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Presentation “Spain Consumption Outlook. First Half 2014″

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The global economic cycle is improving. Expansion in developed economies is offsetting the slowdown in emerging markets. These are risks, but.are not systemic.
Spain: upside bias in growth, which will be above 1% in 2014 and around 2% in 2015, but reforms must continue.
Private consumption is undoubtedly recovering, particularly durable goods. Causes: better fundamentals, more financing, less uncertainty and the PIVE programme (incentivising purchase of energy-efficient cars).
Substituting national products for imported goods, as a result of changing preferences, accounts for 60% of the fall in consumption imports during the crisis.
Lower-income households are bearing higher inflation because they concentrate their consumption on products whose prices are more rigid to the downside.

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  • 1. 1H14 BBVA Research – Madrid, 17 June 2014 Consumption Outlook
  • 2. Consumption Outlook 1H14 / 17 June 2014 Key Messages The global economic cycle is improving. Expansion in developed economies is offsetting the slowdown in emerging markets. There are risks, but these are not systemic Spain: upside bias in growth, which will be above 1% in 2014 and around 2% in 2015 … … but reforms must continue Private consumption is undoubtedly recovering, particularly durable goods. Causes: better fundamentals, more financing, less uncertainty and the PIVE programme (incentivising purchase of energy-efficient cars) Substituting national products for imported goods, as a result of changing preferences, accounts for 60% of the fall in consumption imports during the crisis Lower-income households are bearing higher inflation because they concentrate their consumption on products whose prices are more rigid to the downside 1 2 3 4 5 6 Page 2
  • 3. Consumption Outlook 1H14 / 17 June 2014 Section 1 The world economy improves Section 2 The recovery of the Spanish economy accelerates, but further reforms are required Section 3 Private consumption is undoubtedly recovering… Section 4 … particularly in (some) durable goods Section 5 On Spanish households’ consumption habits: import substitution and inflation differentials between households Index Page 3
  • 4. Consumption Outlook 1H14 / 17 June 2014 Section 1 The world economy improves World GDP growth (Annualised quarterly % rate based on BBVA-GAIN) Source: BBVA Research World economic growth remains at over 3% The expansion of developed economies offsets the slowdown in emerging markets… … despite the improvement in their financial conditions Page 4 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14
  • 5. Consumption Outlook 1H14 / 17 June 2014 Section 1 The world economy improves US: growth in line with forecasts (2.5%) The Fed will end tapering by the end of 2014 and will start to raise interest rates in the second half of 2015 Emerging economies: the end of QE in the US is an event with global impact in financial markets, but there will still be great differentiation between emerging markets China: adjustment to the downside of growth outlook (7.2%) because of recent moderation and the shift in economic policy targets, although with room for manoeuvre Banking Union should support credit recovery. The strength of the euro and “too low inflation for too long” are dragging down on the recovery EMU: Domestic demand will contribute to recovery in 2014 (1.1%) and 2015 (1.9%), especially investment Page 5
  • 6. Consumption Outlook 1H14 / 17 June 2014 Section 1 Favourable outlooks, pending risks Economic growth (%) Source: BBVA Research Global expansion will continue, with some uncertainty but without immediate systemic risks Heterogeneous impact on emerging markets Risks on the horizon: tightening monetary policy by the Fed and slowdown in China Page 6 3,3 3,0 3,6 3,9 2,8 1,8 2,5 2,5 -0,6 -0,4 1,1 1,9 5,0 5,4 5,6 5,9 -4 -2 0 2 4 6 8 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 World US EMU BBVA- EAGLES Baseline scenario Apr-2014 Baseline scenario Jan-2014
  • 7. Consumption Outlook 1H14 / 17 June 2014 Section 1 Growth drivers in the eurozone 1. The available data are favourable, particularly confidence 2. The financial environment has improved, especially on the periphery 3. Fiscal policy is less restrictive 4. Unprecedented measures by the ECB to re-establish its monetary-policy´s transmission mechanism. ECB ready to offer further support 5. In general terms, banking union is progressing 6. The external environment is favourable, but the euro is very strong Page 7
  • 8. Consumption Outlook 1H14 / 17 June 2014 Section 1 Risks are bounded Inflation in the eurozone (% YoY) Source: BBVA Research Surprises to the downside in inflation have increased the risk of unanchored expectations The strength of the euro and the fall in prices of raw materials are exerting pressure to the downside on inflation … … but the recovery underway in demand and the improvement in the credit supply reduce the risk of deflation -1,0 -0,5 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 2008 2009 2010 2011 2012 2013 2014 20% 40% 60% 95% Page 8
  • 9. Consumption Outlook 1H14 / 17 June 2014 Section 1 The world economy improves Section 2 The recovery of the Spanish economy accelerates, but further reforms are required Section 3 Private consumption is undoubtedly recovering… Section 4 … particularly in (some) durable goods Section 5 On Spanish households’ consumption habits: substituting imports and inflation differentials between households Index Page 9
  • 10. Consumption Outlook 1H14 / 17 June 2014 The Spanish economy’s recovery accelerates Spain: GDP growth and MICA-BBVA forecasts (% QoQ) Source: BBVA Research based on INE The economy has grown for three consecutive quarters, and more strongly in 1Q14 (0.4% QoQ) … … thanks to better fundamentals, less need for fiscal adjustment, mitigation of some uncertainties and import substitution If the favourable start to 1Q14 were to consolidate in the next few months, growth could accelerate again, granting a rate above 1% in 2014 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 Jun-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(f) CI at 60% CI at 40% CI at 20% GDP (% QoQ) Page 10
  • 11. Consumption Outlook 1H14 / 17 June 2014 Spain: GDP growth by region (%) Source: BBVA Research We have revised 2014 GDP growth upwards, from 0.9% to 1.1%, and we maintain our 1.9% forecast for 2015 … are key to explaining the regions’ different growth rates Regional growth is heterogeneous. Progress in correcting imbalances and exposure to foreign demand … Section 2 The Spanish economy’s recovery accelerates Page 11 AND ARA AST BAL CAN CNT CYL CLM CAT EXT GAL MAD MUR NAV BASC RIO VAL SPA 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 GDPgrowthin2015 GDP growth in 2014
  • 12. Consumption Outlook 1H14 / 17 June 2014 Section 2 Some uncertainties have been resolved Spain: growth and composition of goods exports by geography Source: BBVA Research based on Datacomex Declining activity in emerging markets accounts for the temporary slowdown in goods exports observed in the last two quarters On average, three quarters of the export growth during the crisis is accounted for by geographic and product diversification Competitiveness continues to improve through decreasing ULCs, which helps both exports and the process of import substitution Exports continue to grow1 Page 12 0 10 20 30 40 50 60 70 -15 -10 -5 0 5 10 15 20 European Union North America EAGLEs Rest of the world Nominal growth, 1Q13 average % YoY (LHS) Nominal growth, 4Q13 average % YoY (LHS) Nominal growth, 1Q14 average % YoY (LHS) Exports share, % (RHS)
  • 13. Consumption Outlook 1H14 / 17 June 2014 Section 2 Some uncertainties have been resolved Spain: investment in machinery and equipment (M&E) (Real ratios at 2008 prices) Source: BBVA Research based on INE Whereas in Europe as a whole investment in M&E has grown 8.3% since it bottomed- out in 2Q09, in Spain it has grown by 17.6% … which is consistent with the change in productive model oriented towards the external sector Today M&E investment represents around 45% of the total and more than 8% of real domestic demand (all-time high)… Investment gathers pace2 Page 13 4 5 6 7 8 9 10 Dec-81 Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 % GDP % domestic demand
  • 14. Consumption Outlook 1H14 / 17 June 2014 Section 2 Some uncertainties have been resolved Spain: 10-year bond yield (Difference vs. previous forecasts in bp) Source: BBVA Research Improved perceptions abroad have reduced dependence on the ECB and also improved access to wholesale markets for large companies A permanent drop of 100bp in sovereign yields implies up to 1% more growth for the economy Lower financial tensions are felt in the economy with a six- to nine-month time lag Lower financial tensions3 -250 -200 -150 -100 -50 0 2014 2015 Jul-13 Oct-13 Ene-14 Abr-14 Page 14
  • 15. Consumption Outlook 1H14 / 17 June 2014 Section 2 Some uncertainties have been resolved Spain: new retail credit operations (% YoY) Source: BBVA Research based on Bank of Spain The Spanish economy is going through an unavoidable deleveraging process … A turning point is already visible, together with an improvement in credit flows to households and SMEs, which will be strengthened throughout 2014 … which is compatible with credit availability for solvent projects New credit flows are improving4 Page 15 -35% -25% -15% -5% 5% 15% 25% Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Actual Trend
  • 16. Consumption Outlook 1H14 / 17 June 2014 Section 2 Some uncertainties have been resolved Regions: breakdown of public deficit, excluding aid to the financial sector (% GDP) Source: BBVA Research based on MINHAP The fiscal effort made at the end of 2013 and the recovery both significantly increase the likelihood of meeting targets in 2014 … Meeting the 2015 targets will depend on the impact of the tax reform and the measures passed with the official budget … although doubts remain over how public revenues will respond to economic growth and the impact of the reform of local corporations Meeting fiscal targets5 Page 16 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 Deficit 2011 Passivefiscalpolicy Fiscaleffort Deficit2012 Passivefiscalpolicy Fiscaleffort Deficit2013 Passivefiscalpolicy Fiscaleffort Deficit2014 Passivefiscalpolicy Fiscaleffort Deficit2015 2012 2013 2014 2015
  • 17. Consumption Outlook 1H14 / 17 June 2014 Section 2 Some uncertainties have been resolved Spain: impact of the wage restraint in 2012 on employment (‘000s of full-time-equivalent jobs) Source: BBVA Research Some of the reforms introduced in the last few years are starting to have a positive impact … Structural changes will imply that employment will respond more rapidly to economic recovery … such as labour reform. Job-creation has begun earlier than expected Impact of reforms6 Page 17 0 200 400 600 800 1000 1200 Short term From the third year From the third year Employment destruction avoided by the wage moderation Jobs that would have been saved had the process begun in 2008
  • 18. Consumption Outlook 1H14 / 17 June 2014 Section 2 The need to go further with the reforms Employment performance (Employment level at the beginning of each crisis = 100 ) Source: BBVA Research based on Andrés and Doménech (2012) Urgent short-term goal: reduce the unemployment rate Wage flexibility to win back productivity (∆ of employment and W) and more competition (margin reduction) But the labour market’s problems go deeper: collective bargaining, two-tier system and employment policies Target for GDP growth: 2.5% to 2025 Page 18 80 85 90 95 100 105 Peak 2 4 6 8 10 12 14 16 18 years Employmentlevelatthebeginningofthecrisis= 100 Spain , 2007-25 EU8, 2007-11 USA, 2007-14 USA, 1929-40
  • 19. Consumption Outlook 1H14 / 17 June 2014 Section 2 The need to go further with the reforms 1. Complete the restructuring of the financial sector and deleverage to improve financing in the Spanish economy and attract FDI 2. Public administration 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 3. Reforms to improve productivity, firm size, competitiveness and the attractiveness of Spain to foreign physical, human and technological capital 4. Going further with reforms that improve the effectiveness of active employment policies, reduce the two-tier nature of the labour market and make it work better more employment, and of higher quality Page 19
  • 20. Consumption Outlook 1H14 / 17 June 2014 Section 1 The world economy improves Section 2 The recovery of the Spanish economy accelerates, but further reforms are required Section 3 Private consumption is undoubtedly recovering… Section 4 … particularly in (some) durable goods Section 5 On Spanish households’ consumption habits: import substitution and inflation differentials between households Index Page 20
  • 21. Consumption Outlook 1H14 / 17 June 2014 Section 3 Private consumption is undoubtedly recovering Page 21 Spain: growth in private consumption (%) Source: BBVA Research based on INE Disposable income: change in the labour market cycle Propensity to consume: less uncertainty Wealth: Increase in financial wealth What are the drivers of the improvement in consumption? Borrowing capacity: Household: increase in financing Public sector: PIVE -6 -5 -4 -3 -2 -1 0 1 2 3 Mar-08 Jun-08 Sep-08 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 Mar-15 Jun-15 Sep-15 Dec-15 % YoY Average
  • 22. Consumption Outlook 1H14 / 17 June 2014 Section 3 Private consumption is undoubtedly recovering Spain: employment and unemployment rate (%) Source: BBVA Research based on INE 1. Cyclical change in the labour market The labour market reform has enabled a readjustment of the balance between quantities (employment) and prices (wages) Sustained reduction in the unemployment rate will arrive in 2H14 The economy has started to create employment in 1H14 Page 22 0.0 4.0 8.0 12.0 16.0 20.0 24.0 28.0 -7.5 -6.0 -4.5 -3.0 -1.5 0.0 1.5 3.0 2008 2009 2010 2011 2012 2013 2014 2015 Employment (% LHS) Unemployment rate (% RHS)
  • 23. Consumption Outlook 1H14 / 17 June 2014 Section 3 Private consumption is undoubtedly recovering Spain: real net financial wealth (Deflated with the consumption deflator, swda data, %) Source: BBVA Research based on Bank of Spain 2. Increase in net financial wealth Reductions in financial tensions → recovery of share prices and reduction in borrowing costs → ∆ in financial wealth BBVA Research: ∆ of 1% per quarter in real net financial wealth → accumulated ∆ in private consumption of 0.2% over the following four quarters Real net financial wealth: ∆32.2% since 2Q12 → ∆5.5pp of growth in consumption to 4Q14 Page 23 -15 -10 -5 0 5 10 15 0 200 400 600 800 1000 1200 Mar-08 Jun-08 Sep-08 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 EURmn (LHS) %qoq (RHS) 2Q12-4Q13: ∆32.2%
  • 24. Consumption Outlook 1H14 / 17 June 2014 Section 3 Private consumption is undoubtedly recovering Spain: household perceptions of the economic situation (swda data, quarterly averages, balance of answers) Source: BBVA Research based on EC 3. Less uncertainty On the macroeconomy: the perception of the Spanish economy is at pre-crisis levels On the microeconomy: perceptions of households’ own financial situation is as high as it has been for the last decade The reduction in uncertainty is an incentive to consume, at the expense of saving ∆10 points in confidence → ∆ 1.2 points in consumption in the next 3 years Page 24 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 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 Expectations on the household´s financial situation (12 months) Expectations on the overall economic situation (12 months) +22.9 points +57.9 points
  • 25. Consumption Outlook 1H14 / 17 June 2014 Section 3 Private consumption is undoubtedly recovering Page 25 Spain: new consumer financing operations (3rd order centred moving average. Jan 11 = 100) Source: BBVA Research based on Bank of Spain 4. Improvement in financing (I) New consumer credit operations have grown at double-digit rates between January and April … … driven by the increase in short-, medium- and long-term financing … in a context of decreasing outstanding credit and high interest rates Consumer credit/Spain GDP=5.9%=EMU40 60 80 100 120 140 160 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Total < 1 year 1-5 years > 5 years
  • 26. Consumption Outlook 1H14 / 17 June 2014 Section 3 Private consumption is undoubtedly recovering BBVA business trends survey: perceptions of consumer credit supply and demand (Balance of replies. A value <0 indicates deterioration) Source: BBVA Research The BBVA Business Trends Survey (BTS) in 2H13 already anticipated an increase in financing BTS for 1H14: those surveyed think that credit has performed favourably in all retail trade activities… … and that it will continue to do so in the second half of the year 4. Improvement in financing (II) Page 26 -90 -75 -60 -45 -30 -15 0 15 30 45 60 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 (f) Supply Demand
  • 27. Consumption Outlook 1H14 / 17 June 2014 Section 3 Private consumption is undoubtedly recovering Spain: effect of the PIVE car programme on private consumption (pp of the quarterly growth rate) Source: BBVA Research The PIVE programme has limited the negative and permanent effect on consumption caused by the increase in VAT in September 2012 ∆VAT → a fall of 300k new car registrations between October 2012 and May 2014 if the PIVE plan had not been approved. The subsidy has meant this fall was restricted to 53k vehicles The effect on private consumption is 0.9% since 4Q12 5. Fiscal stimulus: PIVE Page 27 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:
  • 28. Consumption Outlook 1H14 / 17 June 2014 Section 1 The world economy improves Section 2 The recovery of the Spanish economy accelerates, but further reforms are required Section 3 Private consumption is undoubtedly recovering… Section 4 … particularly in (some) durable goods Section 5 On Spanish households’ consumption habits: import substitution and inflation differentials between households Index Page 28
  • 29. Consumption Outlook 1H14 / 17 June 2014 Section 4 Spending on durable goods takes off Spain: new car registrations, by channel (swda figures, MA3, Jan 09 = 100) Source: BBVA Research based on ANFAC and GANVAM The private channel is the main responsible for the increase in registrations (2.3x since the 1st PIVE came into force) … …together with an increase in demand from car rental firms and, to a lesser extent, from companies (renting) The second-hand/new vehicle ratio has fallen: 1.9 to May 2014 vs. 2.1 to May 2013 Cars: sales are still driven by the PIVE programme … but the country’s total car fleet is still aging (51.7% of cars are 10+ years old); average age ≈ 11.3 years old Page 29 0 25 50 75 100 125 150 175 200 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Total Retail Firms Car rental Plan 2000E End of Plan 2000E + ∆VAT ∆VAT + PIVE
  • 30. Consumption Outlook 1H14 / 17 June 2014 Section 4 Spending on durable goods takes off Page 30 Spain: forecast new car registrations Source: BBVA Research 2014: 840k units (15.5% more than in 2013) 2015: numbers will depend on whether the subsidy is continued or not ∆2.5% if current conditions are continued through to the first half of the year Drivers (per capita income, unemployment, relative prices and interest rates) are now favourable PIVE extension → rise in car registrations in 2014 -40 -30 -20 -10 0 10 20 0 200 400 600 800 1000 1200 2008 2009 2010 2011 2012 2013 2014 L/T (%YoY) '000sofvehicles Actual Forecast actual % YoY (RHS) forecast % YoY (RHS)
  • 31. Consumption Outlook 1H14 / 17 June 2014 Section 4 Spending on durable goods takes off Spain: new motorbike registrations and estimated fleet (CVEC data, 1Q08 = 100) Source: BBVA Research based on Bank of Spain Anesdor 1H14: double-digit growth Drivers: improved expectations by potential buyers, increased availability of finance and the unavoidable renovation of the fleet 2014: 112k new motorbike registrations (∆16.7%) Motorbikes: the recovery consolidates Page 31 0 20 40 60 80 100 120 140 Mar-08 Jun-08 Sep-08 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(f) Car registrations Estimated car fleet Moto-E Plan
  • 32. Consumption Outlook 1H14 / 17 June 2014 Section 4 Spending on durable goods takes off Spain: white goods sales per household (% YoY in unit terms) Source: BBVA Research based on ANFEL The overall market has halved: -5.2 million appliances since 2006 (-51.8%) Sales Jan-May 2014: 12.4% YoY (-5.6% in 2013) Downward trend in prices → more modest ∆ in turnover (6.1%) All electrical appliances saw positive YoY growth, the majority in double digits White goods: light at the end of the tunnel Page 32 -40 -20 0 20 40 Refrigerators Freezers Washing Machines Driers Dishwashers Cooks Ovens Counters Extractor hoods Total 2013 Jan-May 2013 Jan-May 2014
  • 33. Consumption Outlook 1H14 / 17 June 2014 Section 4 Spending on durable goods takes off Spain: actual retail sales of brown goods (swda data, 1Q08 = 100) Source: BBVA Research based on INE Sales have been weak since the VAT hike in September 2012 … 2Q14: recovery in demand for consumer electronics related to the World Cup Fall in relative prices and in penetration rates Exceptions: tablets, laptops & mobile phones Brown goods: erratic performance Page 33 -12 -10 -8 -6 -4 -2 0 2 4 6 Mar-08 Jun-08 Sep-08 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(f) ICT Consumer electronics Non-food products
  • 34. Consumption Outlook 1H14 / 17 June 2014 Section 4 Spending on durable goods takes off Spain: turnover of the furniture sector vs. housing investment (Trend. 1Q08 = 100) Source: BBVA Research based on INE Stable turnover, stable prices … for the fourth consecutive quarter BBVA Research estimates: ∆ in nominal investment in housing at 1% QoQ → 0.5% cumulative ∆ in turnover House purchases will start to recover over the course of 2014, which should drive consumer demand for furniture starting in 1H15 Furniture: in a context of increasing demand for housing Page 34 20 30 40 50 60 70 80 90 100 Mar-08 Jun-08 Sep-08 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 Mar-15 Jun-15 Sep-15 Dec-15 Furniture Nominal housing investment Real housing investment
  • 35. Consumption Outlook 1H14 / 17 June 2014 Section 1 The world economy improves Section 2 The recovery of the Spanish economy accelerates, but further reforms are required Section 3 Private consumption is undoubtedly recovering… Section 4 … particularly in (some) durable goods Section 5 On Spanish households’ consumption habits: import substitution and inflation differentials between households Index Page 35
  • 36. Consumption Outlook 1H14 / 17 June 2014 Section 5 Are consumer preferences for Spanish-made goods changing? Spain: private consumption and imports of non- energy consumer goods (Deflated sa data, 1Q09 = 100) Source: BBVA Research based on INE & Customs Since the beginning of 2009, consumer goods imports have contracted 12%, more than twice as much as private consumption And the rest? Import substitution by domestic output Part of the correction is explained by reduced household spending (income effect) Box 1 Page 36 70 75 80 85 90 95 100 105 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 Private consumption Imports of non-energy consumption products -6.2% until 1Q13 (-4.8% until 1Q14) -25.7% until 1Q13 (-12.0% until 1Q14)
  • 37. Consumption Outlook 1H14 / 17 June 2014 Section 5 Are consumer preferences for Spanish-made goods changing? Yes, they are Spain: breakdown of the variation in consumer goods imports into their long-term drivers (1Q09-1Q13, pp) Source: BBVA Research Import substitution could be due to: • Deterioration in competitiveness – price of foreign-made goods • Change in households’ preferences towards Spanish-made goods … particularly in durable goods (substitution effect : 70%) Results: • Import sensitivity to income and, above all, to prices has increased during the recession • Import substitution, cased by changes in preferences, explains two-thirds of the fall in consumer imports … Page 37 -60,0 -50,0 -40,0 -30,0 -20,0 -10,0 0,0 10,0 Total Durables Loss (-) / Gain (+) in competitiveness Income effect Change in preferences Total (actual) Total (LT explained)
  • 38. Consumption Outlook 1H14 / 17 June 2014 Section 5 My CPI isn’t like your CPI: inflation differentials by household Spain: inflation distribution in 2007 & 2013 (% of households) Source: BBVA Research based on INE The apparent simplicity of CPI has facilitated its use as a mechanism for indexing numerous monetary variables (salaries, pensions, etc.) Outcome: inflation dispersion is significant and has increased during the crisis Nonetheless, it aggregates prices for millions of household baskets → inflation is not the same for all households Box 2 Page 38 Average 2013 Average 2007 0 5 10 15 20 -2 0 2 4 6 8 Headline inflation (%)
  • 39. Consumption Outlook 1H14 / 17 June 2014 Section 5 My CPI isn’t like your CPI: inflation differentials by household Spain: estimated inflation differentials by income level (in pp vs. the 20% of households with higher equivalent income) Source : BBVA Research What household characteristics affect the rate of inflation for that household? • Basic goods (foodstuffs) • Products subject to regulated prices (alcohol and tobacco) • A combination of both factors (housing and supplies) Lower-income households face higher inflation because their consumption is concentrated on products whose prices are more rigid to the downside: Page 39 -0,05 0,00 0,05 0,10 0,15 0,20 0,25 1st Quintile (20% with lower income) 2nd Quintile (20%-40%) 3 rd Quintile (40%-60%) 4 th Quintile (60%-80%) Marginal effect of the income level on the household´s inflation rate CI at 90%
  • 40. Consumption Outlook 1H14 / 17 June 2014 Key Messages The global economic cycle is improving, supported by the expansion in developed economies Spain is not lagging behind. Growth is accelerating, but more reforms are still needed Private consumption is undoubtedly recovering, particularly durable goods Causes: better fundamentals, more financing, less uncertainty and the PIVE programme (incentivising purchase of energy-efficient cars) Lower preference by Spanish consumers for imported products. The role played by the price in purchase decision making has become more and more relevant Inflation differentials among household types is significant. Lower-income families are bearing higher inflation 1 2 3 4 5 6 Page 40
  • 41. Consumption Outlook 1H14 / 17 June 2014 Appendix Baseline Scenario Spain & Europe: macroeconomic forecasts Source: BBVA Research based on INE & Eurostat Page 41 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) -6,8 -3,7 -6,6 -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)