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 ResearchTRANSCRIPT
Spain Economic Outlook
Madrid, 09 May 2012
Spain Economic Outlook, 9 May 2012
Page 2
Key themes
1
2
3
Despite the dynamism of the global economy, Europe is decoupling
The international context of the Spanish economy will be largely determined by the outcome of the European crisis
Europe needs a long-term plan to boost activity and to share sovereign risk in exchange for improved coordination, governance and structural reforms
Spain mantains the prospect of a GDP contraction of 1.3% in 2012 and a slow recovery in 2013, but with increased uncertainty
Improving confidence depends upon the design, execution and communication of a credible reform agenda
4
5
Spain Economic Outlook, 9 May 2012
Page 3
Section 1
International environment: continued global growth and risks in EuropeSection 2
Spain: recession confirmed, yet getting no worse. The reforms introduced will stimulate growth
Contents
Spain Economic Outlook, 9 May 2012
Page 4
Evidence of global growth, although heterogenous
Global growth (quarterly %)Source: BBVA Research and Haver analytics
Wider growth gap between the U.S. and Japan, on the one hand, and Europe, on the other
Emerging economies will continue growing faster than developed economies
Moderate global growth
-3
-2
-1
0
1
2
3
2008 2009 2010 2011 2012 2013
Global Developed Emerging
Spain Economic Outlook, 9 May 2012
Page 5
The European crisis continues
Significant progress... ... but still with challenges ahead
To date, the authorities have been a step behind the events half measures to overcome the crisis
Restructuring of Greek debt and bringing forward the ESM
Long-term ECB liquidity provision
Reforms in Portugal, Spain, and Italy
Approval of the Stability Treaty
1. Doubts in Greece and Portugal
4. Growth agenda
3. Greater progress towards a fiscal union
2. Need for an efficient firewall
Spain Economic Outlook, 9 May 2012
Page 6
1. Uncertainty in Greece and Portugal
Greece and Portugal: public debt forecasts (% of GDP)Source: BBVA Research and IMF
Greece: highly ambitious targets, but uncertainty following the elections, and in a deep recession
Portugal: despite significant progress, there is no guarantee of a return to capital markets in 2013
There is still a high risk of setbacks
40
60
80
100
120
140
160
180
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Portugal Greece*
* Optimistic scenario for Greece. Assumes 95% participation in the haircut, growth close to 3% as of 2015 and primary surplus of 4.5% of GDP as of 2014 (primary deficit of 2.4% in 2011)
Spain Economic Outlook, 9 May 2012
Page 7
2. Need for an efficient firewall
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
It is more important that the available resources are used efficiently: they shouldn't crowd out private demand
The increase in IMF funds (€330Bn)
The debate is centered around the amount of resources available, but it goes beyond:
Spain Economic Outlook, 9 May 2012
Page 8
3. Greater progress towards a fiscal union
From the Stability Treaty...
Despite difficulties estimating it, the Treaty makes the right empahsis on structural
adjustment...
...but it raises doubts about how the extraordinary circumstances clause will be
applied
Not ambitious enough for an assertive move from the ECB hardliners and Germany?
...to a fiscal union
Eurobonds: a convenient mechanism for mutualising risk
The "blue" and "red" bond proposalensures a degree of market discipline
A union with temporary (rather than permanent) fiscal transfers would be sufficient
Spain Economic Outlook, 9 May 2012
Page 9
Banking system: Eurozone sovereign bond holdings as % of assetsSource: ECB and BBVA Research
Indirect ECB intervention in the sovereign bond market via banks
The increased exposure of banks to sovereign debt increases the potential negative feedback
between the two
Emphasises the need for a definite solution to the doubts about sovereign solvency
3. Greater progress towards a fiscal union
Objective: eliminate the interaction between sovereign risk and bank risk
4.0
4.5
5.0
5,5
6.0
6.5
7.0
7.5
8.0
Jan
-10
Mar
-10
May
-10
Jul-1
0
Sep
-10
No
v-10
Jan
--11
Mar
-11
May
-11
Jul-1
1
Sep
-11
No
v-11
Jan
-12
Mar
-12
Spain Italy
Spain Economic Outlook, 9 May 2012
Page 10
4. Growth plan
Clear route map for the future of EMU
Balance between growth and austerity:reforms in exchange for a growth strategy
Short-term objective: to avoid the risk of an austerity-recession vicious circle and the doubts regarding the solvency of
sovereign debt
Gradual fiscal adjustment with multi-year plans.Focus on structural deficits as the Treaty proposes
A growth plan that complements fiscal adjustment
Spain Economic Outlook, 9 May 2012
Page 11
Europe decoupling from global growth
GDP growth (% yoy)Source: BBVA Research
The debt crisis continues, with Portugal under the spotlight and concerns about Spain
High levels of financial stress in Europe, with a risk of credit restrictions
Stability Treaty: towards Maastricht 2.0.More emphasis on growth
Expansive, but no homogeneous, monetary policies by the Fed, the Bank of England and the
ECB
A slow, heterogeneous and vulnerable recovery
3.64.0
-0.2
0.9
2.3 2.2
5.8
6.4
-1
0
1
2
3
4
5
6
7
2012 2013 2012 2013 2012 2013 2012 2013
Global EMU USA EAGLES
May-12 Feb-12
Spain Economic Outlook, 9 May 2012
Page 12
Section 1
International environment: continued global growth and risks in Europe
Section 2
Spain: recession confirmed, yet getting no worse. The reforms introduced will stimulate growth
Contents
Spain Economic Outlook, 9 May 2012
Page 13
National environment
Main changes in the economic scenario in 2012
Main drivers behind the economic scenarioSource: BBVA Research
New
fact
ors
Growth forecast 3 months ago
2012 growth forecast unchanged, but increased uncertainty -1.3%
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
-1.3%
1. Information on 1Q and 2Q confirms the scenario
2. Rising oil prices
Spain Economic Outlook, 9 May 2012
Page 14
1. Available data confirms the scenario
Spain: real GDP growth and forecasts based on MICA-BBVA model (%, qoq)Source: BBVA ResearchCurrent forecast: 4 May The Spanish economy entered technical recession
in 1Q12...
Employment continues to be hindered by the negative outlook for growth
Published data indicates that 2Q12 growth is likely to have remained negative
...albeit with no acceleration in the rate of deterioration versus 4Q11
CI at 60% CI at 40% CI at 20%
MICA-BBVA point estimation (21% of data for 2Q12)
Actual (BBVA Research official forecast for 2Q12)
-1.5
-1.0
-0.5
0.0
0.5
1.0
2Q0
9
3Q0
9
4Q
09
1Q10
2Q10
3Q10
4Q
10
1Q11
2Q11
3Q11
4Q
11
1Q12
2Q12
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.51.5
Spain Economic Outlook, 9 May 2012
Page 15
1. Available data confirms the scenario
Spain: fiscal adjustment and economic growth (%)Source: BBVA Research
Information published so far has led to small changes in regional forecasts
Lower household savings rate and higher unemployment hinder private domestic demand
Both tourism and exports support a better performance of some autonomous communities
Fiscal adjustment in the autonomous communities, the main cause of the differences
MAD
GAL
CANANAV
RIO
CYL BASC
ARA
AVG.
AND
AST
VAL
CAT
BAL
CANT MUR
EXT
CLM
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
2012
GD
P gr
owth
(%
)
2012 deficit adjustment as detailed in 2012-2014 Stability Programme (% of GDP)
Spain Economic Outlook, 9 May 2012
Page 16
2. Pick up in oil prices
Spain: impact on activity and prices of recent oil price increase (deviation from previous scenario)Source: BBVA Research
The increase is the result of both supply-side and demand-side factors
No expectations of a contractionay monetary policy response
Of a transitory nature on its long term trend
Negative, but limited impact
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
2012 2013 2012 2013
GDP (%y/y) CPI (%y/y)
Supply Precautionary demand Global demand Total
S
Spain Economic Outlook, 9 May 2012
Page 17
3. Increased financial stress
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 idea that both Europe and Spain have lacked a medium and long-term strategic plan
The higher amount of sovereign debt on banks' balance sheets: negative interaction between sovereign and banking risks
Despite the ECB liquidity, the progress being made in Europe, and the reforms in Spain, markets are still cautious due to:
Spain Economic Outlook, 9 May 2012
Page 18
Spain: balance of payments and capital flows(12 months cumulative, % of GDP)Source: BBVA Research based on Bank of Spain
3. Increased financial stress
FDI and other capital flows entering the country were financing the current account deficit before
the onset of the financial crisis
As of 2007, other capital inflows (bonds, loans, etc.) became highly volatile...
... which affected the economy's dependance on flows through the Eurosystem
It is liquidity, not solvency
Faced with a lack of liquidity, the main risk lies in self-fulfilling expectations
-15
-10
-5
0
5
10
15
Dec
-99
Au
g-0
0
Ap
r-0
1
Dec
-01
Au
g-0
2
Ap
r-0
3
Dec
-03
Au
g-0
4
Ap
r-0
5
dic
-05
Au
g-0
6
Ap
r-0
7
Dec
-07
Au
g-0
8
Ap
r-0
9
Dec
-09
Au
g-1
0
Ap
r-11
Dec
-11
FDI Rest Eurosystem Current Account
Spain Economic Outlook, 9 May 2012
Page 19
4. Unprecedented fiscal adjustment due to the deviation in 2011
Spain: Public Administration receipts and expenditures (% of GDP)Source: BBVA Research based on MINHAP and INE
The 2.5pp deviation from the 2011 deficit target was the result of...
a worse-than-expected cyclical slump in receipts, and...
a structural adjustment in expenditure that was insufficient to meet the objective
20.0
22.5
25.0
27.5
30.0
32.5
35.0
37.5
40.0
42.5
45.0
47.5
50.0
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
2010
2011
2012
(f)
2013
(f) -12
-10
-8
-6
-4
-2
0
2
4
Financing Cap. (+) / Req. (-) (rhs.)
Receipts (lhs.) Expenditures (lhs.)
Spain Economic Outlook, 9 May 2012
Page 20
4. Unprecedented fiscal adjustment due to the deviation in 2011
Spain: adjustment of Public Administration deficit (% of GDP)Source: BBVA Research Fiscal adjustment measures worth 5.1pp of GDP
are required in order to reach the -5.3% target for 2012
The 2012-2015 Stability and Growth Pact contains measures that make the central government
target credible...
... with the focus of compliance on the autonomous communities
Additional room for manouevre: privatisations or other measures not yet announced by the
autonomous communities
0.8
3.2
2.3
-3
-2
-1
0
1
2
3
4
5
6
2011 (Deficit: 8.5%) 2012 (Target: -5.3%) 2013 (Target: -3.0%)
Cyclically adjusted Cyclical deterioration Discretionary measures Structural deterioration Total
(+) Reduces deficit
(-) Increases deficit
Spain Economic Outlook, 9 May 2012
Page 21
4. Unprecedented fiscal adjustment due to the deviation in 2011
Spain: Public Administration financing cap. (+) / req. (-)(% of GDP)Source: BBVA Research, based on MINHAP
Structural deficit objectives
More gradual adjustments
Multi-year programme with announcements of future fiscal measures
Towards a new European strategy on fiscal adjustment
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
2010
2011
2012
(f)
2013
(f)
Cyclically adjusted Cyclical balance Total
Spain Economic Outlook, 9 May 2012
Page 22
5. The Budget Stability Law
EU27: index of standardised fiscal rules (2010)Source: BBVA Research, based on EC data
Spain has been a pioneer in this kind of legislation
Main improvements: structural targets and control mechanisms for the autonomous
communities
This legislation is likely to improve significantlythe perception on Spanish institutions
Budget Stability Law
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
UK
DK
BG LT SE NL SP PL EE FR LU DE
AT SI FI SK CZ
HU BE
LV PT RO IT IE CY EL MT
EU27
Spain Economic Outlook, 9 May 2012
Page 23
GDP impact on 2012 from the Supplier Payment Programme (pp of GDP)Source: BBVA Reaerch based on MINHAP
Important liquidity injection
5. Supplier Payment Programme
*/ Max and Min depend on agents' level of liquidity restriction
Government will inject 2.5% of GDP (€27Bn) to pay off local and regional government
debts with suppliers
If suppliers are experiencing liquidity restrictions, the impact on growth could be significant
To a large extent, the final impact will depend upon the level of uncertainty
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
20% 33% 50%Percentage of unpaid invoices discounted
Spain Economic Outlook, 9 May 2012
Page 24
Spain: response to labour market reform (% deviation from trend)Source: BBVA Research
The challenge: from adjustment to growth
Short-term objective: to prevent further job losses→ adjustment via working hours + labour
flexibility and a better organization of production
To stimulate growth where it is weak and to take advantage of it in sectors that are buoyant
A redistribution of factor inputs towards the more dynamic firms and sectors
(exporting sector)
To eliminate internal growth barriers via a more favourable regulatory framework
6. Labour market reform
-2
0
2
4
6
8
10
12
14
16
18
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
GDP Employment
Spain Economic Outlook, 9 May 2012
Page 25
6. The challenge of increasing productivty
Spain: total factor productivity(Percentage deviation from trend)Source: BBVA Research based on Correa-López and de Blas (2011)
Spain, an economy dependant on foreign technology
The medium-term challenge is to increase total factor productivity
Following the labour market reform, Spain needs additional reforms to improve competitiveness
and make the economy more attractive
It is vital that Spain does not miss the train of technology adoption, through bilateral trade links
and FDI
12
8
4
0
-4
-8
-12
Medium-term cycle Medium-frequency component
1951
1955
1959
196
3
196
7
1971
1975
1979
198
3
198
7
199
1
199
5
199
9
200
3
200
7
Spain Economic Outlook, 9 May 2012
Page 26
Conclusions
1
2
3
Despite the dynamism of the global economy, Europe is decoupling
The international context of the Spanish economy will be largely determined by the outcome of the European crisis
Europe needs a long-term plan to boost activity and to share sovereign risk in exchange for improved coordination, governance and structural reforms
Spain mantains the prospect of a GDP contraction of 1.3% in 2012 and a slow recovery in 2013, but with increased uncertainty
Improving confidence depends upon the design, execution and communication of a credible reform agenda
Thank youwww.bbvaresearch.com
4
5
Spain Economic Outlook
Madrid, 09 May 2012
Spain Economic Outlook, 9 May 2012
Page 28
Appendix
Macroeconomic forecastsSource: BBVA Research, based on INE, Bank of Spain, and Eurostat data(*) contribution to growth
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 2.0Equipment and machinery 5.5 4.2 1.6 5.1 -4.6 -2.5 2.8 2.2Construction -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 1.1Other 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 0.3
GDP mp -0.1 1.8 0.7 1.5 -1.3 -0.2 0.6 0.9
Pro-memoria
GDP 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
2012 (f) 2013 (f)(% YoY)
2010 2011 (f)
Spain Economic Outlook, 9 May 2012
Page 29
Appendix
The Spanish economy entered a technical recession in 1Q12...
Employment continues to be hindered by the negative growth outlook
Published data indicates that 2Q12 growth is likely to have remained negative
...albeit with no acceleration in the rate of deterioration versus 4Q11
Spain: GDP and main indicators from the MICA-BBVA model (CVEC data, %, qoq unless otherwise stated)Source: BBVA Research based on official organism
Cost of financing (change in bp)
Interest rate curve (change in GDP)
-2.0 -1.0 0.0 1.0 2.0 3.0
Registered unemployment
Electricity demand
Financial market stress (change in bp)
Industrial confidence (change in dt)
Real GDP
Social Security affiliation
Real credit to private sector
Consumer confidence (change in dt)
Real wage income
4Q11 1Q12
Spain Economic Outlook, 9 May 2012
Page 30
Appendix
Bn euro % GDP
Deficit 2011 (a) -91.4 -8.5Objective 2012 (b) -57.1 -5.3
Difference (c=b-a) 34.3 3.2Additional adjustment (d) 20.7 1.9
Total necessary adjustment (c+d) 55.0 5.1Announced measures
PGE 2012 25.7 2.4Local Corporations.: increase of IBI 0.9 0.1Autonomous Communities: more revenues 4.1 0.4Fight against the Social Sec. fraud 1.9 0.2Autonomous Communities : education, public health and social services
5.7 0.5
Local Corporations : duplicities and issues on competencies 0.1 0.0Central Government: less spending 0.3 0.0Autonomous Communities: spending adjustment rebalancing plans
5.7 0.5
Local Corporations: adjustment rebalancing plans3.1 0.3
Total measures 47.4 4.4PromemoriaNominal GDP 1,073.9
2012 Fiscal adjustment Source: BBVA Research based on MEC
Spain Economic Outlook, 9 May 2012
Page 31
Appendix
More cumulative fiscal consolidation in two years. OECD, 1978-2009 Descomposition by adjustmentSource: BBVA Research based on Devries et al (2011)
0
1
2
3
4
5
6
7
8
9
ITA FIN ITA ITA ITA SWE IRL DNK FIN NLD
1992 -1993
1993 -1994
1991 -1992
1993 -1994
1994 -1995
1995 -1996
1982 -1983
1983 -1984
1994 -1995
1983 -1984
Increase of revenues
Decrease of expenditures
Revenues% of GDP before adjustment
44 56 43 45 44 55 39 55 57 53
Spain: 36% revenues/GDP
Spain: 2012-2013 measures to reach 3% of deficit: 7.3% GDP
Spain Economic Outlook, 9 May 2012
Page 32
Appendix
Economic impact of substituting social security contributions by indirect taxes(Diference with respect to base scenario, percentage points)Source: BBVA Research
0.0
0.3
0.6
0.9
1.2
1.5
tt+1
GDP Employment