The European and Spanish Economic Outlook: A Less Cloudy Global Scenario? Rafael Doménech BBVA Financial Institutions Conference

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1 Economic Outlook Spain June The European and Spanish Economic Outlook: A Less Cloudy Global Scenario? Rafael Doménech BBVA Financial Institutions Conference

2 The global economic scenario has improved in the past three months, but growth is still weak, and vulnerable to several risks In Spain, data on activity lend an upward bias to our growth forecast for 2016, while increased uncertainty gives a downward bias for 2017 Uncertainties make it more necessary to push for an ambitious programme of reforms in Europe and Spain 2

3 Global

4 The world Weak growth, fragile and more vulnerable to risks 2016 USA Spain Euro zone China Latin America World Source: BBVA Research World figures consistent with world GDP published by the IMF Down Steady Up 4

5 Markets have been improving since January -0.3% Fewer doubts about China (in the short term) +37% Increase in oil prices (Brent) +15% -125 bps Rising markets (world stock markets, MSCI) Better financing conditions in EM (Reduction in EMBI risk premium) Reduced uncertainty as regards global growth Source: BBVA Research. Trends observed since 10/02/2016 5

6 The European and Spanish Economic Outlook, June 2016 Stabilizing oil prices at low levels Movements in the price of oil (Brent, US$ per barrel) Cheap oil is good news but not for all. Less uncertainty about global growth Oil prices stabilize at very low levels, while are expected to increase gradually Support buyers disposable income, but weigh on that of oil producers 0 Actual Forecasts Source: BBVA Research and Bloomberg 6

7 Global growth: weak and subject to several risks Global economic growth Forecasts based on BBVA-GAIN (%, annualised rate) Average Average Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 Crecimiento, Growth, forecast previsiones for 1Q161T16 and y 2Q16 2T16 Source: BBVA Research 7

8 Global trade is sending warning signals Growth in world trade Exports of goods, % YoY - BBVA indicator Average Average Q3 sep Q2 jun Q1 mar Q4 dic Q3 sep Q2 jun Q1 mar : IMF data Source: BBVA Research and IMF 8

9 Probability The European and Spanish Economic Outlook, June 2016 What are the risks on the global scenario? Europe Brexit Geopolitical Peripheral countries China Crisis Emerging markets US Federal Reserve s raising interest rates Source: BBVA Research Impact 9

10 Forecasts China: slow adjustment to continue The European and Spanish Economic Outlook, June 2016 China: GDP growth (YoY %) ,7 7,3 6,9 6,4 5,8 In the short term, monetary and fiscal policies will modulate the adjustment to China s growth, which will continue Semi-public enterprises: sustained by debt and with overcapacity. Without reforms, they will act as a brake on growth in the medium term (f) 2017(f) Source: CEIC and BBVA Research forecasts 10

11 Forecasts USA: growth increasing over the course of 2016 USA: GDP growth (YoY %) 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 1,5 2,4 2,4 2,5 2, (f) 2017(f) After a gentle start, the economy will accelerate over the course of the year, driven by employment The Federal Reserve will take into account the strength of the domestic economy and the negative effect on the global environment when deciding on the timing and extent of its interest rate hikes Source: BEA and BBVA Research forecasts 11

12 Forecasts Eurozone: revised downwards, but recovery continues Euro zone: GDP growth (YoY %) 2,5 2,0 1,5 1,0 0,5 0,0-0,5-1,0-0,2 0,9 1,5 1,6 1, (f) 2017(f) The external environment weighs down exports and growth Certain support factors are fading: the positive effects of low oil prices and the euro s depreciation Meanwhile, policies continue to support growth: specially monetary policy and, marginally, fiscal policy Source: Eurostat and BBVA Research forecasts 12

13 Drivers Eurozone: revised downwards, but recovery continues ECB expanded QE and cut interest rates further Slightly expansive fiscal policy Economic policies Lower foreign demand Rebalancing in EM and lower imports from advanced economies Some structural reforms bear fruit on the periphery Supporting Fading Softer tailwinds Oil prices stabilization and more appreciated euro in the shortterm Strength of domestic factors Confidence, despite events in early 2016 Resilience Political uncertainty Brexit, Greece, terrorism, delays in the reform process, 13

14 Political uncertainty Greece: agreement reached, but still cornerstones ahead Achieved Measures approved : tax reform, pension reform and ready to hike indirect taxes, enough to get 5.4bn cuts by 2018 and achieve fiscal target of 3.5% of GDP Contingency measures demanded by the IMF (plan B in case those measures are not enough): agreement of automatic horizontal cuts Disbursement second tranche of the ESM programme (EUR10.3bn) Agreement on benchmark for gross financing needs and on a gradual package of debt measures at the end of the programme in mid-2018 What s left? Greece s ownership, reforms deployment and assessment Political issues: IMF has to decide if it participates ECB likely to buy Greek bonds in September 14

15 Political uncertainty Brexit: short and long-term risks The European and Spanish Economic Outlook, June 2016 Referendum Timing: June 23rd (3 days before Spanish elections) Polls: 45%-43% for Bremain Brexit is not about economics: it is mainly about politics and emotions Long-term costs For UK: lower GDP (-1%/-9%, depending on new status), employment, impact on FDI and the City, Scotland, etc. For EU: Risks of further centripetal moves (social and politics), but mostly for non-eu countries (Eastern Europe, Nordics). Britain s pro-market role. Short-term impact Depreciation (GBP): Most cited figures is additional -15% (vs USD) Reaction of BoE: So far, strong anti-brexit positioning by Mr Carney, defying calls for independence; contingency plans; debate over rates post-brexit: raise rates to avoid inflationary pressures or cut taxes to avoid recession Contagion to rest of Europe, global: unknown 15

16 mar-05 mar-06 mar-07 mar-08 mar-09 mar-10 mar-11 mar-12 mar-13 mar-14 mar-15 mar-16 The European and Spanish Economic Outlook, June 2016 Forecasts Euro zone: monetary policy is nearing its limit Euro zone: official rate and deposit rate (%) Source: BBVA Research Deposit rate Refinancing Official rate rate The ECB approves a new package of measures: interest rate cuts, extension of QE and new liquidity supply (at zero cost) These measures will mitigate bank financing doubts, but their impact on the real economy and credit is uncertain The ECB is starting to take account of the side-effects of negative rates 16

17 Europe s future lower economic and political role Regional contribution to world growth in the next ten years (%) Western Europe 6.2% Africa 6.3% Eastern Europe 5.4% 2045 Japan: 0.9% China: 29.1% Middle East 3.9% Other Asia 31.9% Oceania 0.8% North America 9.9% Latin America 5.6% World Center of Gravity Global growth will be concentrated in the Asia-Pacific region, which will account for 78.2% of the increase in GDP between 2015 and Source: BBVA Research, IMF and Quah D., 2011, The Global Economy s Shifting Centre of Gravity. 17

18 Europe s future lower economic and political role World GDP weights (%) Lower employment and productivity growth than in emerging countries imply a smaller share of Europe in world GDP 15 From 2000 to 2020 Europe s share in world GDP will halve Eurozone US Japan China The influence in world politics will depend on the EU leadership in political and economic agreements (e.g., TTIP, climate change, etc.)

19 Spain The European and Spanish Economic Outlook, June 2016

20 GDP growth The recovery continues The European and Spanish Economic Outlook, June % 2.7% 2.7% Source: BBVA Research and INE (National Statistics Institute) 20

21 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Economic policy and growth Uncertainty remains high The European and Spanish Economic Outlook, June 2016 Spain: Economic Policy Uncertainty (idiosyncratic component in standard deviations) 2,0 1,5 1,0 0,5 0,0-0,5-1,0-1,5 General elections Source: BBVA Research based on EPU of Baker et al. (2015) 21

22 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 (f) Economic policy and growth but the recovery continues The European and Spanish Economic Outlook, June 2016 Spain: GDP growth Available data point to GDP growth (% QoQ, MICA-BBVA model) 1,5 1,5 slowing down gently (to 0.7% in 2Q16) 1,0 0,5 0,0 1,0 0,5 0,0 All in all, the probability of growth exceeding 2.7% in 2016 remains high -0,5-1,0-0,5-1,0 Domestic demand (particularly private consumption and investment) support the recovery CI at 60% CI at 40% CI at 20% GDP (%QoQ) (f): forecast Source: BBVA Research based on INE 22

23 Tailwinds Growth will continue to be supported by The European and Spanish Economic Outlook, June 2016 Record low oil prices Expansive monetary policy Moderated acceleration in the euro zone Neutral fiscal policy 23

24 Domestic risks Economic policy uncertainty The European and Spanish Economic Outlook, June 2016 Spain: GDP growth scenarios (%) 3,3 3,1 2,9 2,7 2,5 2,3 2,1 1,9 1,7 1, (p) 2017 (p) In an environment without uncertainty, the economy could have grown by 0.3 pp more in 2016 and 0.5 pp more in 2017 The longer this situation persists, the greater the impact will be Counter-factual scenario (without uncertainty) (p): projected. Source: BBVA Research based on INE Base scenario (with uncertainty) 24

25 Domestic risks Non-compliance with fiscal commitments The European and Spanish Economic Outlook, June 2016 Breakdown of public administrations fiscal adjustment. (pp of GDP) ,8 Deficit ,9 Pasive fiscal policy 1,1 Fiscal effort 5,0 Deficit ,3 0,1 Pasive fiscal policy Fiscal effort (a): advance; (f): forecast. Not including assistance to banks Source: BBVA Research based on MINHAP and INE 3,9 Deficit ,1 Pasive fiscal policy 0,1 Fiscal effort 2015 (A) 2016 (f) 2017 (f) 2,9 Deficit 2017 In the absence of stimulus measures, the government would have reached the deficit target in 2015 In the short term, the fiscal impetus contributed about half a percentage point to growth In the long run, the costs may be significant: the overshoot is likely to increase the risk premium by about 25 bps relative to a scenario in which the commitments had been met 25

26 Economic Outlook Spain Conclusions

27 The global economic scenario has improved in the past three months, but growth is still weak, and vulnerable to several risks In Spain, data on activity lend an upward bias to our growth forecast for 2016, while increased uncertainty gives a downward bias for 2017 Uncertainties make it more necessary to push for an ambitious programme of reforms in Europe and Spain 27

28 Economic Outlook Spain June The European and Spanish Economic Outlook: A Less Cloudy Global Scenario? Rafael Doménech BBVA Financial Institutions Conference

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