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Spain Economic Outlook
2Q17
Main messages
• The world economy continues to improve, albeit
within an environment in which risks are still present
• In Spain, current figures confirm the upward bias.
Thus 2017 GDP growth forecast has been revised to
3%, while we have maintained unchanged the 2.7%
for 2018
• There are no major changes in the fundamentals of
growth, nor have there been second-round effects
regarding inflation so far
• Although reforms have had a positive impact, there
are still significant imbalances
Spain Economic Outlook
2Q17
4
The positive dynamic takes hold
The main trends continue… …while uncertainties take shape
Recovery of
industrial activity and
international trade is confirmed
Financial markets stable
amidst growing geopolitical tension
Headline inflation continues to rise,
while core inflation remains stable
A substantial growth stimulus
in the US seems less likely...
…although more protectionist
scenarios too
Central banks move
towards normalisation
Spain Economic Outlook
2Q17
5
The world's economy continues to accelerate in early 2017
Global GDP growth Forecasts based on BBVA-GAIN (% QoQ)
Confidence indicators are at
very high levels, but hard
indicators only partially reflect
that improvement
China and advanced economies
show signs of strength.
However, the emerging
economies are performing more
irregularly
(e): estimated
Source: BBVA Research
0,4
0,6
0,8
1,0
1,2
CI 40%
GDP growth
Average for period
CI 20%
CI 60%
Ma
r 1
4
Ju
n 1
4
Se
p 1
4
De
c 1
4
Ma
r 1
5
Ju
n 1
5
Sep 1
5
De
c 1
5
Ma
r 1
6
Ju
n 1
6
Sep 1
6
De
c 1
6
Ma
r 1
7 (
e)
Ju
n 1
6 (
e)
Spain Economic Outlook
2Q17
(e): estimated
Based on BBVA-Trade Index figures
Source: BBVA Research and CPB
6
Exports improve around the world
World exports of goods (constant prices) (YoY, %)
World trade shows signs of
acceleration, driven by investment
in China
Industrial activity partially reflects
this improvement
Consumer indicators show some
signs of slowing down
0
2
4
6
8
10
12
14
ma
r-1
1
jun-1
1
sep-1
1
dic
-11
ma
r-1
2
jun-1
2
sep-1
2
dic
-12
ma
r-1
3
jun-1
3
sep-1
3
dic
-13
ma
r-1
4
jun-1
4
sep-1
4
dic
-14
ma
r-1
5
jun-1
5
sep-1
5
dic
-15
ma
r-1
6
jun-1
6
sep-1
6
dic
-16
ma
r-1
7
Exportaciones de bienes - BBVA
Mar
14
Jun 1
4
Sep14
Dec14
Mar
15
Jun15
Sep15
Dec15
Mar
16
Jun16
Sep16
Dec16
Mar
17 (
e)
Mar
11
Jun 1
1
Sep 1
1
Dec 1
1
Mar
12
Jun 1
2
Sep 1
2
Dec 1
2
Mar
13
Jun 1
3
Sep 1
3
Dec 1
3
Good exports - BBVA
Spain Economic Outlook
2Q17
7
Financial tension remains low
BBVA financial tension index (normalised index)
Volatility has shrunk despite
the economic policy
uncertainty
Fiscal and Monetary stimulus
mask substantives concerns
Europe has been the
exception, with sovereign
spreads increasing, due to
forthcoming French elections
and the overall political
scenario
Source: BBVA Research
-2,0
-1,0
0,0
1,0
2,0
4 M
ar-
14
4 S
ep
-14
4 M
ar-
15
4 S
ep
-15
4 M
ar-
16
4 S
ep
-16
4 M
ar-
17
Desarrollados Emergentes Developed Emerging
China1 China2 Brexit
0
Ma
r 1
4
Se
p 1
4
Ma
r 1
5
Sep 1
5
Ma
r 1
6
Sep 1
6
Ma
r 1
7
Trump
Spain Economic Outlook
2Q17
8
Inflation shows no signs of second round effects so far
Headline and core inflation (YoY, %)
The effect of commodity prices on
inflation is reaching its maximum
level
Core inflation remains low, without
apparent second-round effects
As a result, inflation forecasts have
been lowered
Source: BBVA Research and Haver
Core inflation – World
Core inflation – Developed economies
Headline inflation – World
Headline inflation – Developed
economies
0
1
2
3
4
en
e-1
6
feb-1
6
ma
r-1
6
ab
r-1
6
ma
y-1
6
jun-1
6
jul-16
ag
o-1
6
sep-1
6
oct-
16
no
v-1
6
dic
-16
en
e-1
7
feb-1
7
Mar
16
Apr
16
May 1
6
Jun 1
6
Jul 16
Aug 1
6
Sep 1
6
Oct 16
Dec 1
6
Jan 1
7
Fe
b 1
7
Jan 1
6
Feb 1
6
Nov 1
6
Spain Economic Outlook
2Q17
9
FED and ECB interest rates (bp)
Central banks move towards a normalisation of their policies
Source: BBVA Research, FED and
ECB
0,0
0,5
1,0
1,5
2,0
2,5
en
e-1
6
ab
r-1
6
jul-16
oct-
16
en
e-1
7
ab
r-1
7
jul-17
oct-
17
en
e-1
8
ab
r-1
8
jul-18
oct-
18
FED BCE
ECB
Gradual fall in spending
ECB
End of QE. Remains
remains stable
Jan 1
6
Apr
16
Jul 16
Oct 16
Jan 1
7
Apr
17
Jul 17
Oct 17
Jan 1
8
Apr
18
Jul 18
Oct 18
FED ECB
The Federal Reserve continues to raise interest rates,
although it remains cautious about the economic
The ECB is increasingly looking at an exit strategy for
monetary policy
Spain Economic Outlook
2Q17
10 Source: BBVA Research. Latin America comprises: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and
Venezuela
Upward revision in China and the eurozone, slightly higher in Latin
America. Unchanged in the US.
USA.
2017
2.3 2018
2.4
LATIN AMERICA
2018
1.8
EURO ZONE
CHINA 2017
1.7
2018
5.8
2018
1.7
2017
1.1
2017
6.3
Downwards
Upwards
Remains
WORLD
2018
3.4 2017
3.3
Spain Economic Outlook
2Q17
11
China: a new impulse from old engines
GDP growth (YoY, %)
We have revised our forecasts for
2017 and 2018 upwards, due to
recent figures that mainly reflect
the fiscal impulse
Nevertheless, mid-term risks
remain considerable:
• The rebalancing process toward
services and consumption has
stagnated
• Economic policy mistakes may lead to
disorderly deleveraging process
Source: BBVA Research and CEIC
3
4
5
6
7
2017 2018
Current forecast Previous forecast
6.3 5.8
Spain Economic Outlook
2Q17
12
USA: expected fiscal stimulus delayed
Activity will accelerate in 2017
due to improving investment.
However, consumption is
somewhat less dynamic
Economic policy risks continue
despite the more optimistic tone
in recent months
Source: BBVA Research and the BEA
GDP growth (YoY, %)
0,0
0,5
1,0
1,5
2,0
2,5
3,0
2017 2018
Current forecast Previous forecast
2.3 2.4
Spain Economic Outlook
2Q17
13
The eurozone: a more positive panorama, although risks remain
Slight upward growth revision in
2017 and 2018, which may drive
inflation. Exports are behind this
improved scenario
Risks are mainly political in nature,
but there are still many sources of
uncertainty (electoral cycle, hard
Brexit, Greece, the geopolitical
prospect etc.)
Source: BBVA Research and Eurostat
GDP growth (YoY, %)
0,0
0,5
1,0
1,5
2,0
2017 2018
Current forecast Previous forecast
1.7 1.7
Spain Economic Outlook
2Q17
Recent economic figures (e.g.
employment and exports) point
to a slightly better than expected
short-term outlook
Upward revision of 0.3pp in the
growth forecast, which now
stands at 3% for 2017
Spain: Observed GDP growth and forecasts of the
MICA-BBVA Model* (% QoQ.
(e): estimated
Source: BBVA Research
(*) Camacho, M. and R. Doménech (2010): “MICA-BBVA: A Factor Model of Economic and Financial Indicators
for Short-term GDP Forecasting”, BBVA WP 10/21, available at: http://goo.gl/zeJm7g
Upward bias confirmed
15
0,0
0,5
1,0
1,5
0,0
0,5
1,0
1,5
ma
r.-1
4
jun.-
14
sep.-
14
dic
.-1
4
ma
r.-1
5
jun.-
15
sep.-
15
dic
.-1
5
ma
r.-1
6
jun.-
16
sep.-
16
dic
.-1
6
ma
r-1
7 (
e)
jun-1
7 (
e)
CI (20%) GDP (%, QoQ)
Spain Economic Outlook 1Q17 CI (40%)
CI (60%)
Ma
r 1
4
Ju
n 1
4
Se
p 1
4
Dec 1
4
Ma
r 1
5
Ju
n 1
5
Se
p 1
5
De
c 1
5
Ma
r 1
6
Ju
n 1
6
Se
p 1
6
De
c 1
6
Ma
r 1
7 (
e)
Jun
16
(e)
Spain Economic Outlook
2Q17
16
...despite the slowdown in internal demand
Spain: contributions to YoY GDP growth (%)
We have seen slower
growth in household
consumption, private
investment in machinery
and equipment
Some cyclical stimulus
may have run out (pent-up
demand), while uncertainty
may have seen growth
clipped
(e): estimated
Source: BBVA Research based on INE (National Statistics Institute) figures
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2015 2016 2017 (e)
M&E Investment Consumption GDP
Spain Economic Outlook
2Q17
17
Residential investment gains momentum
Spain: Social Security affiliation growth (SCA, % QoQ)
Recent figures point to the
long-awaited acceleration
in the real estate sector
Demand, along with a
reduction in oversupply,
have been the causes of
the price increases and
the uptick in activity in
certain urban areas
Source: BBVA Research based on Ministry of Employment and Social Security figures
0,0
0,5
1,0
1,5
2,0
2,5
mar-16 jun-16 sep-16 dic-16 mar-17
Total Sector de la construcciónConstruction Sector Total
Mar-17
Spain Economic Outlook
2Q17
18
Exports of goods recover, despite Brexit
The recovery in goods
exports can be explained
partly by improved
performance in emerging
markets
The euro zone continues to
bolster growth in exports,
while lower sales to the
United Kingdom has had a
relatively small impact
Spain: Exports per country (trend, %YoY)
(e): estimated
*Red and green respectively indicate
negative and positive quarterly trend variations
Source: BBVA Research based on INE figures
Se
p-1
5
De
c-1
5
Ma
r-1
6
Ju
n-1
6
Se
p-1
6
De
c-1
6
ma
r-1
7 (
e)
Total
UNIÓN EUROPEA
ZONA DEL EURO
- FRANCIA
- ALEMANÍA
- ITALIA
UE, EXTRA UEM
- REINO UNIDO
RESTO DEL MUNDO
AMERICA
AMÉRICA LATINA
CHINA
min 0 max
Se
p-1
5
De
c-1
5
Ma
r-1
6
Ju
n-1
6
Se
p-1
6
De
c-1
6
ma
r-1
7 (
e)
Total
UNIÓN EUROPEA
ZONA DEL EURO
- FRANCIA
- ALEMANÍA
- ITALIA
UE, EXTRA UEM
- REINO UNIDO
RESTO DEL MUNDO
AMERICA
AMÉRICA LATINA
CHINA
min 0 max
TOTAL
EUROZONE
France
Germany
Italy
EU, NON-EMU
United Kingdom
REST OF THE WORLD
Latin America
China
EUROPEAN UNION
Sep 1
5
Dec 1
5
Mar 1
6
Jun 1
6
Sep 1
6
Dec 1
6
Mar 1
7
Se
p-1
5
De
c-1
5
Ma
r-1
6
Ju
n-1
6
Se
p-1
6
De
c-1
6
ma
r-1
7 (
e)
Total
UNIÓN EUROPEA
ZONA DEL EURO
- FRANCIA
- ALEMANÍA
- ITALIA
UE, EXTRA UEM
- REINO UNIDO
RESTO DEL MUNDO
AMERICA
AMÉRICA LATINA
CHINA
min 0 max
Spain Economic Outlook
2Q17
19
Foreign service sales remain strong
Spain: Tourism services exports (annual average of quarterly growth rates)
Non-tourism service exports
continue to grow at a healthy
rate (an average of 6.8% per
year, 2014 to 2018)
Geopolitical tension in
competing countries
continues to bolster growth in
tourism
(e): estimated
Source: BBVA Research based on INE figures
0,0
0,5
1,0
1,5
2,0
2,5
2014 2015 2016 mar-17 (e)Mar-17 (e)
Spain Economic Outlook
2Q17
20
Source: BBVA Research
We revise our 2017 GDP growth forecast to 3%
2016 2017 2018
3.2% 3.0% 2.7%
Spain Economic Outlook
2Q17
3 2
21
1
Oil price
Despite increases
in recent months,
prices stay 40% below
2014 levels
Euro exchange rate
The euro is still depreciated
against the dollar in 2017, but
with an upward trend for 2018
Risk premium
Still low as a result of the
ECB's Asset Purchase
Programme
Global demand
Positive perspectives,
especially in the euro zone
and in emerging markets,
will drive the exports
Geopolitical tension
Tourism in Spain will continue
to benefit from the perception
of insecurity in competing
destinations
Official Interest rates
At historical lowest levels,
with expectations of
moderate increases in the
short term interest rates in
late 2018
The global context, positive for Spain
5 4
Spain Economic Outlook
2Q17
-1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 2,0
1997-2007
2008-2013
2014-2016
Wages Productivity Margins Taxes Total
Spain: breakdown of the inflation differential with respect to the EMU 12 based on the GDP
deflator (average annual growth)
22
Inflation: gains from competitiveness
During recovery, competitiveness gains have remained stable, thanks to the contribution of both margins and
wages
This distribution has been consistent with the creation of employment, the growth of investment and the increase in
exports. Maintaining this level will be key
Source: BBVA Research based on AMECO figures
Competitiveness gain Competitiveness loss
Spain Economic Outlook
2Q17
23
Fiscal policy in line with targets
(f): forecast.
Source: BBVA Research
Spain: Fiscal adjustment (%, YoY)
The 2016 deficit (in line with
expectations), recovery and
Central Government Budget for
2017 make the stability target
viable
Although there is some
uncertainty regarding expected
revenues, the higher GDP and
prices growth will facilitate a
reduction of the deficit
4,3
1,2 0,0
3,1
1,0 0,0
2,1
0
1
2
3
4
5
Dé
ficit 2
01
6
Política f
isca
l p
asiv
a
Política d
iscre
cio
nal
Dé
ficit 2
01
7
Política f
isca
l p
asiv
a
Política d
iscre
cio
nal
Dé
ficit 2
01
8
2017(p) 2018(p)
Pa
siv
e fis
ca
l p
olic
y
Fis
ca
l e
ffo
rt
De
ficit 2
01
7
Pa
siv
e fis
ca
l p
olic
y
Fis
ca
l e
ffo
rt
De
ficit 2
018
2017(f) 2018(f)
De
ficit 2
01
6
Spain Economic Outlook
2Q17
24
Economic performance highlights structural improvements
Source: BBVA Research based on INE and CF INC
The ongoing upward revision of GDP growth forecasts suggests an underestimation of both structural and
cyclical factors
Deleveraging efforts would appear to have been underestimated, as has reorientation towards external
demand and the impact of reforms
Spain: Potential 2015 GDP growth by forecast date (%)
2015 Forecasted
three years ago
0.5 Current
forecast
1.2
Spain Economic Outlook
2Q17
25
In the medium term, improved productivity will be a key factor
Source: BBVA Research based on Eurostat figures
The gap between Spain and the
EMU in productivity growth has
decreased in recent years
Productivity growth is still low,
although in part this might be the
result of global factors
There are some signs of structural
improvement
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
1,6
1T95-4T07 3T13-4T16
Zona Euro España
Spain
3Q13-4Q16 1Q95-4Q07
Spain: Labour factor productivity (GVA per hour worked % QoQ, annualised average)
EMU
Spain Economic Outlook
2Q17
26
Sectoral composition shows some reasons for optimism
Source: BBVA Research
Productivity performance is
influenced by traditionally
leading sectors, such as ICT
and Manufacturing
Recently, other labour intensive
sectors have increased
productivity, as well as creating
employment
Spain: Labour productivity factor GVA per hour worked (% QoQ, average annualised)
-4
-3
-2
-1
0
1
2
3
4
1Q
95-1
Q08
2Q
08-2
Q13
3Q
13-4
Q16
1Q
95-1
Q08
2Q
08-2
Q13
3Q
13-4
Q16
1Q
95-1
Q08
2Q
08-2
Q13
3Q
13-4
Q16
1Q
95-1
Q08
2Q
08-2
Q13
3Q
13-4
Q16
ICT Manufacturing Professionalactivities
Retail,transport andhotel industry
Spain Economic Outlook
2Q17
90
95
100
105
110
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
PIB per cápita (base 2010=100) Nivel 2007 GDP per capita (2010=100)
27
In any event, there is still much to be done
1.2%
8.2
15.6
Unemployment rate
2007
2018
Spain: GDP per capita (2010=100)
Unemployment rate
Source: BBVA Research based on INE figures
2007 level
Spain Economic Outlook
2Q17
Intelligent fiscal consolidation
The primary budget balance and public
debt showed clear signs of public account
unsustainability between 2009 and 2011
Significant costs to GDP (>5pp) and
employment (>3pp) of maintaining high
debt levels after the recession
Reducing structural unemployment would
allow to bring down public debt, deficit
levels and the tax burden, as well as
increasing per capita public expenditure
Primary budget balance and public debt. Spain, 1995 - 2018 (% of GDP)
Source: BBVA Research, based on Doménech and González-Páramo (2017, published in
press)
Public deficit (% of GDP)
Pri
ma
ry b
ud
ge
t b
ala
nce
(%
of G
DP
)
28
In any event, there is still much to be done
1995
2000
2007
2008
2009
2011
2012
2013
2016
2017
2018
-10
-8
-6
-4
-2
0
2
4
0 15 30 45 60 75 90 105 120 135 150
A'
A
O
Unsustainable Sustainable
Spain Economic Outlook
2Q17
Main messages
• The world economy continues to improve, albeit
within an environment in which risks are still present
• In Spain, current figures confirm the upward bias.
Thus 2017 GDP growth forecast has been revised to
3%, while we have maintained unchanged the 2.7%
for 2018
• There are no major changes in the fundamentals of
growth, nor have there been second-round effects
regarding inflation so far
• Although reforms have had a positive impact, there
are still significant imbalances