 2.0 2.0 Developed economies: the US and the Euro Area keep a slightly better outlook for 2014 1 0.0 0.0 -0.5 -0.4 -2.0 -2.0 12 13 World July-13 14 12 13 US 14 12 13 14 Eurozone 12 13 Emerging economies, growth in BBVA Eagles remains, although somewhat lower due to downward revisions in China and Latam 14 Eagles April-13 Page 13
  14. 14. Global Economic Oulook – October 2013 Section 1 Global economy: a more balanced contribution to growth between developed and emerging economies Section 2 Spain: the economy is bottoming out in 2013 and growth will resume in 2014 Page 14
  15. 15. Spain Economic Outlook, September 2013 The Spanish economy is bottoming out in 2013 … Spain: GDP growth and MICA-BBVA forecasts (% QoQ) Source: BBVA Research based on INE data 0,5 0,0 0,0 -0,5 -0,5 -1,0 -1,0 -1,5 -1,5 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 0,5 A more protracted economic recession in Europe, financial fragmentation and the intensification of the fiscal consolidation ... ... were responsible for a higher-than-expected economic decline in 4Q12 and 1Q13... ..., but trends in activity improved in 2Q13 and are pointing to slight growth in 2H13 CI at 20% CI at 40% CI at 60% Data (MICA-BBVA Nowcast for 3Q13) Page 15
  16. 16. Spain Economic Outlook, September 2013 … following previous business cycle stylised facts Leading . Exports growth Gross operating surplus Investment in machinery and equipment New credit operations (flow) Lagging . GDP growth Stabilized Employment growth = . Stabilized Stabilizing Growth of the stock of credit Falling Page 16
  17. 17. Spain Economic Outlook, September 2013 Exports growth: great performance compared to EMU Exports (% change, 1Q12-2Q13) )*): Data unitl 1Q13 Source; BBVA Research based on INE Spain Portugal Switzerland Germany United Kingdom Netherlands Euro area European Union Austria France Italy Denmark Belgium Sweden Finland Norway Ireland -5% In spite of the recession experienced within the EMU in the last year (50% of total Spanish exports), Spanish exports have grown The increase was partly a result of higher exports to countries in the BBVA-EAGLEs area and other developed economies,… …, but also of the higher competitiveness of Spanish exports, in terms of both price and quality 0% 5% 10% Page 17
  18. 18. Spain Economic Outlook, September 2013 The current account balance: from deficit to surplus EU: cumulative change in Current Account and unit labour costs, 1Q08-4Q12 (%) Source: BBVA Research based on Eurostat data 16 14 Productivity gains have been large since the beginning of the crisis (12%) LT EL PT LV 12 Current Account (change in pp) IE 10 ESP EE SI HU SK They have been widespread and not concentrated in residential construction RO 8 NL MT 6 CY 4 PL DK IT 2 DE CZ 0 LU BE FR SE -2 Tradeables like manufacturing and industry have had gains above 20% UK NO AT FI -4 -6 -15 -10 -5 Unit labor Costs (%5change) 10 0 15 20 Page 18
  19. 19. Spain Economic Outlook, September 2013 The current account balance: from deficit to surplus Spain: Financing Capacity (+) / Needs (-) with the rest of the world (% of GDP) Source: BBVA Research 10% A stable private saving rate and the reduction in the investment rate… 5% …have allowed firms to increase their financial capacity, fuelling a deleveraging process that is now hitting its fifth year 0% -5% This has improved their balance sheets, placing them in a better position to resume investments -10% -15% 2007 Private sector 2013(f) Public sector Total Page 19
  20. 20. Spain Economic Outlook, September 2013 Investment in equipment and machinery recovering Spain: exports and investment in equipment and machinery (2008=100) Source: BBVA Research based on INE data 140 Brighter prospects for the EMU and sustained growth in exports... 130 120 110 … should drive higher private investment 100 90 Indeed, in 1H13 investment grew 8% yoy 80 70 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 60 Exports GFKF: Equipement and Machinary Page 20
  21. 21. Spain Economic Outlook, September 2013 Fiscal consolidation will require smaller efforts Public administrations: budget deficit breakdown excluding financial sector aid (% of GDP) Source: BBVA Research, based on MINHAP data 14 Fiscal consolidation is working: budget effort in 2012 was above 4pp of GDP 12 2.6 10 4.6 8 1.7 2014 will not require as great an effort as in 2013 and 2012 2.2 6 4 -0,1 9.0 7.0 0.6 6.5 5.8 2 2011 2012 2013 Deficit 2014 Fiscal effort Passive fiscal policy Deficit 2013 Fiscal effort Passive fiscal policy Deficit 2012 Fiscal effort Passive fiscal policy Deficit 0 Overall, there are still major reforms to be undertaken (pensions, local corporations, PES), that would increase the efficiency of the public administrations 2014 Page 21
  22. 22. Global Economic Oulook – October 2013 The labour market is stabilising Spain: GDP, employment and productivity (% qoq) Source: BBVA Research based on INE 1.5 Job destruction has slowed down in the last few quarters… 1.0 0.5 0.0 -0.5 …, partly thanks to wage moderation -1.0 -1.5 Should Spain have had better labor institutions at the beginning of the crisis, job destruction would have been lower -2.0 mar-08 jun-08 sep-08 dic-08 mar-09 jun-09 sep-09 dic-09 mar-10 jun-10 sep-10 dic-10 mar-11 jun-11 sep-11 dic-11 mar-12 jun-12 sep-12 dic-12 mar-13 jun-13 sep-13 (e) -2.5 Employment f.t.e Labor productivity GDP Page 22
  23. 23. Global Economic Oulook – October 2013 The labour market is stabilising Spain: impact of wage moderation in 2012 on employment (thousands of jobs) Source: BBVA Research 1200 Labour market reform and the 2nd Agreement on Employment and Collective Bargaining prevented greater job destruction in 2012 1000 800 Without the wage moderation of 2012, an additional 60 thousand jobs would have been lost in the short term (300 thousand in the medium and long term) 600 400 200 0 Short term From the third year Employment destruction avoided by the wage moderation From the third year The existence of better employment institutions at the onset of the crisis might have prevented the destruction of around one million jobs Jobs that would be saved if the process had begun in 2008 Page 23
  24. 24. Spain Economic Outlook, September 2013 A window of opportunity that must be seized The baseline scenario is highly sensitive to financial conditions in international markets, while numerous risks persist Efforts to achieve permanent improvement of markets and take advantage of it, unlike previous recovery in the past Europe should progress towards a more genuine EMU. For this, progress towards the banking union in 2013 and European policies to promote growth are crucial Spain must strengthen efforts with the ongoing adjustments and structural reforms required to boost the competitiveness of its economy Page 24
  25. 25. Global Economic Oulook – October 2013 A window of opportunity that must be seized The ECB is serving as a bridge until the new institutional framework is established The new fiscal and imbalances detection framework should serve to deliver a better balance between fiscal consolidation and structural reforms in EMU members Banking union is key to tackling market fragmentation. Any delay implies risks The medium term goal of configuring some form of fiscal union requires significant pre-requisite steps Page 25
  26. 26. The Global Economic Outlook and the Spanish Economy Rafael Doménech IADS FINANCIAL DIRECTORS MEETING Madrid, October, 3 and 4, 2013
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