Global and Spanish Economic Outlook - 2nd quarter 2014

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World economy: the recovery continues, but is not accelerating
Spain: the biases to the upside are confirmed
Commitment to the reforms is essential in consolidating the improvement in markets and increasing growth potential

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Global and Spanish Economic Outlook - 2nd quarter 2014

  1. 1. Global and Spanish Outlook May 2014
  2. 2. Global and Spanish Outlook, May 2014 Key messages 1 2 3 The global economic cycle is improving, although growth is not accelerating as expected, particularly in emerging economies Some economic policy uncertainties are being dispelled but some risks remain, although they are no longer systemic as in previous years Spain confirms the biases to the upside in growth, which will be above 1% in 2014. Uncertainties such as those associated with the deceleration in export growth and non-compliance with the deficit target, with its impact on GDP, are being resolved positively Reforms are having a positive effect on the economy. However, the effort can and ought to be greater if the recovery is to strengthen. A more efficient tax system, which includes a fiscal devaluation, or an ambitious reform of the services sector might raise exports noticeably 4 Page 2
  3. 3. Global and Spanish Outlook, May 2014 Section 1 World economy: the recovery continues, but is not accelerating Section 2 Spain: the biases to the upside are confirmed Section 3 Commitment to the reforms is essential in consolidating the improvement in markets and increasing growth potential Index Page 3
  4. 4. Global and Spanish Outlook, May 2014 World GDP growth (% QoQ) Based on BBVA-GAIN Source: BBVA Research Global cycle: growth remains robust at a quarterly 0.8% in the first half of the year Overall, higher growth in developed economies is partly offsetting lower growth in emerging economies Growth is still robust and financial conditions have also eased in emerging economies, but incoming information reveals no acceleration of global growth in the first half of 2014 0,0 0,2 0,4 0,6 0,8 1,0 1,2 Last MC Current Last MC Current Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Actual Estimates Page 4
  5. 5. Global and Spanish Outlook, May 2014 US: GDP growth (% YoY) Source: BBVA Research, BEA US: growth is in line with our baseline scenario We maintain our baseline scenario for growth. The 1Q14 slowdown should be short-lived (bad weather related) The balance of risks remains slightly biased to the upside The Fed will end tapering by the end of the year, and will start increasing rates in the second half of 2015 2,8 1,9 2,5 2,5 0,0 0,5 1,0 1,5 2,0 2,5 3,0 2012 2013 2014 2015 Baseline Apr-2014 Baseline Jan-2014 Page 5
  6. 6. Global and Spanish Outlook, May 2014 Exchange rate volatility in May-June 2013 and external financial needs Source: BBVA Research Monetary return to normal in the US is an event of global impact in financial markets Financial tensions vs. Lehman BBVA Research’s Financial Tension Index vs. Lehman=100% Source: BBVA Research In May 2013 markets perceived that the end to the Fed’s balance-sheet expansion was near, which increased global volatility, especially in emerging markets Exchange rate volatility was higher in emerging economies with larger external financial dependency ARG BRA BUL CHL CHN COL HUN IND IDN KOR MYS MEX PER PHL POL ROM RUS THA TUR VEN 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 -6.0 -4.0 -2.0 0.0 2,0 4.0 6.0 Foreign funding gap as % GDP (Current accout balance plus FDI) Exchangeratevariationin May2013FED'staperingevent Page 6 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
  7. 7. Global and Spanish Outlook, May 2014 Eurozone: economic growth is consolidating, as expected … Page 7 Domestic demand will contribute to the recovery in 2014, especially in investment The euro’s strength will slow down the contribution of external demand to growth Banking union, in place through the AQR and the ST, should support the credit recovery in 2015, signaling the end of the crisis Eurozone: GDP growth (% YoY) Source: BBVA Research -0.6 1.1 -0.4 1.9 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2012 2013 2014 2015 Baseline Apr-2014 Baseline Jan-2014
  8. 8. Global and Spanish Outlook, May 2014 …which should favour a decrease in deflation risks Downside surprises on headline inflation have increased the risk of unanchored expectations Downward pressures come from the Euro’s appreciation and lower raw-material prices The current recovery in demand, lower financial stress and improved credit supply reduce deflation risks Inflation in the eurozone: baseline scenario (% YoY) Source: BBVA Research Page 8 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2008 2009 2010 2011 2012 2013 2014 20% 40% 60% 95%
  9. 9. Global and Spanish Outlook, May 2014 “Too low” inflation for “too long” is a risk for the recovery Inflation pressure in developed economies (% YoY) Trimmed mean of CPI in the eurozone and Japan, and PCE in the US Source: BBVA Research and Dallas Fed Optimised measures of inflation tensions show the lack of upside inflation pressures as a whole Decreasing inflation in the eurozone makes it vulnerable to additional negative shocks The ECB seems ready to take further action if needed. Even if not very likely, a QE is being considered Page 9 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 EMU US Japan
  10. 10. Global and Spanish Outlook, May 2014 China: industrial production, YoY % Source: Haver and BBVA Research Chinese growth weakens in the beginning of 2014 China’s indicators are losing momentum … China: debt in the non-financial private sector Total debt as % GDP Source: BBVA Research, BIS and OECD … as the authorities are more focused on reducing vulnerabilities with less room for manoeuvre in the short term Page 10 2.0 6.0 10.0 14.0 18.0 22.0 Mar-07 Mar-08 Mar-09 Mar-10 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
  11. 11. Global and Spanish Outlook, May 2014 The government will continue with economic reforms, and will implement measures to reduce financial risks China: the baseline scenario has been revised downwards due to the recent moderation and new targets on economic policy Page 11 We expect a greater adjustment in investment than in consumption In case of higher-than-expected deceleration in the economy (below 7%), there is room for public intervention (investment in infrastructure, fiscal stimulus) China: GDP growth (% YoY) Source: BBVA Research 7.7 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
  12. 12. Global and Spanish Outlook, May 2014 Roughly every pp of lower growth in China reduces global growth by 0.4, mainly through the trade channel (lower foreign demand from China) If, in addition to this channel, lower Chinese growth would cause higher global financial volatility, the impact in world GDP could double to almost 1.0 All in all, differences will remain in the impact expected between geographical areas GDP growth, impact of an adjustment in China’s growth. Ranking from higher to lower impact Source: BBVA Research What could be the impact of lower growth in China on other economic areas? Ranking Economic area 1 Latin America 2 Japan 3 Eurozone 4 US Page 12
  13. 13. Global and Spanish Outlook, May 2014 All in all, heterogeneity characterises the impact of deceleration in China or an interest rate rise in the US Page 13 Emerging Markets’ exposure to China’s slowdown and foreign funding needs The size of the circle is proportional to the exchange rate volatility in the Fed’s tapering episode, May 2013 Source: BBVA Research BRA COL ARG BUL THA CHL IND IDN KOR MYS MEX PER PHL POL ROM RUS HUN TUR -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 -1 1 3 5 7 9 11 13 FundingGap(CAB+FDI,avg.2012,%GDP) Exports to China 2012, % of GDP
  14. 14. Global and Spanish Outlook, May 2014 Global GDP growth (%) Source: BBVA Research To sum up global growth will continue, with a monetary return to normal ahead 1 2 Global expansion will continue, with China growing less than previously but without immediate risks of a sudden adjustment The combination of the Fed’s tightening (diverging further from ECB policy) and adjustments in China’s growth will be the dominant drivers in the coming months, with an heterogeneous impact on EM Page 14 2.8 -0.4 5.2 4.0 3.2 3.0 3.4 3.8 -3 -2 -1 0 1 2 3 4 5 6 2008 2009 2010 2011 2012 2013(e) 2014(f) 2015(f) Developed Mkts Emerging Mkts
  15. 15. Global and Spanish Outlook, May 2014 Index Page 15 Section 1 World economy: the recovery continues, but is not accelerating Section 2 Spain: the biases to the upside are confirmed Section 3 Commitment to the reforms is essential in consolidating the improvement in markets and increasing growth potential
  16. 16. Global and Spanish Outlook, May 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, a lower need for fiscal adjustment, reduction of some uncertainties and import substitutions If the favourable start to 2Q13 were to consolidate in the next few months, growth could accelerate again Page 16 -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)
  17. 17. Global and Spanish Outlook, May 2014 The Spanish economy’s recovery accelerates Spain: BBVA Economic Activity Survey (Balance of extreme replies, %) Source: BBVA Research Box 1 This expansion in activity is confirmed by data from the BBVA Economic Activity Survey … … which is highly correlated with activity in those regions with a wide response base … … and the results of which will be presented quarterly from now onwards Page 17 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 -60 -40 -20 0 20 40 60 GDPgrowthinQ(QoQ,%) Perspective in t-1 for t (balance of extreme responses, %)
  18. 18. Global and Spanish Outlook, May 2014 Spain: GDP growth by region (%YoY) Source: BBVA Research The regions continue to be heterogeneous We have revised 2014 growth upwards, from 0.9% to 1.1%, and maintain our 1.9% forecast for 2015 Heterogenous progress in correcting imbalances and exposure to foreign demand … … are key to explaining the regions’ different growth rates Page 18 AND ARA AST BAL CAN CNT CYL CLM CAT EXT GAL MAD MUR NAV BASC RIO VAL SPA 1.0 1.2 1.4 1.6 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
  19. 19. Global and Spanish Outlook, May 2014 Some uncertainties have been positively resolved: 1. Exports continue to grow Spain: growth and composition in goods exports by geographic areas Source: BBVA Research based on Datacomex Note: data to February 2014 Deceleration in goods exports at the end of 2013 seems to have been temporary Services exports continue to grow, although more modestly than in 2013 Improved global perspectives will enable exports to continue growing in coming months Page 19 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, 4Q13 Avg. % YoY (LHS) Nominal growth, 1Q13 Avg. % YoY (LHS) Weight of exports in total, % (RHS)
  20. 20. Global and Spanish Outlook, May 2014 Some uncertainties have been positively resolved: 2. Investment gathers pace Spain: investment in machinery and equipment (M&E) (Real ratios at 2008 prices) Source: BBVA Research based on INE Whereas investment in M&E has grown by 8.3% in Europe since it touched bottom in 2Q09, in Spain it has grown by 17.6% Today it already represents 45% of total investment and over 8% of real domestic demand (all-time high) … … which is consistent with the change in the productive model, oriented more towards the foreign sector Page 20 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 % of GDP % of national demand
  21. 21. Global and Spanish Outlook, May 2014 Spain: 10-year bond interest rate (Difference over earlier forecasts in bp) Source: BBVA Research Some uncertainties have been positively resolved: 3. Lower financial tensions Better perception from abroad has reduced dependency on the ECB and improved access of large companies to wholesale markets Lower financial tensions are felt in the economy with a six to nine month time lag A permanent drop of 100bp in sovereign interest rates implies up to 1% more growth for the economy Page 21 -250 -200 -150 -100 -50 0 2014 2015 Jul-13 Oct-13 Jan-14 Apr-14
  22. 22. Global and Spanish Outlook, May 2014 Some uncertainties have been positively resolved: 4. Flows of new credit operations are improving Spain: new credit retail operations (% YoY) Source: BBVA Research based on BoS The Spanish economy is going through an unavoidable process of debt reduction … … which is compatible with credit provision for solvent projects A turning point is already visible, together with an improvement in credit flows to households and SMEs, which will be strengthened in 1H14 Page 22 -35% -25% -15% -5% 5% 15% 25% Mar-04 Sep-04 Mar-05 Sep-05 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 %YoYvariation Data Trend
  23. 23. Global and Spanish Outlook, May 2014 Regions: breakdown of public deficit, excluding aid to the financial sector (%GDP) Source: BBVA Research based on MINHAP Some uncertainties have been positively resolved: 5. GDP growth and meeting fiscal targets Fiscal adjustments made at the end of 2013 and the recovery both significantly increase the likelihood of compliance in 2014,… … although doubts remain over the response of public revenue to economic growth and the impact of the local authorities’ reform … … as well as the tax reform and the regions’ budgetary measures for 2015 Page 23 9.1 3.1 5.3 6.8 1.8 2.0 6.6 -0,4 0.3 5.8 -0,9 0.2 5.1 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 Deficit2011 Pasivefiscalpolicy Fiscaleffort Deficit2012 Pasivefiscalpolicy Fiscaleffort Deficit2013 Pasivefiscalpolicy Fiscaleffort Deficit2014 Pasivefiscalpolicy Fiscaleffort Deficit2015 2012 2013 2014 2015
  24. 24. Global and Spanish Outlook, May 2014 99 100 101 102 103 104 99 100 101 102 103 104 Productivityoflabour FTE Jobs Since 1Q94 = 100 Since 3Q13 = 100 (f) Although some uncertainties persist Spain: labour productivity and job creation (Onset of the recovery =100) Soure: BBVA Research 1. Employment response to growth: how will productivity of labour behave in the recovery? 2. Fundamentals do not account for all the growth in private consumption 3. Export prices have offset the appreciation in the exchange rate. Can exports continue to hold up? More Employment More productivity Page 24
  25. 25. Global and Spanish Outlook, May 2014 Index Page 25 Section 1 World economy: the recovery continues, but does not accelerate Section 2 Spain: the biases to the upside are confirmed Section 3 Commitment to the reforms is essential in consolidating the improvement in markets and increasing growth potential
  26. 26. Global and Spanish Outlook, May 2014 The need to go further with the reforms Spain: potential effects after a year of the flat contribution to Social Security paid for indefinite contracts Source: BBVA Research) Despite some weaknesses (it is not permanent and savings to the employer increase in step with the contribution base) … … we forecast a positive effect on employment (0.6 - 0.7%) and on GDP (0.2 – 0.3%), with a net fiscal cost of 0.12% of GDP New measures: fiscal devaluation, incentivising open-ended contracts, improving active employment policies Box 2 1.0 0.8 0.6 % 0.4 0.2 0.0 Employment GDP Page 26
  27. 27. Global and Spanish Outlook, May 2014 The need to go further with the reforms Spain: effect on exports of adopting best regulatory practices, large corporations (accumulated variation %, 1992-2008) Source: BBVA Research based on Correa-López & Doménech (2014) Thanks to the process of deregulation in the services sector since 1990, manufacturing exports are 50% higher Had international best practices been adopted, exports would have been a further 18% higher So, there is still scope for continuing to eliminate obstacles which make it difficult for companies to become more international Box 3 Page 27 0 5 10 15 20 25 Non-metalminerals Chemicals Textile Food Paperindustry Rubber&plastics Basicmetals Transportmaterial Electricequipment Othermanufactured goods Avf. effect: 18%
  28. 28. Global and Spanish Outlook, May 2014 The need to go further with the reforms 1. Reduce debt and improve financing in the Spanish economy: complete the restructuring of the financial sector and attract direct foreign investment 3. Reforms with which to improve productivity, the size of companies, competitiveness and Spain’s perception abroad, to attract inward physical, human and technological capital 4. Going further with reforms that improve the efficiency of active employment policies, reduce the two-tier nature of the labour market and make it work better -more employment, and of higher quality 2. Public administrations reform, fiscal consolidation and long-term sustainability of public finances, with an efficient fiscal system that incentivises growth and the creation of employment -> Experts Committee report Page 28
  29. 29. Global and Spanish Outlook May 2014
  30. 30. Global and Spanish Outlook, May 2014 Macro-economic scenario Spain and Europe: macro-economic forecasts Source: BBVA Research based on INE and Eurostat Page 30 Spain EMU Spain EMU Spain EMU Spain EMU Households final consumption expenditure -2.8 -1.4 -2.1 -0.7 1.4 0.8 1.3 1.3 General government final consumption exp. -4.8 -0.6 -2.3 0.1 -1.6 0.3 1.4 0.7 Gross fixed capital formation (G.F.C.F.) -7.0 -3.8 -5.1 -2.9 1.0 3.1 4.7 5.1 Equipment and machinery -3.9 -4.3 2.2 -1.9 7.9 5.2 6.9 7.0 Housing -8.7 -3.3 -8.0 -3.6 -3.4 1.1 4.9 3.9 Other constructions -10.6 -4.7 -10.9 -4.3 -4.0 0.5 1.1 3.2 Changes in inventories (*) 0.0 -0.5 0.0 -0.1 0.0 0.0 0.0 0.0 Domestic Demand (*) -4.1 -2.1 -2.7 -1.0 0.7 1.0 1.9 1.8 Exports 2.1 2.7 4.9 1.4 6.0 3.1 5.1 4.2 Imports -5.7 -0.8 0.4 0.0 5.4 3.1 5.4 4.6 External Demand (*) 2.5 1.5 1.5 0.6 0.4 0.1 0.0 0.0 GDP mp -1.6 -0.6 -1.2 -0.4 1.1 1.1 1.9 1.9 Pro-memoria GDP excluding housing -1.2 -0.4 -0.9 -0.2 1.3 1.1 1.8 1.7 GDP excluding contruction -0.4 -0.2 -0.1 0.0 1.6 1.2 1.8 1.7 Total employment (LFS) -4.3 -0.7 -2.8 -0.9 0.3 0.1 1.4 0.7 Unemployment rate (% Active pop.) 24.8 11.3 26.1 12.0 25.1 11.9 24.2 11.4 Current account balance (% GDP) -1.2 1.2 0.8 2.3 1.3 2.2 1.5 2.1 Public debt (% GDP) (**) 86.0 93.0 93.9 95.2 98.4 95.9 100.4 95.5 Public deficit (% GDP) -10.5 -3.7 -7.1 -3.0 -5.8 -2.6 -5.1 -2.1 CPI (average) 2.4 2.5 1.4 1.4 0.3 0.9 0.9 1.3 CPI (end of period) 2.9 2.3 0.3 0.8 0.5 1.1 1.2 1.4 (*) Contribution to GDP Growth (f): forecast (**) Excluding aid to the banking sector in Spain 2012 (% YoY) 2013 2014 (f) 2015 (f)

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