global economic outlook 2q12 - bbva research

Global recovery, but heightened risksGlobal Economic Outlook – Second Quarter 2012

Madrid, 8 May 2012

Global Economic Outlook / Second Quarter 2012

Global growth will gradually recover in 2012 from the trough in 2011Q4. It will be between 3,5% and 4% in 2012 and 2013.

Risks to the global growth outlook are strongly tilted to the downside as the European crisis continues.

There have been some advances to solve the European crisis, but crucial steps are still pending: a more credible sovereign firewall, a roadmap to a fiscal union and a pro-growth agenda.

Emerging economies are on track for a soft landing. They will contribute about 80% of global growth in 2012 and 2013.

Main messages1

2

3

Global growth (%)Fuente: BBVA Research

4

2.8

-0.6

5.1

3.93.6

4.0

-2

-1

0

1

2

3

4

5

6

2008 2009 2010 2011 (f) 2012 (f) 2013 (f)

Adv. Economies Emerging Economies

Baseline Feb-12 Baseline May-12


1 The global economy will recover gradually in 2012

2 The European crisis is still the main global risk

3 Recession in Europe, with high heterogeneity

4 Oil prices are a moderate global risk

5 Forecast revision

Contents


Global economy trough in 2011Q4The global trough is likely to be behind us, although global growth will still be below trend and downside risks remain.

Global GDP growth (%qoq at annual rates)Source: BBVA Research and Haver Analytics

Wider growth divergence betweenUS and Japan vs Europe

Wider growth divergence betweenUS and Japan vs Europe

Emerging economies continue growing faster than advanced economies

Emerging economies continue growing faster than advanced economies

Moderate global growth going forwardModerate global growth going forward

-3

-2

-1

0

1

2

3

08 09 10 11 12 13

World Developed Emerging


The rebound in Q1 is most evident in business confidenceThe rebound of global activity is most evident in Asia.The recovery, however, is trapped in a modest range, with the US at the better end, the Euro area at the weaker end, and emerging markets somewhere in the middle.

Industrial production (%qoq of 3-month moving avg)Source: BBVA Research , CPB and national sources

Business expectations (PMI)Source: BBVA Research and Bloomberg

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

US Asia Euro Zone Latin America Global

30

35

40

45

50

55

60

65

Oct 08 Apr 09 Oct 09 Apr 10 Oct 10 Apr 11 Oct 11 Apr 12

USA China EuroZone Brazil Global


US: ongoing but fragile recovery…Recent data suggest that growth will be resilient in 2012, but will be limited by the ongoing deleveraging. The declining trend in the unemployment rat in the context of moderate growth (below previous recoveries) represents not very positive news: it reflects the exit from the labor force of a large part of working-age population.

US: Unemployment rateSource: BBVA Research and Haver

US: GDP Growth (%yoy)Source: BBVA Research

4

5

6

7

8

9

10

11

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

-6

-4

-2

0

2

4

6

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13


…and fiscal policy represents one of the main risks ro growth in 2013.Monetary policy is burdened with most of the task of supporting private sector demand. But fiscal policy and structural reforms should take up the job in the medium term.

The recovery reduces the probability of an additional quantitative easing (QE3)

The recovery reduces the probability of an additional quantitative easing (QE3)

Interest rates will be kept lowfor an extended period

Interest rates will be kept lowfor an extended period

Nevertheless, further quantitative easing would be implemented rapidly

in case the outlook deteriorates

Nevertheless, further quantitative easing would be implemented rapidly

in case the outlook deteriorates

Monetary policy

If there are no new measures, there will be a sharp fiscal tightening at the end of 2012.

It could induce a recession in 2013.

If there are no new measures, there will be a sharp fiscal tightening at the end of 2012.

It could induce a recession in 2013.

Even with the electoral uncertainty, we expect a gradual fiscal consolidation ,

with slight negative effect on growth in 2013.

Even with the electoral uncertainty, we expect a gradual fiscal consolidation ,

with slight negative effect on growth in 2013.

The main problem is the lack of progress to tackle long-run fiscal consolidation

The main problem is the lack of progress to tackle long-run fiscal consolidation

Fiscal Policy


China is on track to a soft landing Despite sharper-than-expected slowdown in Q1 (8.1% vs 8.9% in Q4) growth momentum should have

bottomed and will rebound on policy support (monetary policy and fiscal stimulus).Recent reduction in GDP growth target for 2012 (from 8% to 7.5%) is not particularly significant

because: (i) it was anticipated in the five-year plan published in 2011; (ii) 7,5% is more a floor than a target;

China: GDP growth targets and outturnsSource: BBVA Research and CEIC

-5

0

5

10

15

-5

0

5

10

15

2007 2008 2009 2010 2011 2012 2013

Consumption Investment Net Exports GDP growth

China: quarterly growth (%yoy)Source: BBVA Research and CEIC

0

2

4

6

8

10

12

14

1991-1995 1996-2000 2001-2005 2006-2010 2011-2015 (f)

Target Outturn


Latin America converges to its potential growth rateGrowth in Latin America is also proving resilient, especially due to the strength of its domestic demand.

Growth projections for the region remain mostly unchanged relative to February, around 4% for the next years.

Even with some reduction in inflation, it will remain similar to 2011 levels. Except for Brazil, this will limit a reduction in official interest rates, contrary to big Asian countries (China and India).

Latam 6: ARG, BRA, COL, CHI, PER, VEN.

Latam: GDP Growth (%)Source: BBVA Research

Inflation in Emerging Economies (% annual average)Source: BBVA Research

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2011

2012

2013

Latam Emerging Asia exChina China

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2010 2011 2012 2013 2014 2015 2016

Forecasts Feb 2012

Forecasts May 2012






5 Forecast revision

Contents


European crisis: some timid advances, but there are important pending issues

Greek PSI implementedGreek PSI implemented

Fiscal compact is approvedFiscal compact is approved

ECB long-term liquidity supportECB long-term liquidity support

Advances

Credible liquidity firewallCredible liquidity firewall

Further advances towards a fiscal unionFurther advances towards a fiscal union

Pending issues

1

2

3 Pro-growth agendaPro-growth agenda

Persistent complacency in Europe results in muddling through the crisis, always behind the curve on what is needed

Persistent complacency in Europe results in muddling through the crisis, always behind the curve on what is needed


Greece: Solvency concerns still linger.Greece and Portugal: public debt projectionsSource: BBVA Research and IMF

Greece• Many downside risks remain, threatening debt

reduction path:

• Elections on 6 May, splintered congress

• Hard road for further reforms, close monitoring by the troika

• Recession to continue

• New Greek bonds already under pressure

Portugal• Fiscal adjustment and reforms are on track

• External imbalance is closing

• Yet this will not be enough to access markets in 2013Q3.

• Our central scenario: second bailout and no restructuring

1


Sovereign liquidity firewall (EFSF/ESM) not enough to reassure markets

ESM/EFSF resources and gross financial needs in Spain and Italy (long-term debt and deficit)Source: BBVA Research and IBloomberg

ESM agreement 30 March

1

New available lending capacity: 500 bn EUR(apart from 200 bn EUR already committed by

EFSF)

New available lending capacity: 500 bn EUR(apart from 200 bn EUR already committed by

EFSF)

EFSF may continue lending until mid-2013 to cover the slow process of capitalizing the ESMEFSF may continue lending until mid-2013 to

cover the slow process of capitalizing the ESM

It is not enough to reassure markets, given financing needs in Spain and Italy

It is not enough to reassure markets, given financing needs in Spain and Italy

Increase in IMF Resources (330 bn EUR) will not necessarily be lent to Europe

Increase in IMF Resources (330 bn EUR) will not necessarily be lent to Europe

But …ESM lending

capacity

EFSF committed

funds

Spain

Italy

0

100

200

300

400

500

600

700

800

Firewall Spain & Italy gross financing needs

2012Q2-2013Q4

Spain & Italy gross financing needs

2012Q2-2013Q4


Fiscal compact is agreed, but still waiting for a roadmap for Europe

Fiscal compact

2

Relatively lax: transitory deviations from structural deficit rule permitted under

“exceptional circumstances”.

Relatively lax: transitory deviations from structural deficit rule permitted under

“exceptional circumstances”.

Risk of it being ineffective to contain deficits in the long-run

Risk of it being ineffective to contain deficits in the long-run

May be seen as not strong enough to justify a more forceful and decisive action by hardliners

at the ECB or core Europe

May be seen as not strong enough to justify a more forceful and decisive action by hardliners

at the ECB or core Europe

Eurobonds: convenient as an insurance mechanism

Eurobonds: convenient as an insurance mechanism

Proposal of “blue” and “red” bonds has the advantage of maintaining market disciplineProposal of “blue” and “red” bonds has the

advantage of maintaining market discipline

Still pending: a roadmap to a fiscal union

Not necessarily a union with fiscal transfers Not necessarily a union with fiscal transfers

• Fiscal compact commits governments to establish a fiscal rule at constitutional level, limiting structural budget deficits to 0,5% of GDP.

• Includes reverse majority rule needed to prevent sanctions of about 0.1% of GDP for deviations• Still, no talk of a roadmap to a fiscal union.


Provision of long-term liquidity by the ECB calmed markets temporarily…3

10y sovereign spread vs. Germany (bps)Source: Bloomberg and BBVA Research

Liquidity risk on European banks eased during the first quarter …

Liquidity risk on European banks eased during the first quarter …

… and funding markets were opening up cautiously, helping to reduce sovereign spreads,

… and funding markets were opening up cautiously, helping to reduce sovereign spreads,

but these effects have been short-lived. Recent doubts on Spain have increased tensions

but these effects have been short-lived. Recent doubts on Spain have increased tensions

In any case, the ECB can only serve as a bridge to the long run, which depends on structural

reforms and a growth agenda

In any case, the ECB can only serve as a bridge to the long run, which depends on structural

reforms and a growth agenda0

200

400

600

800

Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12

Ireland Spain ItalyBelgium France NetherlandsAustria


… but it has also increased the exposure of banks to the sovereign3

Banks: Holdings of euro area government debt over total assets (%)Source: ECB and BBVA Research

Indirect intervention of the ECB in sovereign bond markets through banks

Indirect intervention of the ECB in sovereign bond markets through banks

Increased exposure of banks to the sovereign increase potential negative feedback effects

Increased exposure of banks to the sovereign increase potential negative feedback effects

Reinforces the need for a definitive solution to doubts about sovereign solvency and the provision of sovereign liquidity support

Reinforces the need for a definitive solution to doubts about sovereign solvency and the provision of sovereign liquidity support

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12

Spain Italy


CrisisCrisis

Why?Why?

Solution:

eliminate tail risk scenarios

Solution:

eliminate tail risk scenarios

It is worrisome that the tensions came back so soon after: (i) the ECB’s two LTRO ; (ii) the structural reforms is Spain and Italy, and (iii) the European Council

advances in the fiscal compact and the ESM

It is worrisome that the tensions came back so soon after: (i) the ECB’s two LTRO ; (ii) the structural reforms is Spain and Italy, and (iii) the European Council

advances in the fiscal compact and the ESM

Risk of negative feedback between fiscal austerity and recessionRisk of sovereign debt a restructuring and ESM seniority

Risk of negative feedback between fiscal austerity and recessionRisk of sovereign debt a restructuring and ESM seniority

Roadmap to fiscal integrationRoadmap to fiscal integration

Fiscal consolidation needs to be gradual and multiyear, with explicit targets. Focus on structural deficits

Fiscal consolidation needs to be gradual and multiyear, with explicit targets. Focus on structural deficits

We should not rely only on austerity measures. But rather on structural reforms in exchange of a growth strategy

We should not rely only on austerity measures. But rather on structural reforms in exchange of a growth strategy

Re-launch European investment in infrastructureRe-launch European investment in infrastructure

A deepening European crisis is still the main risk to the global economy






5 Forecast revision

Contents


As the short-run effect of long-term liquidity provided by the ECB fades, financial stress has resurfaced, especially in peripheral Europe.

Financial stress in Europe continues to be very high…

BBVA Financial Stress IndexSource: BBVA Research

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12

US EMU


Europe faces a mild recession in 2012, with wide heterogeneity and high risks In the baseline scenario we assume that European authorities will continue to take decisive measures that will gradually lower financial tensions. Nonetheless, risks to the outlook are strongly tilted to the downside. Growth in Europe will be slow relative to other advanced economies such as the US, and very heterogeneous among EMU countries. Peripheral economies will be the most affected by financial tensions and fiscal consolidation plans.

GDP growth in EMU countriesSource: BBVA Research

GDP growth in US and EMU (%yoy)Source BBVA Research

-0.2

0.90.7

1.6

0.5

1.1

-1.5

0.1

-1.3

0.6

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2012

2013

2012

2013

2012

2013

2012

2013

2012

2013

EMU Germany France Italy Spain

Forecast in May-12

Forecast in Feb-12

-6

-4

-2

0

2

4

200 200 2010 2011 2012 2013

US GDP growth (%, yoy) EMU GDP growth (%, yoy)

8 9






5 Forecast revision

Contents


The increase in oil prices represents a moderate risk to global growth

Oil prices in real terms (dollars of 2010)Source: BBVA Research and Haver

Part of the increase in oil prices is the result of tight supply and demand

Part of the increase in oil prices is the result of tight supply and demand

Geopolitical risk premium between 10-15 USD per barrel. Persistent throughout 2012.

Geopolitical risk premium between 10-15 USD per barrel. Persistent throughout 2012.

Very limited impact on growth given scant tightening reaction by central banks

Very limited impact on growth given scant tightening reaction by central banks

In case of a stronger price spike growth could be affected due to

the consequent increase in global risk aversion

In case of a stronger price spike growth could be affected due to

the consequent increase in global risk aversion0

20

40

60

80

100

120

140

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Brent oil in 2010 dollars

Log trend real prices (8% annual)






5 Forecast revision

Contents


All in all: Growth heterogeneity among main economic areas Growth projections remain mostly unchanged relative to the February Global Economic Outlook. Growth will continue to be very heterogeneous between Europe, US and emerging countries. All in all, risks to the projections are strongly tilted to the downside due to the European crisis.

Global growth (%)Source: BBVA Research

3.64.0

1.92.3 2.2

-0.2

0.9

6.0

3.7 3.8

5.26.0

8.38.7

5.7

1.5

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2012

2013

2012

2013

2012

2013

2012

2013

2012

2013

2012

2013

2012

2013

2012

2013

World Developed US EMU Emerging Latam7 Em Asia excChina

China

Forecasts in May-2012Forecasts in Feb-2012


GDP Growth Forecasts2011 2012 2013

World 3.9 3.6 4.0Developed 1.6 1.5 1.9US 1.7 2.3 2.2

EMU 1.5 ‐0.2 0.9

Spain 0.7 ‐1.3 0.6

Emerging 6.2 5.7 6.0LatAm 7 4.3 3.7 3.8

Mexico 3.9 3.7 3.0

LatAm 6 4.5 3.8 4.1

Brazil 2.7 3.3 4.3

LatAm 5 6.7 4.4 3.9

Argentina 8.8 3.7 3.2

Chile 6.0 4.2 4.7

Colombia 5.9 5.0 5.2

Peru 6.9 6.0 5.7

Venezuela 4.2 3.9 1.9

EAGLES 6.7 5.8 6.4

Turkey 8.5 2.7 5.6

Asia Pacific 5.7 5.7 6.1

Emerging Asia 7.3 6.8 7.4

China 9.2 8.3 8.7

Emerging Asia ex China 5.4 5.2 6.0

Global recovery, but heightened risksGlobal Economic Outlook – Second Quarter 2012

Madrid, 8 May 2012

global economic outlook 2q12 - bbva research

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