Europe Economic Outlook. Second Quarter 2014
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Europe Economic Outlook. Second Quarter 2014

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- The global economy remains robust ...

- The global economy remains robust
- Drivers for growth: better financial environment and higher confidence, policies are more friendly, banking union proceeds as expected... but doubts on exports
- Projections: Recovery in 2014 with diminished risks
- Low inflation and sluggish credit growth. ECB policy and AQR’s will be key
- Correction of some imbalances, but others persist
- Country detail

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    Europe Economic Outlook. Second Quarter 2014 Europe Economic Outlook. Second Quarter 2014 Presentation Transcript

    • Europe Economic Outlook May 2014
    • Europe Economic Outlook, May 2014 Page 2 Section 1 The global economy remains robust Section 2 Drivers for growth: better financial environment and higher confidence, policies are more friendly, banking union proceeds as expected… but doubts on exports Section 3 Projections: Recovery in 2014 with diminished risks Section 4 Low inflation and sluggish credit growth. ECB policy and AQR’s will be key Section 5 Correction of some imbalances, but others persist Section 6 Country detail Contents
    • Europe Economic Outlook, May 2014 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 partly offsets lower growth in emerging economies Overall, higher growth in developed economies partly offsets lower growth in emerging economies Growth is still robust and financial conditions have also eased in emerging economies, but incoming information reveal no acceleration in the first half of 2014 Growth is still robust and financial conditions have also eased in emerging economies, but incoming information reveal no acceleration 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
    • Europe Economic Outlook, May 2014 Page 4 US: GDP growth (% YoY) Source: BBVA Research, BEA US: incoming information fits our baseline scenario We maintain our baseline scenario for growth, the 1Q14 slowdown should be short-lived (bad weather related) We maintain our baseline scenario for growth, the 1Q14 slowdown should be short-lived (bad weather related) The balance of risks remain slightly biased to the upside The balance of risks remain slightly biased to the upside The FED will end tapering by the end of the year and will start increasing the Fed funds rate in 2nd half 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-2014
    • Europe Economic Outlook, May 2014 Page 5 Monetary return to normal in the US is an event of global impact in financial markets In May 2013 markets perceived that the end to Fed’s balance raise was near, which increased global volatility, especially in emerging markets Exchange rate volatility was higher in emerging economies with larger external financial dependency Exchange rate volatility in May-June 2013 and external financial needs Source: BBVA Research Financial tensions vs. Lehman BBVA Research’s Financial Tension Index vs. Lehman=100% Source: BBVA Research 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) Exchangeratevariationin May2013FED'staperingevent 0% 10% 20% 30% 40% 50% 60% Greece,2010 EMUperiphery,2011 EMUOMT,2012 Fedtapering,May2013 Greece,2010 EMUperiphery,2011 EMUOMT,2012 Fedtapering,May2013 Greece,2010 EMUperiphery,2011 EMUOMT,2012 Fedtapering,May2013 US EMU Emerging Markets
    • Europe Economic Outlook, May 2014 Page 6 China: growth started weak in 2014 China: industrial production (YoY %) Source: Haver and BBVA Research China’s indicators are losing momentum …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 … as the authorities are more focused on reducing vulnerabilities with less room for manoeuvre in the short term 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 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 All sectors (banking sector and non-intermediated) Domestic banks
    • Europe Economic Outlook, May 2014 Page 7 China: the baseline scenario has been updated due to poor incoming data and new assumptions on economic policy The government will continue with reforms and will implement measures to reduce financial risks We expect a higher adjustment in investment than in consumption In case of higher than expected deceleration in the economy (below 7%), there is room for public response (investment in infrastructure, fiscal stimulus) China: GDP growth (% YoY) Source: BBVA Research 7.7 7.7 7.2 7.0 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
    • Europe Economic Outlook, May 2014 Page 8 Section 1 The global economy remains robust Section 2 Drivers for growth : better financial environment and higher confidence, policies are more friendly, banking union proceeds as expected… but doubts on exports Section 3 Projections: Recovery in 2014 with diminished risks Section 4 Low inflation and sluggish credit growth. ECB policy and AQR’s will be key Section 5 Correction of some imbalances, but others persist Section 6 Country detail Contents
    • Europe Economic Outlook, May 2014 Page 9 Drivers of (slow) growth in the eurozone 1) Incoming data are better, especially confidence1) Incoming data are better, especially confidence 2) The financial environment has improved, especially in the periphery2) The financial environment has improved, especially in the periphery 3) Fiscal policy is less restrictive3) Fiscal policy is less restrictive 4) Monetary policy is loose and ECB is ready to provide further support4) Monetary policy is loose and ECB is ready to provide further support 5) The banking union is advancing broadly as expected5) The banking union is advancing broadly as expected 6) The external environment is supportive, but with some doubts and a high euro exchange rate 6) The external environment is supportive, but with some doubts and a high euro exchange rate
    • Europe Economic Outlook, May 2014 Page 10 Incoming data: GDP growth has returned GDP growth moderately positive since 2Q2013, after a second recession GDP growth moderately positive since 2Q2013, after a second recession Germany clearly ahead of the restGermany clearly ahead of the rest The periphery is now growing GDP growth (% QoQ) Source: BBVA Research (1.00) (0.80) (0.60) (0.40) (0.20) - 0.20 0.40 0.60 0.80 1.00 EMU Germany France Italy Spain 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 (f)
    • Europe Economic Outlook, May 2014 Page 11 Incoming data are positive: First quarter above expectations GDP growth projection for Q1 at 0.4% QoQ, above our previous projection (0.3%) GDP growth projection for Q1 at 0.4% QoQ, above our previous projection (0.3%) The second quarter has started also more positively than expected (0.2%) The second quarter has started also more positively than expected (0.2%) MICA-BBVA model of short term GDP (% QoQ) Source: Haver and BBVA Research -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 CI 20% CI 40% CI 60% MICA-BBVA Real GDP
    • Europe Economic Outlook, May 2014 Page 12 Incoming data are positive: short-term indicators Confidence data more positive since the start of the year Confidence data more positive since the start of the year Activity indicators less upbeat than confidenceActivity indicators less upbeat than confidence Exports have been more hesitant recently Eurozone Latest GDP DEC Private consumption DEC General government expenditure DEC Gross fixed capital formation DEC Exports DEC Imports DEC ESI APR Industrial confidence APR Consumer confidence APR Retail trade confidence APR Volume export order books APR Volume of order books APR Consumer unemployment expectations APR PMI composite APR PMI manufacturing APR PMI services APR IPI FEB Manuf. new orders FEB Domestic FEB Foreign FEB Passenger car registration MAR Retail Sales MAR Exports of goods FEB China FEB USA FEB Imports of goods FEB 2014 National accounts SoftdataHarddata 2012 2013 Based on quarterly growth rates. For the latest data, the average of available months in the quarter is taken. For confidence data, standarized values are used, and the growth and fall are related to the mean. No DATA Stronger growth Deeper fall Growth Fall
    • Europe Economic Outlook, May 2014 Page 13 European peripheral risk and EM risk Source: Bloomberg and BBVA Research 150 200 250 300 350 400 450 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 average peripheral risk premium (pbs) 10Y yields Spain, Italy, Portugal, Ireland and Greece EMBI Global 10Y bond yield: US and GER, % Source: Bloomberg and BBVA Research -60 -40 -20 0 20 40 60 80 100 120 140 1 1,5 2 2,5 3 3,5 Spread US-Germany (rhs) Germany 10Y yield US 10Y yield Further improvement in early 2014: Risk premia in the periphery continued to fall, and the bund’s rates are lower due to the continued mention of QE by the ECB The financial environment has improved
    • Europe Economic Outlook, May 2014 Page 14 Change in public deficit targets Source: Eurostat and BBVA Research Fiscal policy is less restrictive than in previous years The Ecofin relaxed fiscal targets in May 2013 to avoid excessively procyclical policy The Ecofin relaxed fiscal targets in May 2013 to avoid excessively procyclical policy The 3% target was delayed for six countries, including, Portugal, Spain, France and Italy The 3% target was delayed for six countries, including, Portugal, Spain, France and Italy The fiscal stance is now less restrictive 4.5 2.5 1.9 1.8 1.5 1.3 3 2.2 1.3 4.5 2.8 1.9 5.5 4 2.5 2.9 2.6 1.8 3.9 3.8 3 6.5 5.5 4.2 0 1 2 3 4 5 6 7 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 Portugal Italy France Spain End of 2012 Apr-2014
    • Europe Economic Outlook, May 2014 Page 15 Fiscal policy is less restrictive than in previous years Structural public deficit adjustment 2010-2015 (% GDP) Source: BBVA Research The adjustment of the structural deficit has been smaller in 2013 than in previous years The adjustment of the structural deficit has been smaller in 2013 than in previous years The remaining structural deficit after 2015 is still positive and will require further adjustment to comply with the fiscal compact The remaining structural deficit after 2015 is still positive and will require further adjustment to comply with the fiscal compact 0 2 4 6 8 10 12 14 16 Ireland France Spain Portugal Italy Greece 2012 2013 2015 2014 Post 2015 2011
    • Europe Economic Outlook, May 2014 Page 16 External environment positive, but with doubts on the impact from China and a high exchange rate Dollar/euro exchange rate Source: BBVA Research Impact of strong euro on GDP and exports (pp) Source: BBVA Research -0.45 -0.40 -0.35 -0.30 -0.25 -0.20 -0.15 -0.10 -0.05 0.00 GDP Exports 2014 2015 1.20 1.22 1.24 1.26 1.28 1.30 1.32 1.34 1.36 1.38 1.40 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-14 Apr-14 4% appreciation 0.4% appreciation
    • Europe Economic Outlook, May 2014 Page 17 Section 1 The global economy remains robust Section 2 Drivers for growth : better financial environment and higher confidence, less restrictive policies, banking union proceeds as expected… but doubts on exports Section 3 Projections: Recovery in 2014 with diminished risks Section 4 Low inflation and sluggish credit growth. ECB policy and AQR’s will be key Section 5 Correction of some imbalances, but others persist Section 6 Country detail Contents
    • Europe Economic Outlook, May 2014 Page 18 EMU: annual contribution to GDP growth (pp) Source: Eurostat and BBVA Research Projections: Gradual recovery during 2014, with domestic demand playing an increasing role -10 -8 -6 -4 -2 0 2 4 6 2008 2009 2010 2011 2012 2013 2014 2015 Domestic Demand Exports Imports Net exports GDP 2012 2013 2014 (f) 2015 (f) Economic activity REAL GDP (yoy %) -0.6 -0.4 1.1 1.9 Private Cons. -1.4 -0.7 0.8 1.3 Public Cons. -0.6 0.1 0.3 0.7 Investment -3.8 -2.9 3.1 5.1 Domestic Demand (contribution to %) -2.1 -1.0 1.0 1.8 Exports 2.7 1.4 3.1 4.2 Imports -0.8 0.0 3.1 4.6 External Demand (contribution to %) 1.5 0.6 0.1 0.0 External sector Current Account Balance (% GDP) 1.2 2.3 2.2 2.1 Public finance General Government balance (% GDP) -3.7 -3.0 -2.6 -2.1 Prices CPI , % avg 2.5 1.4 0.9 1.3 REAL GDP (yoy %) -0.6 -0.4 1.1 1.9
    • Europe Economic Outlook, May 2014 Page 19 Country GDP projections (%) Source: Eurostat and BBVA Research By country: Germany will continue to outgrow the rest By country, Germany is more advanced in the recovery By country, Germany is more advanced in the recovery France and Italy revised upwards and will converge over 2015 France and Italy revised upwards and will converge over 2015 -0.6 -0.4 1.1 1.9 0.9 0.5 1.8 2.0 0.0 0.3 0.9 1.5 -2.4 -1.8 0.7 1.4 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 EMU Germany France Italy New projection (Apr-14) Last projection (Feb-14)
    • Europe Economic Outlook, May 2014 Page 20 Uncertainties and sources of risk 1) Fed tapering may have an impact on long rates1) Fed tapering may have an impact on long rates 2) Financial market fragmentation persists and credit remains subdued2) Financial market fragmentation persists and credit remains subdued 3) Risks from lower growth in emerging countries, including China3) Risks from lower growth in emerging countries, including China 4) Smooth AQR and stress tests results are needed for the recovery of credit4) Smooth AQR and stress tests results are needed for the recovery of credit 5) Several risks persist in the periphery. Adjustment needs to continue at the right pace 5) Several risks persist in the periphery. Adjustment needs to continue at the right pace 6) Risk of deflation or prolonged low inflation6) Risk of deflation or prolonged low inflation
    • Europe Economic Outlook, May 2014 Page 21 Section 1 The global economy remains robust Section 2 Drivers for growth : better financial environment and higher confidence, less restrictive policies, banking union proceeds as expected… but doubts on exports Section 3 Projections: Recovery in 2014 with diminished risks Section 4 Low inflation and sluggish credit growth. ECB policy and AQR’s will be key Section 5 Correction of some imbalances, but others persist Section 6 Country detail Contents
    • Europe Economic Outlook, May 2014 Page 22 Strong recession, especially in domestic demand, has weighed on prices since 2009 Eurozone: Core inflation (% YoY) Source: Eurostat and BBVA Research Inflation has declined coinciding with the past recession Inflation has declined coinciding with the past recession The reversing of recent tax hikes has also had an impact on disinflation The reversing of recent tax hikes has also had an impact on disinflation 0,0 0,5 1,0 1,5 2,0 2,5 3,0 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 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 Recession Core HICP (% YoY) Core HICP at constant tax (% YoY) 1strecession 2ndrecession
    • Europe Economic Outlook, May 2014 Page 23 Inflation is projected to remain at very low rates in the forecast horizon. Limited deflation risks Eurozone: Inflation (% YoY) Source: Eurostat and BBVA Research Inflation by countries (% YoY) Source: Eurostat and BBVA Research -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 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 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 20% 40% 60% 95% 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Portugal Spain Italy Eurozone France Germany 2013 2014 2015
    • Europe Economic Outlook, May 2014 Page 24 But very low inflation over a protracted period of time could end up pushing down inflation expectations Eurozone: inflation (% YoY) Source: BBVA Research Eurozone: inflation swaps expectations (%) Source: Bloomberg and BBVA Research -3 -2 -1 0 1 2 3 4 5 6 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 CI95 CI80 CI60 CI40 CI20 Optimal trim Headline (official) Core (official) 0.0 0.5 1.0 1.5 2.0 2.5 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 2Y Inflation swap 5Y Inflation swap 10Y Inflation swap
    • Europe Economic Outlook, May 2014 Page 25 -25 -20 -15 -10 -5 0 5 10 15 20 25 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 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 Private consumption LHH Stock (RHS) New consumer loans over 5 yrs initial fix rate (RHS) Eurozone: Stock of loans to households Source: Eurostat and BBVA Research Eurozone: Growth of loans to households and private consumption (% YoY) Source: Eurostat and BBVA Research New loans to households are recovering, mirroring consumption growth… 0 2 4 6 8 10 12 60 65 70 75 80 85 90 95 100 105 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Loans to households (Stock, s.a., Dec10=100, LHS) New consumers loans 1 to 5 yrs initial rate fix (Trend, Bil.EUR, RHS) New consumer loans over 5 yrs initial rate fix (Trend, Bil.EUR, RHS)
    • Europe Economic Outlook, May 2014 Page 26 … but the recovery of loans to firms is still very incipient Eurozone: Loans to non-financial corporations Source: Eurostat and BBVA Research Eurozone: Loans to non-financial corporations and investment (% YoY) Source: Eurostat and BBVA Research 0 1 2 3 4 5 6 7 8 60 65 70 75 80 85 90 95 100 105 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 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 Loans to NFC (Stock, s.a., Dec10=100, LHS) New business loans to NFC 1 to 5 yrs initial rate fix (Trend, Bil.EUR, RHS) New business loans to NFC over 5 yrs initial rate fix (Trend, Bil.EUR, RHS) -30 -20 -10 0 10 20 30 -15 -10 -5 0 5 10 15 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 Feb-14 Investment LNFC Stock (RHS) New business loans to NFC over 5 yrs initial fix rate (RHS)
    • Europe Economic Outlook, May 2014 Page 27 ECB signals a more dovish stance, though communication is not always consistent Rate cut to 0.25% (refi) by surprise, given low inflation and doubts on the recovery Rate cut to 0.25% (refi) by surprise, given low inflation and doubts on the recovery Talk of additional measures if neededTalk of additional measures if needed ECB remains on hold despite inflation forecasts at 1.5% for 2016, which implies non-compliance with its inflation target ECB remains on hold despite inflation forecasts at 1.5% for 2016, which implies non-compliance with its inflation target QE is on the table: “Unanimous” commitment to use unconventional instruments to cope with “risks of a too prolonged period of low inflation” (not necessarily of deflation) QE is on the table: “Unanimous” commitment to use unconventional instruments to cope with “risks of a too prolonged period of low inflation” (not necessarily of deflation) Draghi strongly signals more measures in June, after the new staff inflation projections are presented. The euro a “serious concern” Draghi strongly signals more measures in June, after the new staff inflation projections are presented. The euro a “serious concern” We expect a further cut in refi interest rates, and a negative deposit rate. Additional measures on liquidity are not discarded for the coming months We expect a further cut in refi interest rates, and a negative deposit rate. Additional measures on liquidity are not discarded for the coming months QE is on the table, although it is not the central scenarioQE is on the table, although it is not the central scenario Nov-13Nov-13 Jan/FebJan/Feb MarchMarch AprilApril MayMay JuneJune
    • Europe Economic Outlook, May 2014 Page 28 Draghi has clarified what measures could be used Unwarranted tightening of policy stance (money markets, bonds or euro) Lower interest rate corridor, negative deposit rate, further extension of full allotment, new liquidity injections Further impairments in monetary policy transmission Targeted long-term refinancing operation, ABS purchase Worsening of the medium-term outlook of inflation A more broad-based asset purchase programme (QE)
    • Europe Economic Outlook, May 2014 Page 29 After the SRM, the comprehensive assessment will be the key event of the second half of 2014 Composed of 3 pillars Supervisory Risk Assessment to review key risks, including liquidity, leverage and funding Supervisory Risk Assessment to review key risks, including liquidity, leverage and funding Asset Quality Review (AQR) to analyze the quality of banks’ assets, collateral valuation and provisions Asset Quality Review (AQR) to analyze the quality of banks’ assets, collateral valuation and provisions Stress Test to examine the resilience of banks’ balance sheet to stress scenariosStress Test to examine the resilience of banks’ balance sheet to stress scenarios The exercise should be strict enough so as to dispel any doubts on the resilience of the balance-sheets. Particular attention should be paid to the AQR, as most doubts surge on the current situation of the balance-sheets The exercise should be strict enough so as to dispel any doubts on the resilience of the balance-sheets. Particular attention should be paid to the AQR, as most doubts surge on the current situation of the balance-sheets
    • Europe Economic Outlook, May 2014 Page 30 Section 1 The global economy remains robust Section 2 Drivers for growth : better financial environment and higher confidence, less restrictive policies, banking union proceeds as expected… but doubts on exports Section 3 Projections: Recovery in 2014 with diminished risks Section 4 Low inflation and sluggish credit growth. ECB policy and AQR’s will be key Section 5 Correction of some imbalances, but others persist Section 6 Country detail Contents
    • Europe Economic Outlook, May 2014 Page 31 Macroeconomic imbalances heatmap Public Debt, 2013 Public Deficit, 2013 Unemployment rate, 3-year average Current account, 3-year average Net international investment position Real effective exchange rate, 3- year percentage change Nominal unit labour costs, 3- year percentage change Private sector debt, percentage of GDP, 2012 Private sector credit, percentage of GDP, 2012 Eurozone 93 -3 11 4 -13 1 4 165 0 GER 78 0 6 7 48 0 6 107 2 FRA 93 -4 10 -2 -21 -1 5 141 4 AUT 74 -2 4 2 3 2 7 147 3 BEL 102 -3 8 -2 44 1 9 146 5 NED 74 -3 6 10 53 2 6 219 0 FIN 57 -2 8 -1 16 2 8 158 9 ITA 133 -3 11 -1 -29 2 5 126 -1 SPA 94 -7 25 -1 -98 1 -5 194 -10 POR 129 -5 15 -3 -119 0 -1 224 -4 IRE 124 -7 14 4 -105 -2 -3 306 -2 GRC 175 -13 24 -4 -119 -4 -11 129 -7 CYP 112 -5 12 -4 -86 0 -6 299 10 SLV 72 -15 9 3 -38 1 -1 114 -3 SLK 55 -3 14 0 -65 3 1 73 3 DEN 44 -1 7 6 40 -1 4 239 6 SWE 40 -1 8 6 -5 3 5 212 3 U.K. 92 -6 8 -3 -1 4 6 179 3 Higher than 119 Lower than -9 Higher than 18 Lower than -6 Lower than -100 Greater than 8 Greater than 15 Greater than 263 Greater than 15 99/119 -9/-7 13/18 -6/-4 -100/-67 5/8 9/15 229/263 13/15 80/99 -7/-5 10/13 -4/-2 -67/-35 4/5 6/9 194/229 10/13 60/80 -5/-3 7/10 -2/0 -35/-3 3/4 3/6 160/194 8/10 Lower than 60 Higher than -3 Lower than 7 Greater than 0 Greater than -3 Lower than 3 Lower than 3 Lower than 160 Lower than 8
    • Europe Economic Outlook, May 2014 Page 32 Public and private debt 2005-2015 (% GDP) Source: Eurostat and BBVA Research Deleveraging still not present, with exceptions Spain Portugal France Greece Italy Germany Netherlands 0 20 40 60 80 100 120 140 160 180 80 130 180 230 Publicdebt(%GDP) Private debt (% GDP) Macroeconomic Imbalances Thresholds 2005 x 2015 Private debt has stabilized and started to fall in Spain Private debt has stabilized and started to fall in Spain Periphery countries have experienced much larger debt increases during the crisis than the core Periphery countries have experienced much larger debt increases during the crisis than the core
    • Europe Economic Outlook, May 2014 Page 33 Periphery countries have reduced public deficits but public debts are still growing Government debt and deficit 2005–2015 Source: IMF Spain France Italy Greece Portugal 20 40 60 80 100 120 140 160 180 200 -16 -11 -6 -1 4 GeneralGovernmentDebt(%ofGDP) General Government Deficit (% GDP) Maastricht deficit and debt limits 2005 x 2015 The adjustment of the deficit has been large, especially in countries under programme The adjustment of the deficit has been large, especially in countries under programme But debt levels have not started to fall yetBut debt levels have not started to fall yet The return to growth and higher inflation are key to rapid deleveraging
    • Europe Economic Outlook, May 2014 Page 34 -20 -15 -10 -5 0 5 10 15 Greece Ireland Spain Portugal EA17 Denmark Germany Italy France Netherlands UnitedKingdom Austria Finland Belgium Labour Productivity (Sign switched) Wages Unit Labour Cost Unit Labour Cost Adjustment, 2009-2013 (%) Source: Haver and BBVA Research Unit labour costs have adjusted rapidly in the periphery In some countries such an adjustment is due to higher productivity, due to the fall of employment In some countries such an adjustment is due to higher productivity, due to the fall of employment Wage moderation has also played a role, especially in comparison to core countries Wage moderation has also played a role, especially in comparison to core countries
    • Europe Economic Outlook, May 2014 Page 35 Unemployment since the beginning of the crisis (%) Source: Haver and BBVA Research Periphery countries have reduced deficits but public debts are still growing In some countries such an adjustment is due to higher productivity, due to the fall of employment In some countries such an adjustment is due to higher productivity, due to the fall of employment Wage moderation has also played a role, especially in comparison to core countries Wage moderation has also played a role, especially in comparison to core countries 0 5 10 15 20 25 30 EA18 GER FRA AUT BEL NLD FIN ITA SPA POR IRE GRC CYP SLV SLK DEN SWE UK Latest Feb-08 Feb-13
    • Europe Economic Outlook, May 2014 Page 36 Current account (% of GDP) Source: Eurostat and BBVA Research Current accounts have adjusted much faster than expected Current account (% of GDP) Source: Eurostat and BBVA Research -20 -15 -10 -5 0 5 10 15 20 NLD GER IRE AUT ITA SPA GRC POR FIN FRA BEL Exports Imports Other items Current account, four quarter moving sum: Q4-2008 Q4-2013 Most EZ countries now in surplus (barring France) Most EZ countries now in surplus (barring France) Part of the adjustment due to recession (lower imports), but exports also played a big role Part of the adjustment due to recession (lower imports), but exports also played a big role -15% -10% -5% 0% 5% 10% 15% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Germany France Italy Spain Portugal Netherlands
    • Europe Economic Outlook, May 2014 Page 37 Section 1 The global economy remains robust Section 2 Drivers for growth : better financial environment and higher confidence, less restrictive policies, banking union proceeds as expected… but doubts on exports Section 3 Projections: Recovery in 2014 with diminished risks Section 4 Low inflation and sluggish credit growth. ECB policy and AQR’s will be key Section 5 Correction of some imbalances, but others persist Section 6 Country detail Contents
    • Europe Economic Outlook, May 2014 Page 38 Germany: Growing weight of domestic fundamentals Confidence indicators reached their peak in Q1Confidence indicators reached their peak in Q1 Robust growth with increasing role of domestic demand Robust growth with increasing role of domestic demand 2012 2013 2014 (f) 2015 (f) Economic activity REAL GDP (yoy %) 0.9 0.5 1.8 2.0 Private Cons. 0.7 1.0 1.4 1.6 Public Cons. 1.0 0.7 1.3 0.9 Investment -1.3 -0.5 4.2 5.0 Domestic Demand (contribution to %) -0.2 0.5 1.8 1.9 Exports 3.8 1.0 3.6 3.9 Imports 1.8 1.0 4.2 4.5 External Demand (contribution to %) 1.1 0.0 0.0 0.0 External sector Current Account Balance (% GDP) 7.0 7.5 6.7 7.0 Public finance General Government balance (% GDP) 0.2 0.0 0.0 0.0 Prices CPI , % avg 2.1 1.6 1.3 1.6 Latest GDP Dec Private consumption Dec General government expenditure Dec Gross fixed capital formation Dec Exports Dec Imports Dec ESI Apr Industrial confidence Apr Consumer confidence Apr Retail trade confidence Apr Volume export order books Apr Volume of order books Apr Consumer unemployment expectations Apr Gfk consumer climate Apr Ifo business climate Apr PMI composite Apr PMI manufacturing Apr PMI services Apr IPI Mar Manuf. orders Mar Domestic Mar Foreign Mar Euro area Mar Non-Euro area Mar Retail Sales Mar Exports of goods Feb Intra european union Feb Extra european union Feb Imports of goods Feb Based on quarterly growth rates. For the latest data, the average of available months in the quarter is taken. For confidence data, standarized values are used, and the growth and fall are related to the mean. No DATA Stronger growth Growth Fall Deeper fall 2012 2013 2014 National accounts SoftdataHarddata
    • Europe Economic Outlook, May 2014 Page 39 Germany: Healthy growth with medium-term concerns Ifo confidence index, Composite PMI and Manufacturing foreign orders BBVA Research The growth pace is stronger and more balanced than in the other main economies The growth pace is stronger and more balanced than in the other main economies But the recent approval of a high minimum wage (€/h 8.50), effective from 2016, poses medium term risks for employment But the recent approval of a high minimum wage (€/h 8.50), effective from 2016, poses medium term risks for employment Liberalization of some services sectors would help to prop up consumption and domestic growth -10 -5 0 5 10 15 20 25 30 -1,0 -0,5 0,0 0,5 1,0 1,5 2,0 2,5 3,0 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Ifo confidence index PMI Composite Manufacturing foreign orders YoY (RHS) 3 per. moving average (Manufacuring foreign orders YoY)
    • Europe Economic Outlook, May 2014 Page 40 France: the recovery does not gain momentum Business confidence indicators stalled in the last few months Business confidence indicators stalled in the last few months Slow recovery mainly driven by domestic demand Slow recovery mainly driven by domestic demand 2012 2013 2014 (f) 2015 (f) Economic activity REAL GDP (yoy %) 0.0 0.3 0.9 1.5 Private Cons. -0.3 0.4 0.9 1.2 Public Cons. 1.4 1.8 0.6 0.5 Investment -1.2 -2.1 1.5 2.5 Domestic Demand (contribution to %) -0.9 0.4 0.9 1.3 Exports 2.5 0.7 1.9 3.2 Imports -0.9 1.0 1.8 2.6 External Demand (contribution to %) 1.0 -0.1 0.0 0.1 External sector Current Account Balance (% GDP) -2.3 -1.6 -1.7 -1.6 Public finance General Government balance (% GDP) -4.8 -4.3 -3.8 -3.0 Prices CPI , % avg 2.2 1.0 1.1 1.2 Latest GDP Dec Private consumption Dec General government expenditure Dec Gross fixed capital formation Dec Exports Dec Imports Dec ESI Apr Industrial confidence Apr Consumer confidence Apr Retail trade confidence Apr Volume export order books Apr Volume of order books Apr Consumer unemployment expectations Apr Business Climate Indicator (INSEE) Apr Business sentiment indicator (BdF) Apr PMI composite Apr PMI manufacturing Apr PMI services Apr IPI Mar Manufacturing turnover (excl. Const.) Feb Domestic Feb Foreign Feb Capacity utilization rate (Industry) Apr Consumer spending Mar Retail Sales Mar Exports of goods Mar Intra european union Mar Extra european union Feb Imports of goods Mar 2012 2013 2014 National accounts SoftdataHarddata Based on quarterly growth rates. For the latest data, the average of available months in the quarter is taken. For confidence data, standarized values are used, and the growth and fall are related to the mean. No DATA Stronger growth Fall Deeper fall
    • Europe Economic Outlook, May 2014 Page 41 France: Reforms needed to regain competitiveness Unit labour costs (2005=100) and Current account balance Source: BBVA Research -2.5 -2 -1.5 -1 -0.5 0 95 100 105 110 115 120 2005 2006 2007 2008 2009 2010 2011 2012 2013 FRA Current Acc. Balance (%GDP) RHS Eurozone France Germany Spain Loss of competitiveness is the main medium- term issue Loss of competitiveness is the main medium- term issue Hence, cuts in employment taxes to be financed by lower public spending are expected Hence, cuts in employment taxes to be financed by lower public spending are expected
    • Europe Economic Outlook, May 2014 Page 42 Italy: Exports support a slow recovery Recent confidence indicators are clearly more upbeat Recent confidence indicators are clearly more upbeat Out of recession since 4Q13, on the path of an export-driven recovery Out of recession since 4Q13, on the path of an export-driven recovery 2012 2013 2014 (f) 2015 (f) Economic activity REAL GDP (yoy %) -2.4 -1.8 0.7 1.4 Private Cons. -4.0 -2.6 0.1 1.2 Public Cons. -2.6 -0.8 -0.6 0.5 Investment -8.1 -4.6 1.2 2.4 Domestic Demand (contribution to %) -5.0 -2.6 0.2 1.3 Exports 2.0 0.0 3.3 3.6 Imports -7.1 -2.9 1.9 3.5 External Demand (contribution to %) 2.6 0.8 0.5 0.2 External sector Current Account Balance (% GDP) -0.7 0.8 1.1 0.9 Public finance General Government balance (% GDP) -2.8 -3.0 -2.6 -2.0 Prices CPI , % avg 3.3 1.3 0.7 1.2 Latest GDP Dec Private consumption Dec General government expenditure Dec Gross fixed capital formation Dec Exports Dec Imports Dec ESI Apr Industrial confidence Apr Consumer confidence Apr Retail trade confidence Apr Volume export order books Apr Volume of order books Apr Consumer unemployment expectations Apr Consumer confidence (ISTAT) Apr Business confidence indicator (ISTAT) Dec PMI composite Apr PMI manufacturing Apr PMI services Apr IPI Feb Industrial new orders Feb Domestic Feb Foreign Feb Capacity utilization rate (Min. & Manuf.) Mar Passenger car registrations Apr Retail Sales Feb Exports of goods Feb Intra european union Feb Extra european union Mar Imports of goods Feb Based on quarterly growth rates. For the latest data, the average of available months in the quarter is taken. For confidence data, standarized values are used, and the growth and fall are related to the mean. No DATA Stronger growth Fall Deeper fall 2012 2013 2014 National accounts SoftdataHarddata
    • Europe Economic Outlook, May 2014 Page 43 Italy: Reforms needed to increase growth potential GDP / Working Age Population (2000=100) Source: BBVA Research 90 95 100 105 110 115 120 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Italy Eurozone Spain In fiscal policy, the main issue is the high volume of public debt (132,6%), while the deficit seems to be under control (-3%) In fiscal policy, the main issue is the high volume of public debt (132,6%), while the deficit seems to be under control (-3%) Very low potential growth reflects lack of reforms over a long period Very low potential growth reflects lack of reforms over a long period Many reform initiatives have been launched, but need to be defined
    • Europe Economic Outlook, May 2014 Page 44 Spain: The recovery is gaining traction Soft and hard indicators have been gaining traction over the first months of Q4 Soft and hard indicators have been gaining traction over the first months of Q4 Growth projections at 1.1% and 1.9% in 2014 and 2015, with an upward bias this year Growth projections at 1.1% and 1.9% in 2014 and 2015, with an upward bias this year 2012 2013 2014 (f) 2015 (f) Economic activity REAL GDP (yoy %) -1.6 -1.2 1.1 1.9 Private Cons. -2.8 -2.1 1.4 1.3 Public Cons. -4.8 -2.3 -1.6 1.4 Investment -6.9 -5.2 1.0 4.5 Domestic Demand (contribution to %) -4.1 -2.7 0.7 1.9 Exports 2.1 4.9 6.0 5.1 Imports -5.7 0.4 5.4 5.4 External Demand (contribution to %) 2.5 1.5 0.4 0.0 External sector Current Account Balance (% GDP) -1.2 0.8 1.3 1.5 Public finance General Government balance (% GDP) -6.8 -6.6 -5.8 -5.1 Prices CPI , % avg 2.4 1.4 0.3 0.9 Latest GDP Dec Private consumption Dec General government expenditure Dec Gross fixed capital formation Dec Exports Dec Imports Dec ESI Apr Industrial confidence Apr Consumer confidence Apr Retail trade confidence Apr Volume export order books Apr Volume of order books Apr Consumer unemployment expectations Apr Private consumption (synth. indicator) Mar PMI composite Apr PMI manufacturing Apr PMI services Apr IPI Mar Industrial new orders Feb Capacity utilization rate (Industry) Apr Motor vehicle registrations Apr Retail Sales Mar Exports of goods Feb Intra european union Feb Extra european union Feb Imports of goods Feb Stronger growth Growth Fall Deeper fall No DATA 2012 2013 2014 National accounts SoftdataHarddata Based on quarterly growth rates. For the latest data, the average of available months in the quarter is taken. For soft data, standarized values are used, and the growth and fall are related to the mean.
    • Europe Economic Outlook, May 2014 Page 45 EU 15: current account balance and implicit Social Security contribution rates Source: BBVA Research basef on based on Boscá, Doménech and Ferri (2013) Fiscal devaluation: the optimum alternative BE DK DE IE EL ES FR IT LU NL AT PT FI SE UK -0.17 -0.13 -0.09 -0.05 -0.01 0.03 0.07 0.11 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 Currentaccountbalance(%GDP,2007) Social security contributions/indirect tax , 2007 Recent cut in Social Security Contributions (SSC) will have a positive impact on GDP and employment.. Recent cut in Social Security Contributions (SSC) will have a positive impact on GDP and employment.. … but limited due to the temporary nature of the measure (among other factors) … but limited due to the temporary nature of the measure (among other factors) A fiscal devaluation (increase indirect taxes + reduction of SSC) may improve price- competitiveness, employment and activity Spain: Reforms needed to reduce unemployment and consolidate competitiveness gains
    • May 2014 Europe Economic Outlook