Summary of the BBVA Research report "Spain Economic Outlook: 2Q12"

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English version of the presentation of the report "Spain Economic Outlook: second quarter 2012" by BBVA Research

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Summary of the BBVA Research report "Spain Economic Outlook: 2Q12"

  1. 1. Spain Economic OutlookMadrid, 09 May 2012
  2. 2. Spain Economic Outlook, 9 May 2012Key themes1 Despite the dynamism of the global economy, Europe is decoupling2 The international context of the Spanish economy will be largely determined by the outcome of the European crisis3 Europe needs a long-term plan to boost activity and to share sovereign risk in exchange for improved coordination, governance and structural reforms4 Spain mantains the prospect of a GDP contraction of 1.3% in 2012 and a slow recovery in 2013, but with increased uncertainty5 Improving confidence depends upon the design, execution and communication of a credible reform agenda Page 2
  3. 3. Spain Economic Outlook, 9 May 2012ContentsSection 1International environment:continued global growth and risks in EuropeSection 2Spain: recession confirmed, yet getting no worse. The reforms introduced will stimulategrowth Page 3
  4. 4. Spain Economic Outlook, 9 May 2012Evidence of global growth, although heterogenousGlobal growth (quarterly %)Source: BBVA Research and Haver analytics3 Wider growth gap between the U.S. and Japan, on the one hand, and Europe, on the other2 1 Emerging economies will continue growing faster than developed economies0-1 Moderate global growth-2-3 2008 2009 2010 2011 2012 2013 Global Developed Emerging Page 4
  5. 5. Spain Economic Outlook, 9 May 2012The European crisis continues Significant progress... ... but still with challenges ahead Restructuring of Greek debt and bringing 1. Doubts in Greece and Portugal forward the ESM Approval of the Stability Treaty 2. Need for an efficient firewall Reforms in Portugal, Spain, and Italy 3. Greater progress towards a fiscal union Long-term ECB liquidity provision 4. Growth agenda To date, the authorities have been a step behind the events  half measures to overcome the crisis Page 5
  6. 6. Spain Economic Outlook, 9 May 20121. Uncertainty in Greece and PortugalGreece and Portugal: public debt forecasts (% of GDP)Source: BBVA Research and IMF180 Greece: highly ambitious targets, but uncertainty160 following the elections, and in a deep recession140 Portugal: despite significant progress, there is no120 guarantee of a return to capital markets in 2013100 80 There is still a high risk of setbacks 60 40 2020 2030 2017 2025 2026 2029 2012 2013 2015 2016 2019 2024 2021 2028 2014 2027 2010 2011 2018 2022 2023 Portugal Greece** Optimistic scenario for Greece. Assumes 95% participation in the haircut, growthclose to 3% as of 2015 and primary surplus of 4.5% of GDP as of 2014 (primary deficit of2.4% in 2011) Page 6
  7. 7. Spain Economic Outlook, 9 May 20122. Need for an efficient firewall The debate is centered around the amount of resources available, but it goes beyond: New lending capacity: €500Bn (in addition to the €200Bn already commited to under the EFSF) The EFSF can keep on lending until mid-2013, so as to enable the capitalisation of the ESM The increase in IMF funds (€330Bn) It is more important that the available resources are used efficiently: they shouldnt crowd out private demand Page 7
  8. 8. Spain Economic Outlook, 9 May 20123. Greater progress towards a fiscal union From the Stability Treaty... ...to a fiscal union Despite difficulties estimating it, the Treaty Eurobonds: a convenient mechanism for makes the right empahsis on structural mutualising risk adjustment... ...but it raises doubts about how the The "blue" and "red" bond proposal extraordinary circumstances clause will be ensures a degree of market discipline applied Not ambitious enough for an assertive move A union with temporary (rather than from the ECB hardliners and Germany? permanent) fiscal transfers would be sufficient Page 8
  9. 9. Spain Economic Outlook, 9 May 20123. Greater progress towards a fiscal unionBanking system: Eurozone sovereign bondholdings as % of assetsSource: ECB and BBVA Research Objective: eliminate the interaction8.0 between sovereign risk and bank risk7.57.0 Indirect ECB intervention in the sovereign bond market via banks6.56.0 The increased exposure of banks to sovereign5,5 debt increases the potential negative feedback5.0 between the two4.54.0 Emphasises the need for a definite solution to the doubts about sovereign solvency Jan-10 Jan--11 May-10 Sep-10 May-11 Sep-11 Jan-12 Mar-12 Mar-10 Jul-10 Mar-11 Jul-11 Nov-10 Nov-11 Spain Italy Page 9
  10. 10. Spain Economic Outlook, 9 May 20124. Growth plan A growth plan that complements fiscal adjustment Clear route map for the future of EMU Balance between growth and austerity: reforms in exchange for a growth strategy Gradual fiscal adjustment with multi-year plans. Focus on structural deficits as the Treaty proposes Short-term objective: to avoid the risk of an austerity-recession vicious circle and the doubts regarding the solvency of sovereign debt Page 10
  11. 11. Spain Economic Outlook, 9 May 2012Europe decoupling from global growthGDP growth (% yoy)Source: BBVA Research The debt crisis continues, with Portugal under the 7 6.4 spotlight and concerns about Spain 5.8 6 5 High levels of financial stress in Europe, with a risk 4.0 of credit restrictions 4 3.6 3 2.3 2.2 Stability Treaty: towards Maastricht 2.0. 2 More emphasis on growth 0.9 1 Expansive, but no homogeneous, monetary 0 policies by the Fed, the Bank of England and the -1 -0.2 ECB 2012 2013 2012 2013 2012 2013 2012 2013 Global EMU USA EAGLES A slow, heterogeneous and vulnerable recovery May-12 Feb-12 Page 11
  12. 12. Spain Economic Outlook, 9 May 2012ContentsSection 1International environment: continued global growth and risks in EuropeSection 2Spain: recession confirmed, yet getting no worse. The reformsintroduced will stimulate growth Page 12
  13. 13. Spain Economic Outlook, 9 May 2012National environmentMain changes in the economic scenario in 2012 Main drivers behind the economic scenario Source: BBVA Research Growth forecast 3 months ago -1.3% 1. Information on 1Q and 2Q confirms the scenario 2. Rising oil prices New factors 3. Increased financial stress 4. Unprecedented fiscal adjustment due to the deviation in 2011 5. BSL and the Supplier Payment Plan 6. Labour market reform 2012 growth forecast unchanged, but increased uncertainty -1.3% Page 13
  14. 14. Spain Economic Outlook, 9 May 20121. Available data confirms the scenarioSpain: real GDP growthand forecasts based on MICA-BBVA model (%, qoq)Source: BBVA Research The Spanish economy entered technical recessionCurrent forecast: 4 May 1.5 1.5 in 1Q12... 1.0 1.0 0.5 0.5 ...albeit with no acceleration in the rate of deterioration versus 4Q110.0 0.0-0.5 -0.5-1.0 -1.0 Published data indicates that 2Q12 growth is likely to have remained negative -1.5 -1.5 1Q12 1Q11 2Q11 3Q11 4Q11 1Q10 2Q10 3Q10 2Q12 4Q10 2Q09 3Q09 4Q09 CI at 60% CI at 40% CI at 20% Employment continues to be hindered by the MICA-BBVA point estimation (21% of data for 2Q12) negative outlook for growth Actual (BBVA Research official forecast for 2Q12) Page 14
  15. 15. Spain Economic Outlook, 9 May 20121. Available data confirms the scenarioSpain: fiscal adjustment and economic growth (%)Source: BBVA Research Information published so far has led to small 0.0 changes in regional forecasts BAL NAV -0.5 CANA MADCYL BASC Fiscal adjustment in the autonomous2012 GDP growth (%) -1.0 communities, the main cause of the differences GAL CANT MUR AVG. RIO AST -1.5 ARA CAT Both tourism and exports support a better EXT performance of some autonomous communities AND -2.0 CLM VAL -2.5 Lower household savings rate and higher 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 unemployment hinder private domestic demand 2012 deficit adjustment as detailed in 2012-2014 Stability Programme (% of GDP) Page 15
  16. 16. Spain Economic Outlook, 9 May 20122. Pick up in oil pricesSpain: impact on activity and prices Negative, but limited impactof recent oil price increase (deviation from previous scenario)Source: BBVA Research 0.8 The increase is the result of both supply-side and 0.6 demand-side factors 0.4 0.2 0.0 Of a transitory nature on its long term trend -0.2 -0.4 -0.6 -0.8 No expectations of a contractionay monetary -1.0 policy response 2012 2013 2012 2013 GDP (%y/y) CPI (%y/y) Supply Precautionary demand Global demand Total S Page 16
  17. 17. Spain Economic Outlook, 9 May 20123. Increased financial stress Despite the ECB liquidity, the progress being made in Europe, and the reforms in Spain, markets are still cautious due to: The difficulties to reach the 2012 and 2013 deficit targets. The fear that fiscal austerity may lead to a vicious circle The potentially higher cost of bank restructuring as a result of the adjustment in the real estate sector and the slower growth The higher amount of sovereign debt on banks balance sheets: negative interaction between sovereign and banking risks The idea that both Europe and Spain have lacked a medium and long- term strategic plan Page 17
  18. 18. Spain Economic Outlook, 9 May 20123. Increased financial stressSpain: balance of payments and capital flows It is liquidity, not solvency(12 months cumulative, % of GDP)Source: BBVA Research based on Bank of Spain 15 FDI and other capital flows entering the country10 were financing the current account deficit before the onset of the financial crisis 5 As of 2007, other capital inflows (bonds, loans, etc.) 0 became highly volatile... -5-10 ... which affected the economys dependance on flows through the Eurosystem-15 Dec-99 Dec-03 Dec-07 Aug-00 Dec-09 Aug-10 Apr-01 Apr-11 Dec-01 Aug-02 Apr-03 dic-05 Aug-06 Apr-07 Dec-11 Apr-05 Apr-09 Aug-04 Aug-08 Faced with a lack of liquidity, the main risk lies in self-fulfilling expectations FDI Rest Eurosystem Current Account Page 18
  19. 19. Spain Economic Outlook, 9 May 20124. Unprecedented fiscal adjustment due to the deviationin 2011Spain: Public Administration receipts andexpenditures (% of GDP)Source: BBVA Research based on MINHAP and INE 50.0 4 The 2.5pp deviation from the 2011 deficit target was the result of... 47.5 2 45.0 42.5 0 40.0 a worse-than-expected cyclical slump in receipts, -2 37.5 and... 35.0 -4 32.5 -6 30.0 a structural adjustment in expenditure that was 27.5 -8 insufficient to meet the objective 25.0 -10 22.5 20.0 -12 2009 2002 2010 2011 2005 2007 2003 2006 2008 2000 2001 2004 2012(f) 2013(f) Financing Cap. (+) / Req. (-) (rhs.) Receipts (lhs.) Expenditures (lhs.) Page 19
  20. 20. Spain Economic Outlook, 9 May 20124. Unprecedented fiscal adjustment due to the deviationin 2011Spain: adjustment of Public Administration deficit(% of GDP)Source: BBVA Research Fiscal adjustment measures worth 5.1pp of GDP 6 are required in order to reach the -5.3% target for 5 2012 4 (+) Reduces deficit 3.2 3 2.3 The 2012-2015 Stability and Growth Pact contains measures that make the central government 2 target credible... 1 0.8 0 ... with the focus of compliance on the -1 autonomous communities (-) Increases deficit -2 -3 Additional room for manouevre: privatisations or 2011 (Deficit: 8.5%) 2012 (Target: -5.3%) 2013 (Target: -3.0%) other measures not yet announced by the Cyclically adjusted Cyclical deterioration autonomous communities Discretionary measures Structural deterioration Total Page 20
  21. 21. Spain Economic Outlook, 9 May 20124. Unprecedented fiscal adjustment due to the deviationin 2011Spain: Public Administration financing cap. (+) / req. (-)(% of GDP) Towards a new European strategy on fiscalSource: BBVA Research, based on MINHAP adjustment 8 6 4 Structural deficit objectives 2 0 -2 -4 More gradual adjustments -6 -8-10-12 Multi-year programme with announcements of future fiscal measures-14 2000 2001 2010 1996 1999 2011 2012(f) 2013(f) 2007 1997 2003 2005 1998 2002 2006 2009 1995 2004 2008 Cyclically adjusted Cyclical balance Total Page 21
  22. 22. Spain Economic Outlook, 9 May 20125. The Budget Stability LawEU27: index of standardised fiscal rules (2010)Source: BBVA Research, based on EC data Budget Stability Law 2.5 2.0 Spain has been a pioneer in this kind of legislation 1.5 1.0 Main improvements: structural targets and control mechanisms for the autonomous 0.5 communities0.0-0.5 This legislation is likely to improve significantly the perception on Spanish institutions-1.0 -1.5 BE DK SK UK LV RO AT CZ BG FR SI SP MT DE FI LT SE NL IT EE PT HU IE LU EL CY PL EU27 Page 22
  23. 23. Spain Economic Outlook, 9 May 20125. Supplier Payment Programme Important liquidity injectionGDP impact on 2012 from the Supplier PaymentProgramme (pp of GDP)Source: BBVA Reaerch based on MINHAP Government will inject 2.5% of GDP 1.0 (€27Bn) to pay off local and regional government 0.9 debts with suppliers 0.8 0.7 If suppliers are experiencing liquidity restrictions, 0.6 the impact on growth could be significant 0.5 0.4 To a large extent, the final impact will depend upon 0.3 the level of uncertainty 0.2 0.1 0.0 20% 33% 50% Percentage of unpaid invoices discounted*/ Max and Min depend on agents level of liquidity restriction Page 23
  24. 24. Spain Economic Outlook, 9 May 20126. Labour market reformSpain: response to labour market reform The challenge: from adjustment to growth(% deviation from trend)Source: BBVA Research18 Short-term objective: to prevent further job16 losses→ adjustment via working hours + labour flexibility and a better organization of production141210 To stimulate growth where it is weak and to take advantage of it in sectors that are buoyant 8 6 4 A redistribution of factor inputs towards the more dynamic firms and sectors 2 (exporting sector) 0-2 To eliminate internal growth barriers via a more 2012 2014 2020 2021 2018 2017 2013 2015 2016 2019 favourable regulatory framework GDP Employment Page 24
  25. 25. Spain Economic Outlook, 9 May 20126. The challenge of increasing productivtySpain: total factor productivity Spain, an economy dependant on foreign(Percentage deviation from trend)Source: BBVA Research based on Correa-López and de Blas (2011) technology 12 8 The medium-term challenge is to increase total factor productivity 4 0 Following the labour market reform, Spain needs additional reforms to improve competitiveness -4 and make the economy more attractive -8 It is vital that Spain does not miss the train of-12 technology adoption, through bilateral trade links and FDI 1991 1975 1955 1979 1987 1951 1959 1967 1971 1983 1963 1995 1999 2007 2003 Medium-term cycle Medium-frequency component Page 25
  26. 26. Spain Economic Outlook, 9 May 2012Conclusions1 Despite the dynamism of the global economy, Europe is decoupling2 The international context of the Spanish economy will be largely determined by the outcome of the European crisis3 Europe needs a long-term plan to boost activity and to share sovereign risk in exchange for improved coordination, governance and structural reforms4 Spain mantains the prospect of a GDP contraction of 1.3% in 2012 and a slow recovery in 2013, but with increased uncertainty5 Improving confidence depends upon the design, execution and communication of a credible reform agenda Thank you www.bbvaresearch.com Page 26
  27. 27. Spain Economic OutlookMadrid, 09 May 2012
  28. 28. Spain Economic Outlook, 9 May 2012AppendixMacroeconomic forecastsSource: BBVA Research, based on INE, Bank of Spain, and Eurostat data(*) contribution to growth 2010 2011 (f) 2012 (f) 2013 (f)(% YoY) Spain EMU Spain EMU Spain EMU Spain EMUHouseholds final consumption expenditure 0.7 0.8 -0.1 0.2 -2.0 -0.4 -0.9 0.6General government final consumption expenditure 0.2 0.5 -2.2 0.1 -8.0 -0.6 -5.6 0.3Gross fixed capital formation (G.F.C.F.) -6.2 -0.7 -5.1 1.6 -7.4 -2.6 -1.0 1.4 Equipment and cultivated assets 5.3 4.8 1.5 4.5 -4.5 -2.9 2.9 2.0 Equipment and machinery 5.5 4.2 1.6 5.1 -4.6 -2.5 2.8 2.2 Construction -10.1 -4.3 -8.1 -0.4 -9.2 -2.9 -3.2 0.8 Housing -9.8 -3.3 -4.9 1.9 -6.6 -1.4 -1.6 1.1 Other constructions -10.4 -5.4 -11.2 -2.9 -11.8 -4.7 -4.9 0.5 Changes in inventories (*) 0.0 0.5 0.0 0.0 0.0 -0.1 0.0 0.0Domestic Demand (*) -1.0 1.0 -1.8 0.5 -4.5 -1.0 -1.8 0.7Exports 13.5 11.1 9.1 6.3 4.0 2.4 8.9 4.3Imports 8.9 9.4 -0.1 4.0 -6.2 0.6 1.6 4.1External Demand (*) 0.9 0.8 2.5 1.0 3.1 0.8 2.4 0.3GDP mp -0.1 1.8 0.7 1.5 -1.3 -0.2 0.6 0.9Pro-memoriaGDP excluding housing 0.8 2.1 1.2 1.5 -0.9 -0.1 0.7 0.9GDP excluding contruction 2.0 2.6 2.3 1.7 0.0 0.1 1.1 0.9Total employment (LFS) -2.3 -0.5 -1.9 0.3 -4.6 -0.5 -2.0 0.0Unemployment rate (% Active pop.) 20.1 10.1 21.6 10.2 24.6 10.9 24.8 11.0Current account balance (% GDP) -4.5 0.2 -3.5 0.4 -1.9 0.8 -0.4 1.2Public debt (% GDP) 61.2 85.5 68.5 87.3 79.8 89.5 82.3 89.6Public deficit (% GDP) -9.3 -6.2 -8.5 -4.1 -5.3 -3.1 -3.0 -2.3CPI (average) 1.8 1.6 3.2 2.7 1.9 2.4 0.7 1.5CPI (end of period) 3.0 2.0 2.4 2.9 1.7 2.1 0.7 1.3 Page 28
  29. 29. Spain Economic Outlook, 9 May 2012AppendixSpain: GDP and main indicators from the MICA-BBVAmodel (CVEC data, %, qoq unless otherwise stated)Source: BBVA Research based on official organism Real wage income The Spanish economy entered a technical recession in 1Q12... Consumer confidence (change in dt) Real credit to private sector Social Security affiliation ...albeit with no acceleration in the rate of deterioration versus 4Q11 Real GDP Interest rate curve (change in GDP) Industrial confidence (change in dt) Published data indicates that 2Q12 growth is likely Cost of financing (change in bp) to have remained negativeFinancial market stress (change in bp) Electricity demand Employment continues to be hindered by the Registered unemployment negative growth outlook -2.0 -1.0 0.0 1.0 2.0 3.0 4Q11 1Q12 Page 29
  30. 30. Spain Economic Outlook, 9 May 2012Appendix 2012 Fiscal adjustment Source: BBVA Research based on MEC Bn euro % GDP Deficit 2011 (a) -91.4 -8.5 Objective 2012 (b) -57.1 -5.3 Difference (c=b-a) 34.3 3.2 Additional adjustment (d) 20.7 1.9 Total necessary adjustment (c+d) 55.0 5.1 Announced measures PGE 2012 25.7 2.4 Local Corporations.: increase of IBI 0.9 0.1 Autonomous Communities: more revenues 4.1 0.4 Fight against the Social Sec. fraud 1.9 0.2 Autonomous Communities : education, public health and 5.7 0.5 social services Local Corporations : duplicities and issues on competencies 0.1 0.0 Central Government: less spending 0.3 0.0 Autonomous Communities: spending adjustment 5.7 0.5 rebalancing plans Local Corporations: adjustment rebalancing plans 3.1 0.3 Total measures 47.4 4.4 Promemoria Nominal GDP 1,073.9 Page 30
  31. 31. Spain Economic Outlook, 9 May 2012Appendix More cumulative fiscal consolidation in two years. OECD, 1978-2009 Descomposition by adjustment Source: BBVA Research based on Devries et al (2011) 9 8 Spain: 2012-2013 measures to reach 3% of deficit: 7.3% GDP 7 6 5 4 3 2 1 Increase of revenues 0 Decrease of expenditures ITA FIN ITA ITA ITA SWE IRL DNK FIN NLD 1992 - 1993 - 1991 - 1993 - 1994 - 1995 - 1982 - 1983 - 1994 - 1983 - 1993 1994 1992 1994 1995 1996 1983 1984 1995 1984 Revenues 44 56 43 45 44 55 39 55 57 53 % of GDP before adjustment Spain: 36% revenues/GDP Page 31
  32. 32. Spain Economic Outlook, 9 May 2012Appendix Economic impact of substituting social security contributions by indirect taxes (Diference with respect to base scenario, percentage points) Source: BBVA Research 1.5 1.2 0.9 0.6 0.3 0.0 t t+1 GDP Employment Page 32

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