global and spanish economic outlook - february 2014 - bbva research

Global and Spanish Economic Outlook

February 2014

Global and Spanish Economic Outlook, February 2014

Main messages

The global economic cycle is improving and we expect a moderate acceleration in growth in 2014-15 supported by the developed economies

Some economic policy uncertainties have been resolved but there are still risks, although not of a systemic nature, as was the case in the past

For the first time since the beginning of the crisis the risks to our forecasts for the Spanish economy are to the upside. The recovery is being driven by exports, import substitution and the recovery in new lending. In addition, both financial tensions and fiscal consolidation are less intense

The scope of the reforms needs to be expanded if they are to underpin a robust and sustained recovery, and reverse the jobs destroyed within a reasonable period


Index

Section 1

Global economy: a gradual acceleration supported by the developed economies Section 2

Spain: upside risks for the first time since the beginning of the crisis

Section 3

Commitment to the reforms is crucial to consolidate the improvement in the markets and increase potential growth


Main Messages

Global GDP growth (%) Source: BBVA Research 1

2

The global expansion will continue in 2014-15 this time around with higher contributions from advanced economies

Growth risks are more balanced with upward risks in the US and downward risks that remain:

• the exit from QE and flows to emerging markets,

• the uneven recoveries and vulnerabilities in EM, and

• the eurozone

3.92.8

-0.4

5.24.0

3.22.9

3.6

-3

-2

-1

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013

(e)

2014

(f)

2015

(f)Adv. Economies Emerging economies

Baseline Jan14 Baseline Oct-13


The global momentum is improving

Manufacturing PMIs Source: BBVA Research based on Markit Economics

Industrial production (%,yoy) Source: CPB Netherlands

BBVA Financial Stress Index Source: BBVA Research

46

48

50

52

54

56

58

60

Sep

10

Feb

11

Ju

l 1

1

Dec

11

May 1

2

Oct

12

Mar

13

Aug

13

Jan 1

4

Global

Advanced economies

BBVA Eagles

-0.12

-0.08

-0.04

0.00

0.04

Jan-1

2M

ar-

12

May-1

2Ju

l-1

2Sep-1

2N

ov-1

2Ja

n-1

3M

ar-

13

May-1

3Ju

l-1

3Sep-1

3N

ov-1

3Ja

n-1

4M

ar-

14

-0.50

-0.10

0.30

0.70

1.10

Emerging Markets, left axis

Developed Markets, right axis

-2

0

2

4

6

8

10

12

14

16

May-1

0

Nov-1

0

May-1

1

Nov-1

1

May-1

2

Nov-1

2

May-1

3

Nov-1

3

Global Advanced Emerging


FED’s forward guidance and ECB’s room of maneuver should anchor the global financial scenario

US: Fed funds futures and long term yields (%) Source: Bloomberg

EMU: Future of the EONIA rate and long term yields Source: Bloomberg and BBVA Research

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

1.10

1.30

1.50

1.70

1.90

2.10

Jan-1

3

Mar-

13

May-1

3

Jul-1

3

Sep

-13

No

v-1

3

Jan-1

4

10-Year Bund Yield at Constant Maturity (Avg, %)

EONIA Implied by the 12-Month Futures Price (% )

Tapering talks

September FOMC meeting

2 3

Tapering talks

September FOMC meeting

1 2

“Real” tapering

“Real” tapering

0.05

0.10

0.15

0.20

0.25

0.30

0.35

1.2

1.6

2.0

2.4

2.8

3.2

Jan-1

3

Mar-

13

May-1

3

Jul-1

3

Sep

-13

No

v-1

3

Jan-1

4

10-Year Treasury Note Yield at Constant Maturity (Avg, %)

Federal Funds Rate Implied by the 12-Month Futures Price (%)

3 1


The tightening of liquidity conditions is impacting on EM; anyway, differentiation remains

EM: economic cycle and financial tensions Source: BBVA Research

BRACHL

MEX

TUR

CHI

IND

KOR

MASYA

PHI

TWN

THA

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

-10.0 0.0 10.0 20.0 30.0

Fundin

g G

ap (

CA

+FD

I, a

vg.2

Q´1

3-2

Q'1

2,

% G

DP)

FX depreciation (Febr-14 vs. avg.Dec'12, %)

EM: exposure to short-term capital flows and exchange rate vs USD Source: BBVA Research

-0.12

-0.09

-0.06

-0.03

0.00

0.03

0.06

0.0948

49

50

51

52

53

54

May-1

1

Sep

-11

Jan-1

2

May-1

2

Sep

-12

Jan-1

3

May-1

3

Sep

-13

Jan-1

4

BBVA EAGLEs PMI

BBVA Research Emerging Markets Financial Tension Index,right axis

Financial tensions stop their

Cycle confidence stops its

improvement


US: the sustained recovery and the fiscal agreement bias upwards our scenario for the US

US: GDP growth (y/y) Source: BBVA Research, BEA

US: private-sector payroll growth (monthly change, 3-month average, thousands) Source: Bloomberg

0

50

100

150

200

250

300

0

50

100

150

200

250

300

Apr-

10

Sep

-10

Feb

-11

Jul-1

1

Dec-

11

May-1

2

Oct

-12

Mar-

13

Aug

-13

Jan-1

4

QE2 QE3Twist

2.8

2.5

1.8

2.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015

Baseline Jan-2014 Baseline Oct-2013


China: Growth momentum supported by recent stimulus measures and improving external demand

The “to-do” list of the “Third Plenum” meets our view about the needed reforms; lack of

details introduces uncertainty

The objective of the Communist Party of China is to give markets a “decisive” role as mechanism of allocating resources

Efforts to curtail financial fragilities could lead to somewhat lower momentum in 2014H2 as the traditional engines of growth cannot be

used “extensively” any more

China: GDP Growth (%, y-o-y) Source: BBVA Research

7.77.7

7.67.5

6.0

6.5

7.0

7.5

8.0

8.5

2012 2013 2014 2015



The eurozone: positive growth with an increasing role of domestic demand

Exports will remain as the main driver of growth in both 2013 and 2014

Domestic demand has weighed on growth in 2013, but will contribute to the recovery in

2014-15

Overall: lower financial tensions, higher global growth, lower fiscal drag, ECB’s loosening bias

and Banking Union

Eurozone: GDP growth (y/y) 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

2.5

2012 2013 2014 2015



In the eurozone, the “double-dip” in the period 2008-13 and weak money growth have prompted inflation to fall

EZ: core inflation and demand pressure, % y/y and % potential GDP Source: Eurostat, Haver and BBVA Research

EZ: core inflation and M3, % y/y

Source: Eurostat , Haver and BBVA Research

0.5

0.8

1.1

1.4

1.7

2.0

2.3

2.6

2.9

3.2

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Output gap, 6-Month ahead (LHS) Core CPI y/y (RHS)

0.5

0.8

1.1

1.4

1.7

2.0

2.3

2.6

2.9

3.2

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

M3, % y/y (LHS) Core CPI y/y (RHS)


In the most likely scenario, the risk of deflation is low; yet it increases under more extreme situations

Baseline scenario

Inflation Prob. of deflation

Monetary restriction (M3 growth = 0.9%)

1.0% 7.5%

0.8% 14%

Monetary restriction + shock (M3 growth = 0.9%; growth <-1)

0.4% 34%

… + Unanchored expectations (M3 growth = 0.9%; growth <-1)

0.3% 47%

EZ: Distribution of probability of inflation (average 2014) Source BBVA Research

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0

Base scenario

Monetary-restriction scenario

Monetary restriction + negative schock

Lost of anchored inflation expectations

Expansión económica con diversidad de ritmos y de riesgos

Interconnected risk events with potential to impact on global growth

(*) Heterogeneous developments among countries

QE’s exit and disruptive effects of portfolio rebalancing

Adjustment in China and other EM (*) The Eurozone

Banking union, political instability and deflation risk


In sum, economic growth at diverse paces and with different risks

Growth cycle strengthens, mainly in advanced economies and in some emerging

economies. Economic policy remains as a supportive factor for growth in 2014-15

To reinforce the baseline scenario, policy-makers have to tackle domestic

vulnerabilities: banking issues and disinflation risks in the Eurozone, financial vulnerabilities in

China, and private domestic demand in emerging economies

The impact of FED’s tapering over global funding conditions, in the US and beyond,

remains as a factor of uncertainty

GDP growth (%yoy) Source: BBVA Research and IMF

3.22.9

3.63.9

2.8

1.8

2.5 2.5

-0.6-0.4

1.11.9

5.0 4.85.2 5.4

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

20

12

20

13

20

14

20

15

20

12

20

13

20

14

20

15

20

12

20

13

20

14

20

15

20

12

20

13

20

14

20

15

World US EMU BBVA-EAGLES

Baseline Nov-13


Index

Section 1

Global economy: a gradual acceleration supported by the developed economies

Section 2

Spain: upside risks for the first time since the beginning of the crisis Section 3



The recovery of the Spanish economy is confirmed …

Spain: GDP growth and MICA-BBVA forecasts (% QoQ) Source: BBVA Research based on INE

After three years in recession, domestic demand started to make a positive contribution

to growth again in the second half of 2013…

… as a consequence of improved fundamentals, less restrictive fiscal policy, reduced

uncertainty and increased import substitution

The available information points to growth of at least 0.4% in 1Q14 -1.5

-1.0

-0.5

0.0

0.5

1.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14 (

f)

CI at 20%

CI at 40%

CI at 60%

Data (f: MICA-BBVA Research forecast)


Public sector: breakdown of the public deficit excluding aid to the financial sector (% GDP) Source: BBVA Research based on MINHAP

… and, in spite of the uncertainty regarding the deficit in 2013 …

The significant fiscal consolidation efforts in 2012 and 2013 …

… have resulted in containment of the public deficit at around 7.0% of GDP

The wider the deviation from the target deficit for 2013, the greater the effort that will have

to be made in 2014

9.1

3.0

5.2

6.8

1.8 1.6

7.0

-0.3 0.9

5.8

-0.7

0.0

5.1

0

2

4

6

8

10

12

14

Defici

t2

01

1

Pass

ive f

isca

l polic

y

Fis

cal eff

ort

Defici

t 2

01

2

Pass

ive f

isca

l polic

y

Fis

cal eff

ort

Defici

t 2

01

3

Pass

ive f

isca

l polic

y

Fis

cal eff

ort

Defici

t 2

01

4

Pass

ive f

isca

l polic

y

Fis

cal eff

ort

Defici

t 2

01

5

2012 2013 (e ) 2014 (f) 2015 (f)


… the risks are to the upside for the first time

Spain: GDP growth forecasts, 2014 (% YoY) Source: BBVA Research based on Consensus Forecast Inc.

Economic policy decisions have eliminated the risk scenarios

The differential performance of the Spanish economy confirms this improvement in the

trend

If these trends are confirmed, growth could be even stronger than we are forecasting

0

5

10

15

20

25

30

35

40

45

50

(< -1,2) (-1,2;-0,8) (-0,8;-0,4) (-0,4;0) (0;0,4) (0,4;0,8) (0,8;1,2) (>1,2)

Rela

tive f

requency

GDP Growth forecast

July-2013 (mean: 0,2%) Feb-2013 (mean:0,3%)

Jan-2014 (mean: 0.7%)

BBVA Research (Jan-14)


Upside risks: 1. Exports will continue to expand

Spain: growth and breakdown of goods exports by broad geographical area Source: BBVA Research based on Datacomex

We expect the recovery to continue driven by the increase in exports

The deceleration in exports is a temporary phenomenon and will reverse in a scenario of

stronger global growth

The slowing momentum in EMs has been offset by the recovery in the EMU

0

10

20

30

40

50

60

-24

-18

-12

-6

0

6

12

EMU EAGLEs

Nominal growth, average % yoy 1Q13 (LHS)

Nominal growthl, Oct-Nov 2013 average % yoy (LHS)

Share over total exports (%, RHS)


Upside risks: 1. Exports will continue to expand

Regions: average annual growth in exports of goods due to diversification (2009-2012) (%, Spain: weighted average) Source: BBVA Research Export growth is based on improvements in

competitiveness, and above all, on diversification

On average, 75% of the growth in exports during the crisis was due to product and

geographical diversification

This export diversification prevented even greater negative GDP growth

Box 3

-5

0

5

10

15

20

GA

L

C&

L

BA

L

AR

A

EX

T

RIO

SP

A

NA

V

VA

L

CLM BC

CA

T

MA

D

CA

NT

AST

AN

D

MU

R

CA

N

Geographical diversification Product diversification

Combined effect


Upside risks 2. An increase in savings and financial wealth

Spain: net real household financial wealth (Deflated by the private consumption deflator; seasonally adjusted data) Source: BBVA Research based on Bank of Spain and INE

The increase in corporate and household savings has been an essential part of the

recoveries in Spain …

… that has helped in the deleveraging process and in the improvement in the financial

situation of the private sector …

… and these, together with the stabilisation and improvement in the value of wealth, has

driven an increase in consumption and investment

600

700

800

900

1000

Mar-

08

Jun-0

8

Sep

-08

Dec-

08

Mar-

09

Jun-0

9

Sep

-09

Dec-

09

Mar-

10

Jun-1

0

Sep

-10

Dec-

10

Mar-

11

Jun-1

1

Sep

-11

Dec-

11

Mar-

12

Jun-1

2

Sep

-12

Dec-

12

Mar-

13

Jun-1

3

Sep

-13

Real net financial wealth (billion €)

2Q12-3Q13: +24.8%


Spain: 10Y bond yield (Difference vs. our November 2013 forecast in bp) Source: BBVA Research

Upside risks 3. More certainty and fewer financial tensions

-128

-126

-124

-122

-120

-118

-116

-114

-112

-110

-108

2014 2015

Improved international perceptions of the Spanish economy have allowed Spain to reduce its dependence on ECB funding

Reduced financial tensions are reflected in the economy with a lag of 6-9 months

A permanent 100bp drop in sovereign interest rates implies up to one percentage point more

growth for the economy


Upside risks 4. More dynamic investment

Spain: exports and investment in equipment and machinery (2008=100) Source: BBVA Research based on INE

The recovery we expect in the EMU and the continuing export growth …

… should translate into an increase in private-sector investment

In fact, the investment in equipment and machinery had grown 6.3% by 4Q13

60

70

80

90

100

110

120

130

140

Dec-

99

Sep

-00

Jun-0

1

Mar-

02

Dec-

02

Sep

-03

Jun-0

4

Mar-

05

Dec-

05

Sep

-06

Jun-0

7

Mar-

08

Dec-

08

Sep

-09

Jun-1

0

Mar-

11

Dec-

11

Sep

-12

Jun-1

3

Mar-

14

Dec-

14

Sep

-15

Goods and services exports


Upside risks 5. Improvement in new lending flows

Spain: new lending and credit to households, NPISH and non-financial entities Source: BBVA Research based on Bank of Spain (February 2014)

The Spanish economy is going through an evitable deleveraging process …

… that is compatible with new lending for financially viable projects

There has been a turning point and an improvement in corporate lending, which we

expect to consolidate in 1H14 -40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Yoy %

change

Total Tendencia Tendencia corregidaTotal Trend Corrected trend


Spain: LFS employment (Variation in annual average, %) Source: BBVA Research based on INE

Upside risks 6. Changes in the labour market

Net job-creation has started sooner than we expected, partly as a reflection of wage

moderation

Had labour institutions been in better shape at the beginning of the crisis, millions of job

losses could have been avoided

In 2014 employment will be created for the first time since the beginning of the crisis

-3.1

0.0

1.1

-3.1

0.4

1.0

-3,5

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2013 2014 2015

Spain Outlook 4Q13 Spain Outlook 1Q14


Spain: GDP growth by region (% YoY) Source: BBVA Research

In 2014 all the regions will return to positive growth

The progress made in correcting the imbalances and the exposure to external

demand …

… are the key to explaining the difference in the speed at which the different regions will

start growing

2014: the start of the recovery

AND

ARA

AST

BAL

CAN

CNTC&L

CLM

CAT

EXT

GAL

MAD

MUR NAV

BASQ

RIO

VAL

SPA

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

Gro

wth

in 2

01

5

Growth in 2014


Index Section 1

Global economy: a gradual acceleration supported by the developed economies

Section 2

Spain: upside risks for the first time since the beginning of the crisis

Section 3



The need to broaden the scope of the reform agenda

GDP growth and job-creation Source: BBVA Research and Lebergott (1964)

Assumptions for the USA and the EMU are consistent with BBVA Research´s scenario. The Spanish scenario has been built assuming both that producvity per worker rises 0,6% (as it was the case between 1992 and 2007) and that GDP grows on average 2,5.

The recovery in employment will be very sensitive to economic growth

The objective should be to introduce the necessary reforms to increase economic growth to close to or more than 2.5%

Unless this happens, job-creation will be limited and the recovery slow

80

85

90

95

100

105

Pico 2 4 6 8 10 12 14 16 18años

Level of

em

plo

ym

ent

at

the b

egin

nin

g o

f th

e c

risi

s =1

00

Spain, 2007-2025 EMU, 2007-2017 USA., 2007-2014

USA 1929-1940

Peak years


The ECB must ensure it achieves its inflation target

Spain and EMU: inflation trend (% YoY) Source: BBVA Research based on INE y Eurostat

The ECB needs to converge with its inflation target more quickly, which would help Spain

deleverage …

… while the Spanish economy needs to continue to improve competitiveness

The reforms that improve competitiveness and facilitate internal devaluation in Spain need to

continue

Box 1

-1,0

0,0

1,0

2,0

3,0

4,0

dic

-02

jun-0

3d

ic-0

3ju

n-0

4d

ic-0

4ju

n-0

5d

ic-0

5ju

n-0

6d

ic-0

6ju

n-0

7d

ic-0

7ju

n-0

8d

ic-0

8ju

n-0

9d

ic-0

9ju

n-1

0d

ic-1

0ju

n-1

1d

ic-1

1ju

n-1

2d

ic-1

2ju

n-1

3d

ic-1

3

Spain (Trimmed mean) Europe (core CPI)


Spain: unemployment and public deficit Source: BBVA Research based on INE and MINHAP

An efficient tax system and fiscal sustainability

Box 2

Tax revenues dropped sharply in Spain as a consequence of the recession …

… and the fiscal consolidation process requires sufficient resources to ensure that Spain’s

finances remain in good health…

… but with a structure that drives economic growth and job-creation, two key factors for

reducing the deficit

80

81

8283

84

85

86

878889

9091 92

9394

95

96

97

98

990001 020304

05

0607

08

09

1011

12 13

-12

-10

-8

-6

-4

-2

0

2

4

7 9 11 13 15 17 19 21 23 25 27

Budget deficit (%

GD

P)

Unemployment rate (%)

14%(2006)

18%(2013)

-1.8%


The need to broaden the scope of the reform agenda

1. To continue the deleveraging and improvement in the finances of the Spanish economy: finalising the restructuring of the financial sector and

attracting foreign direct investment

3. Reforms to improve competitiveness, increase the attraction of Spain internationally in terms of physical, human and technological capital

4. To continue with the reforms that reduce the duality in the labour market, improve the way it functions and increase employability

-> more and better-quality jobs

2. Public-sector reform, fiscal consolidation and long-term sustainability of public finances, with an efficient tax system that incentivises growth and job-

creation

Global and Spanish Economic Outlook

February 2014


Macroeconomic scenario


Current disinflation in some advanced economies is comparable to the Great Recession episode

Core inflation in some advanced economies (% y/y)

Source: Haver and BBVA Research

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jan-0

8

Jul-0

8

Jan-0

9

Jul-0

9

Jan-1

0

Jul-1

0

Jan-1

1

Jul-1

1

Jan-1

2

Jul-1

2

Jan-1

3

Jul-1

3

Jan-1

4US Japan Eurozone UK

global and spanish economic outlook - february 2014 - bbva research

Economy & Finance

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