QUAR. November 2018 SPANISH ECONOMY REPORT MINISTERIO DE ECONOMÍA Y EMPRESA GOBIERNO DE ESPAÑA

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1 QUAR November SPANISH ECONOMY REPORT GOBIERNO DE ESPAÑA MINISTERIO DE ECONOMÍA Y EMPRESA

2 The Spanish Economy: recent developments and prospects: November Elaboración y coordinación: Dirección General de Análisis Macroeconómico Madrid: Ministerio de Economía y Empresa, Centro de Publicaciones, V; 26 cm. 1. España-Situación económica I. España. Subdirección General de Coyuntura y Previsiones Económicas II. España. Ministerio de Economía y Empresa. Centro de Publicaciones 338.2(46) NIPO: e-nipo: DEPÓSITO LEGAL: M Elaboración y coordinación: Secretaría de Estado de Economía y Apoyo a la Empresa Dirección General de Análisis Macroeconómico Subdirección General de Coyuntura y Previsiones Económicas Impresión: Centro de impresión digital y/ diseño. Ministerio de Economía y Empresa.

3 RECENT EVOLUTION OF THE ECONOMIC INDICATORS Financial markets The financial markets evolution in November was conditioned by the uncertainty regarding the Italian budget and the Brexit negotiations, although it moderated towards the end of the month, when a preliminary agreement on the Brexit was reached between the United Kingdom and the European Union (EU), and a rapprochement of views regarding the Italian budget took place within the EU framework. In a context of lower trade tensions and lower oil prices, public debt yields fell, most stock indices rose and the euro appreciated slightly against the dollar. The Fed maintains the interest rates and continues with the progressive reduction of its balance sheet The Federal Open Market Committee (FOMC) of the Federal Reserve (Fed), in its two day meeting held on 7 th and 8 th November, decided to maintain the Federal Funds interest rates within the target range of 2.%-2.25%. Likewise, the FOMC decided to continue with the progressive reduction of its balance sheet, so the amount of monthly maturities exceeding 5 billion dollars will be reinvested (3 billion in bonds and 2 billion in assets backed by mortgages). In the statement, the FOMC highlighted that the labour market has continued to strengthen, the economic activity has continued to grow at a solid pace and inflation remains close to the 2% target. With regard to the future path of interest rates, the FOMC foresees gradual increases for the period between 219 and 22 and, possibly, a new rate rise at the next meeting to be held in December. The 12-month Euribor continues recording negative values and registers a slight rise In the interbank market of the Eurozone, longer-term interest rates increased slightly during the last week of November. Thus, on 3 rd December, the one, six and twelve-month Euribor stood at -.368%, -.248% and -.143%, respectively, versus the -.369%, -.259% and -.149% recorded at the end of October. The slight increase of the 12-month Euribor between the end of October and the beginning of December is due to the rise in risk premiums required in the market (the Euribor-OIS differential rose one b.p.), while the OIS remained stable. Public debt yields decrease across the board In the secondary public debt market, the uncertainty regarding the Italian budget and the Brexit negotiations boosted the yields of the peripheral European public debt upwards during the first three weeks of November. However, towards the end of the month, the yields edged downwards, following the preliminary agreement on the Brexit and the rapprochement of views regarding the Italian budget. Thus, the 1-year Spanish bond yield stood at 1.5% on 3 rd December, 8 b.p. below the figure recorded on 31 st October, and the German bond yield fell by 9 b.p., down to.3%, so the differential against the German bond (risk premium) remains stable at 12 b.p. (119 b.p. at the end of October). On the other hand, the Spain-Italy differential stood at -122 b.p. on 3 rd December, compared to the -189 b.p. registered on 31 st October. The fall in yields

4 4 Ministry of Economy and Business / Spanish Economy Report / November in Italy (-32 b.p.) in this period as a result of the rapprochement of views with the European Commission regarding the budget should be noted. In the United States, the 1-year bond yield fell by 16 b.p. in the period, standing at 2.99% on 3 rd December. Countries T 1. Public debt yields and differentials (in % and basis points) Yields (%) Differentials with Germany (basis points) Dec Oct Dec-3-18 Variation in spreads Dec Oct Dec-3-18 Variation in spreads (1) (2) (3) Period (3)-(2) Annual (3)-(1) (4) (5) (6) Period (6)-(5) Annual (6)-(4) Germany Holland Austria Finland France Belgium Ireland Spain Portugal Italy Greece Source: Financial Times. The Spanish Treasury reduces by 5 billion the net issuance of public debt foreseen for this year The Spanish public Treasury will reduce by 5 billion the volume of net issuance expected for, reaching 35 billion, compared to the 4 billion initially established. The good financing conditions, as well as the positive evolution of revenues, allowed cutting the issuance programme. In comparison to 217, the net financing needs of the Treasury have been reduced by 22%. The gross emission forecast for the year as a whole also fell by 6.5 billion, reaching billion, the lowest figure since 212. Most stock indices increase In the stock markets, the main indices rose at the beginning of November driven by business results. However, during the weeks in the middle of the month, the situation in Italy and the uncertainty regarding Brexit, increased volatility and risk aversion, causing indices to drop across the board. Towards the end of the month, indices edged upwards, as uncertainty in Europe eased, so most markets registered gains in the period between 31 st October and 3 rd December. In the European market, the Eurostoxx 5 index rose by.5% in that period. In the Spanish market, the IBEX 35 registered a 3.2% increase, standing at 9,179.6 points on 3 rd December, and in the rest of European markets the behaviour was mixed: the Italian FTSE MIB and the German DAX registered increases (3.% and.2%, respectively) and the FTSE 1 in the United Kingdom and the CAC 4 in Paris recorded falls (-.9% and -.8%, respectively). In the US market, the S&P 5 index rose by 2.9% in the analysed period, so the annual profit stood at 4.4%.

5 Ministry of Economy and Business / Spanish Economy Report / November INTEREST RATES G1. MONETARY AND FINANCIAL INDICATORS (1) 12 EURO EXCHANGE RATE January 29 = 1 MADRID STOCK EXCHANGE 31/12/85 = Dollar/Euro 75 Intervention rate 12 month Euribor rate Yen/Euro -1 1 year government bond yield (1) Daily data. Source: ECB, Banco de España and Bolsa de Madrid. T 2. International stock exchange Level % Variation Countries Index Nov-3-18 Oct Dec Germany DAX 11, France CAC 4 5, Italy FTSE MIB 19, Spain IBEX 35 9, Eurozone EUROSTOXX 5 3, United Kingdom FTSE 1 7, United States S&P 5 2, Japan NIKKEI , China SHANGHAI COMP 2, Mexico IPC 42, Brazil BOVESPA 89, Argentina MERVAL 31, Source: Bolsa de Madrid, Infobolsa, Stoxx and Financial Times. The euro appreciates slightly against the dollar With respect to the currency market, the lower expectations of an increase in interest rates in the United States have appreciated the euro exchange rate against the dollar at the end of November. Thus, in the period between late October and early December, the euro appreciated by.1% against the dollar,.4% against the yen and.3% against the pound, trading at dollars, yen and.8915 pounds by the end of the 3 rd December session. In the same period, the euro depreciated by.5% in nominal effective terms vis-à-vis the group of industrialised countries. The M3 broad monetary aggregate rises by 3.9% in October, three tenths more than in September,... The European Central Bank published the evolution of the monetary and credit aggregates in the Eurozone for October. The M3 broad aggregate rose by 3.9% y-o-y, three tenths more than the figure registered in the previous month. This evolution is due to the lower decrease in

6 6 Ministry of Economy and Business / Spanish Economy Report / November marketable instruments and other short-term deposits (-4.8% and -1.%, respectively, in comparison to the -7.7% and -1.4% registered in September), while cash in circulation and overnight deposits have maintained the growth rate (4.1% and 7.3%, respectively). Monetary aggregates T 3. Eurozone monetary aggregates October Balance (Billion ) % Year-on-year variation September August October 1. Currency in circulation 1, Overnight deposits 7, M1 (= 1 + 2) 8, Other short-term deposits (= ) 3, Term deposits up to two years 1, Deposits redeemable at notice up to three months 2, M2 (= M1 + 3) 11, Marketable instruments (= ) Repurchase agreements Money market funds shares/units Securities other than shares up to two years M3 (= M2 + 4) 12, Source: European Central Bank. and financing to the private sector in the Eurozone maintains the growth rate at 3% On the other hand, the main counterpart to M3, the financing to the private sector in the Eurozone, increased by 3% in October, as in the previous three months. This evolution is due to the fact that the acceleration of securities other than shares (7.2%, in comparison to the 5.9% registered in the previous month) offset the slight moderation in the loans growth (2.8% compared to the 2.9% recorded in the previous month) and the biggest decrease in shares and other equity (-1.5%, % in comparison to the -1.1% registered in the previous month). Within the loans, those granted to households increased by 3.2%, one tenth more than in the previous month, and those granted to non-financial corporations rose by 2.8%, four tenths less than in September. T 4. Financing of private sector in the Eurozone (1) October Balance (Billion ) August % Year-on-year variation September October Credit to the private sector 13, Loans 11, Households 5, House purchases 4, Consumer credit Other lending Non-financial corporations 4, Insurance companies & pension funds Other financial intermediaries Securities other than shares 1, Shares and other equities (1) Assets of the Monetary Financial Institutions (MFI). Source: European Central Bank.

7 Ministry of Economy and Business / Spanish Economy Report / November 7 Financing received by households in Spain increases in October for the fifth consecutive month The stock of financing to the non-financial private sector in Spain rose by.3% y-o-y in October, two tenths more than in September (.1%). Financing received by firms increased by.2%, compared to the.3% decrease registered in the previous month, due to the lower fall recorded by bank loans and foreign loans (-.5% and-1.1%, respectively, versus -1% and -1.9% in September) and the slight acceleration of securities other than shares (two tenths, up to 8.6%). On the other hand, financing received by households increased by.4% in October, two tenths less than in September, due to the lower growth rate of bank loans for purposes other than housing (6.2%, compared to the 7.2% registered in the previous month), while bank loans for housing declined by 1.5%, the drop rate being similar to that of September (-1.6%). T 5. Financing of non-financial sectors residents in Spain October % Year-on-year variation Balance (Billion ) August September October Non-financial corporations and Households 1, Non-financial corporations Bank loans Securities (1) External loans Households Bank loans. Housing Bank loans. Other General Government Total financing (1) Other than shares. Source: Banco de España. The banks NPL ratio is at record lows since 211 According to the data published by the Bank of Spain (BoS), the NPL granted to households and companies by financial institutions operating in Spain fell down to 6.18% in September, 2.2 points lower than that of a year before (8.33%) and the lowest figure reached since March 211, when it stood at 6.11%. This rate is obtained by dividing the balance of doubtful loans by the total volume of loans granted by banking entities to companies and households. The balance of doubtful loans reached 74.9 billion in September, which represents a decrease of 29.1 billion in comparison to a year earlier (-27.96%) and 1.7 billion compared to last August. On the other hand, the volume of loans that banks, building societies and cooperatives have granted to their customers stood at 1.2 trillion in September, which represents a decrease of 35.7 billion compared to a year earlier (-2.86% ) and an increase of 4.4 billion compared to August. New loan and credit operations to Spanish firms rebound in October The total amount of new loan and credit operations to households and non-financial corporations rose by 17.% y-o-y in October, 1.9 points more than in September. This acceleration is due to the greater growth of loans granted to non-financial corporations, 21.5%

8 8 Ministry of Economy and Business / Spanish Economy Report / November y-o-y, 16.5 points more than in September, while loans granted to households moderated the growth rate by more than eight points, to 2.6%. Loans to SMEs (using as a proxy for these credits those under one million euros) accelerated almost ten points, reaching a rate of 12.8%, and those exceeding one million euros rebounded up to 36.% (7.5 % in September). In order to facilitate the analysis, given the high volatility of these series, annual averages were calculated taking into account the last twelve months. Thus, the amount of new loan and credit operations to households increased by 15.7% y-o-y in the last twelve months up to October, compared to the 17.2% recorded in the previous month. This evolution is due to the slowdown of loans for other purposes, 9.4 points down to 1.2%, partially offset by the greater growth of loans for housing (.8 points, up to 14.8%) and consumption (.5 points, up to 2.4%). The amount of new loan and credit operations to SMEs rose by 7.% y-o-y, one tenth more than in the previous month, and the amount of new operations exceeding one million euros increased by 11.1%, a rate 2.6 points higher than that of September. T 6. New loan and credit operations to households and non-financial corporations (1) Balance October (Millions ) August % Year-on-year variation September October TOTAL 462, Loan and credit operations to households 98, House purchase 43, Consumer credit 34, Other lending 2, Loan and credit operations to non-financial corporations 364, Up to 1 million euros 193, Above 1 million euros 17, (1) Accumulated data for the last 12 months. Source: Banco de España. Spanish economy Demand and production In line with the Government's forecasts, the OECD foresees a 2.6% growth for Spain in,... In its November update of the Economic Outlook report, the OECD forecasts a 2.6% growth in and 2.2% in 219 for Spain, in line with the Government's forecasts. For 22, it foresees a slight growth moderation, up to 1.9%. Domestic demand will continue to be the main growth driver, registering rates of 3.2% in and 2.3% in 219, and moderating four tenths by 22, to 1.9%. Among the domestic demand components the OECD expects private consumption to remain robust, driven by a strong job creation and favourable financial conditions. Regarding investment, it expects it to grow above 6% this year, driven by the reduced financing costs and the improvement of the profit margin, a growth that would moderate in 219 and 22. With regards to the foreign sector, the OECD estimates a negative contribution of the net external demand to growth in (-.5 points) and null in 219 and 22.

9 Ministry of Economy and Business / Spanish Economy Report / November 9...similar to the one estimated by the IMF On the other hand, the International Monetary Fund (IMF) forecasts a real GDP growth for the Spanish economy for this year of 2.5%, extending the expansionary trend the following two years, although at a more moderate pace, with rates of 2.2% and 1.9%, respectively. The growth composition is similar to that forecast by the OECD. By demand components, it foresees a private consumption growth reaching 2.4% in, which would moderate in the following two years. Gross fixed capital formation is expected to increase by 5.8% in and 3.8% in 219. On the other hand, external balance would detract half a point from the GDP growth in and one tenth in 219, and would contribute two tenths in and by the Funcas Panel The Forecast Panel for the Spanish economy prepared by the Consenso de la Fundación de las Cajas de Ahorro (Funcas) for November, places the real GDP growth of Spain for and 219 at 2.6% and 2.2%, respectively. These forecasts are aligned with those of the main international institutions and those of the Government. Regarding the composition, domestic demand would contribute by 2.9 points to the GDP growth in and by 2.3 points in 219, while the net external demand would subtract.3 points this year and.1 the next. According to domestic demand components, the growth forecast of household consumption for this year and the next is maintained at 2.3% and 1.9%, and the public consumption forecast is revised upwards to approximately 2% for both years. On the other hand, the projected growth for gross fixed capital formation is revised upwards by one point in and one tenth in 219, up to 5.6% and 4.4%, respectively. Indicators of global activity extend the dynamism in the fourth quarter of the year Available short-term indicators related to the fourth quarter of the year confirm the strong and sustained growth of the Spanish economy. Among the qualitative indicators, the Economic Sentiment Indicator (ESI), published by the European Commission, increased six tenths in the two month period from October to November compared to the third quarter, reaching 17.3 ( average = 1). In the same vein, the global activity composite PMI for Spain increased 1.1 points in this two-month period in comparison to the period between July and September, up to 53.8, standing almost one point above that of the Eurozone (52.9), as a result of the greater activity growth in the services sector. Private consumption remains strong With regard to private consumption, the signals from available indicators point to a continuity of the expansionary trend in recent months. The rebound in October of retail sales stands out, as its 3% y-o-y growth, with deflated and work calendar adjusted data, is the highest since January 217, due to the significant increase of the non-food group (4.6%) and, to a lesser extent, of the food component (1.9%). Likewise, domestic large firms sales of consumer goods, with deflated, fixed-sample and calendar and seasonally adjusted data, grew by 3% y-o-y in September, one tenth more in comparison to the figure registered in August and the highest of the last five months. On the other hand, passenger car registrations, according to the figures provided by ANFAC (Spanish Association of Vehicles Manufacturers), rose by 8% y-o-y in the first eleven months of the year, a rate two tenths higher than the one registered in the same period of 217.

10 1 Ministry of Economy and Business / Spanish Economy Report / November Among the qualitative indicators related to private consumption, the consumer confidence indicator, published by the European Commission, shows favourable signs in November, registering a nine tenths increase compared to the previous month. 8 G 2. ACTIVITY INDICATORS y-on-y growth rate in % 12 G 3. CONSUMPTION INDICATORS y-on-y growth rate in % Composite Activity Indicator SS covered workers Large Firms Sales Retail sales Large firms sales: consumption goods Sources: AEAT, MTMS and MECE. Sources: INE and AEAT. Equipment investment indicators continue the dynamism The available short-term indicators related to investment in equipment continue to show strong growth rates. Thus, domestic large firms sales of equipment and software, deflated, and with fixed-sample and seasonal and calendar adjusted data, increased by 4% y-o-y in the third quarter, more than double the figure of the second quarter (1.8%). Regarding the indicators of the fourth quarter, truck registrations, according to figures provided by the General Direction of Traffic, increased by 5.2% y-o-y in October, in comparison to the 5.6% decrease recorded in the previous month. With regard to the qualitative information, according to the Business Tendency Survey, the Industry Climate Indicator for investment goods, with data adjusted for seasonal variations, improved in November for the third consecutive month, registering a balance of 3.8 points, six tenths higher than the figure registered in the previous month, mainly due to the strong advance in production expectations. According to the Central Balance Sheet. the profitability ratios of non-financial companies improve According to the Quarterly Central Balance Sheet data published by the Bank of Spain, the nominal gross value added (GVA) at factor cost of non-financial companies included in the sample increased by 3.3% y-o-y in the period between January and September. This rate is significantly higher than the figure recorded in the same period of 217 (.5%). By sectors, the GVA grew in general terms in all activity branches, the strong dynamism in the trade and hospitality and energy sectors standing out, with advances of 6% and 4%, respectively. Staff expenses increased by 3.2% y-o-y, seven tenths more than in the first nine months of last year, resulting in a rebound of the gross economic result (GER) of 3.5%, compared to the 1.4% decrease registered in the same period of 217. Despite the lower reduction in financial expenses and the slowdown in financial income, the GER rebound resulted in a growth of the net ordinary result, exceeding 11%, almost double that of the first three quarters of 217.

11 Ministry of Economy and Business / Spanish Economy Report / November 11 The ordinary return on net assets for all the companies in the sample, stood at 4.7% in the first nine months of this year, two tenths higher compared to the figure registered a year earlier. On the other hand, the ratio that measures the financial cost (financial expenses over liabilities) fell one tenth, down to 2.2%, favoured by the lower financing costs, so the differential between them rose three tenths, up to 2.5 percentage points. The expansionary trend of housing investment continues Regarding investment in housing, according to the Statistics on Transfers of Property Rights, the number of home sales accelerated in October by more than six points, up to 15.8% y-o-y, so that the first ten months of the year ended with an average annual increase of 11.4%. The biggest boost in October was due to the used housing purchases, which grew by 15.9%, 6.3 points more than in the previous month, and new housing purchases, which rose by 15.3%, five points and half more than in September. In line with the behaviour of the housing demand, the number of mortgages on housing in September grew more sharply than in the previous month, 9.5% y-o-y, 2.7 points more than in August, ending the third quarter with an average annual growth of 1.2% and an increase in borrowed capital of 16%. On the other hand, according to the Ministry of Public Works, statistics of the appraised value of housing, the average price of unsubsidized housing per square meter registered a y-o-y increase of 3.2% in the third quarter of, six tenths less than the figure recorded in the previous quarter. Second-hand housing prices grew at a similar rate of 3.3% (3.9% in the second quarter), while those of new housing accelerated almost one point, up to 1.7%. The industrial production index increases in October due to the generalised improvement of its components From the supply point of view, amongst the industrial activity indicators, the Industrial Production Index (IPI), with calendar adjusted data, rose by 1% in y-o-y terms in October, compared to a decrease of.7% recorded in the previous month. By destination groups, the IPI improvement was due to the more favourable performance of all its components, except energy, which fell by.9%, after the stabilisation registered in the previous month. In particular, the recovery of equipment goods stands out, which rebounded by 3.8%, after the 1.4% decline registered in the previous month, as well as the advances in intermediate and consumer goods, which increased by.4% and.6%, respectively, after the.9% and.3% falls recorded in the previous month. On the other hand, the Industry New Orders Index (INOI) and the Industry Turnover Index (ITI) registered a less favourable trend in September. The former registered y-o-y rates of -.7%, and the latter of 2.6%, with calendar adjusted data (7.8% and 6%, respectively, in the previous month), as a consequence of the worse behaviour of all its components. However, in the first nine months of the year the average annual growth of both indices maintained high rates, of 5.2% for the ITI and for 4.4% for the INOI. However, the qualitative indicators of the industry activity have registered a positive evolution. According to Markit, the Manufacturing PMI for Spain registered a level of 52.6 in November, eight tenths higher compared to the figure recorded in the previous month, as a result of the acceleration of production and new orders, together with the increase in employment. Likewise, the Industrial Confidence indicator, published by the European Commission, increased seven tenths in November, due to the more favourable valuation of the production expectations components and order portfolio.

12 12 Ministry of Economy and Business / Spanish Economy Report / November G 4. INDUSTRY: PRODUCTION AND CONFIDENCE y-on-y growth rate in % and balances G 5. TOURIST SECTOR INDICATORS y-on-y growth rate in % IPI ICI (right scale) Entry of foreign tourists Hotel stays Services Turnover Sources: INE and European Commission. Source: INE. The activity in the construction sector maintains the expansionary trend In the construction sector, the Production Index in the Construction Industry (PICI), published by Eurostat, deflated and with calendar adjusted data, rebounded by 6.1% in September, after the 2.2% fall recorded in the previous month, due to the strong increase in the building component (8.7%), while the civil works component fell by 5.7%. With regards to construction activity leading indicators, according to construction new permits, floorage approvals in new construction, continued to grow at a strong pace in September, registering a y-o-y variation rate of 17.4% and accumulating an average annual advance of 25.8% in the first nine months of the year, almost five points higher than the figure registered in the same period of 217. Confidence in the sector, according to the European Commission indicator, recorded an increase of more than nine points in the period from October to November, compared to the third quarter, due to the improvement of its two components, the order portfolio and expectations related to employment in the sector. Activity in the services sector continues to show a solid growth With regards to the activity in the services sector, the Services Sector Turnover Index (SSTI), with work calendar adjusted data, accelerated one point in the third quarter, registering a y-o-y rate of 6.7%, where the trade strength stood out, as it increased by 7.6%. Among the qualitative indicators, the Services PMI stood at 54 in November, a high level due to the strong domestic demand. In spite of the commercial activity stability, the new orders grew sharply and continued creating employment in the sector. The tourism sector indicators gain momentum in October Among the tourism indicators, the arrival of 7.6 million international tourists to Spain in October stands out, a figure 5% higher than the one recorded a year earlier, according to the Survey of Tourist Movements on Border, a rate 4.5 points higher than the figure registered in September. In cumulative terms for the first ten months of, the number of tourists exceeds 73.8 million,.5% more than in the same period last year. Likewise, the total expenditure by

13 Ministry of Economy and Business / Spanish Economy Report / November 13 tourists who visited Spain in that month exceeded eight billion euros, representing a y-o-y increase of 4.6%, 3.9 points higher than the previous month, and the average daily cost grew by 6%, twice as much as in September, to 152 euros. In the same vein, air passenger traffic accelerated almost two points in October up to a y-o-y rate of 6.5%, the highest of the last seven months, as a result of the greater growth rate of both domestic and international traffic. Similarly, overnight stays in hotels recorded a y-o-y rate of.8% in October, after the falls recorded in the previous four months. This improvement is basically due to the recovery of overnight stays by foreigners. Prices Inflation falls six tenths in November, down to 1.7%, due to energy Inflation, measured by the general Consumer Price Index (CPI), fell by six tenths in November, reaching 1.7% y-o-y, a rate identical to the flash estimate issued by the INE at the end of last month, mainly due to the more contained growth in energy prices. Thus, inflation stands below 2% for the first time in seven months, mainly due to the more contained advance in energy prices, whose growth rate moderated intensely to 6.4%. This energy prices growth rate is more than four points lower than that registered in October, mainly due to the slowdown of fuels and lubricant prices, by 5.6 points, down to 7.6%, in a context of a marked slowdown of the Brent barrel price in euros. Electricity prices also reduced their growth rate, by three and a half points, to.3%, an evolution that could be explained by the more moderate rise in international price of coal, gas and CO 2 emission rights. For its part, non-processed food prices maintained a y-o-y rate of 3.5%, in which the rebound in the fresh vegetables and pulses prices should be highlighted as they increased at a rate of 6.5%, higher by almost four points than the figure registered in the previous month, while those of fresh fruits slowed down by two and a half points, to 4.5%. 4 G 6. HEADLINE INFLATION y-o-y growth rate (%) and contributions (pp) Headline inflation 2, G 7. CORE INFLATION y-o-y growth rate (%) and contributions (pp) Core inflation Processed food 2 Core inflation Energy products Unprocessed food 1,5 1, Services Non-energy industrial,5, Source: own elaboration from INE. -, Source: own elaboration from INE.

14 14 Ministry of Economy and Business / Spanish Economy Report / November Core inflation remains close to 1% Core inflation, which excludes the most volatile elements from the CPI (non-processed food and energy products), remained at.9% y-o-y, one tenth below the figure recorded in October. The slight reduction of core inflation was due both to the services component, whose prices moderated the growth rate by one tenth, to 1.5%, mainly due to the fall in the prices of passenger air transport and tourist packages, as well as to processed food, beverages and tobacco, whose prices increased by.6%, four tenths less than in October. The fall in the prices of olive oil stood out. For its part, the prices of non-energy industrial goods (BINE) remained virtually stable, registering a rate of.1% y-o-y. Inflation in Spain stands below that of the Eurozone In harmonised terms, the y-o-y rate of the Spanish CPI also fell six tenths, down to 1.7%. The rate published by Eurostat for the Eurozone as a whole stood at 1.9% in that month, resulting in a general inflation differential of -.2 percentage points. For its part, the Spanish harmonised core inflation stood at 1% y-o-y, in November one tenth lower than that of October, resulting in a differential of -.1 p.p. compared to the one registered by the Eurozone. 4 G 8. HEADLINE HICP y-o-y growth rate (%) and differential (pp) Spain 2 G 9. CORE HICP y-o-y growth rate (%) and differential (pp) Euro area 2 Differential 1-1 Spain Euro area Differential Sources: INE and Eurostat. Source: own elaboration from INE and Eurostat. Industrial prices grow at a 4.5% y-o-y rate The Producer Price Index (PPI) rose by 4.5% y-o-y in October, tow tenths less than in the previous month, mainly due to the slowdown of production, transport and distribution of electricity prices, almost nine points to 7.1%. On the other hand, the non-energy PPI y-o-y rate rose one tenth, up to 1%, a slight acceleration that is mainly due to the lower decrease of prices for meat processing and preservation and preparation of meat products (it falls by almost one point, down to -.8%).

15 Ministry of Economy and Business / Spanish Economy Report / November 15 Labour Market The number of Social Security covered workers maintains a y-o-y growth rate close to 3% In November, the average number of registrations in the total Social Security System reached the figure of 18.9 million. This represents a m-o-m decrease of 47,449 people, the highest in a month of November since 214. With seasonally adjusted data by the Ministry of Employment, Migrations and Social Security, Social Security covered workers in November rose by 12,82 people,.1% m-o-m, versus the.6% growth recorded in the previous month. In y-o-y terms, and with unadjusted data, the number of Social Security covered workers increased by 527,868 people, what represents a rate of 2.9%, similar to the one registered in October (3.1%). This evolution is explained by the private sector, where the number of Social Security covered workers moderated the y-o-y growth rate two tenths, to 2.9%, and to a lesser extent by the public sector, where it grew by 2.9%, one tenth less than in October, mainly due to the regional administration (3.9%, three tenths less). By activity sections, this evolution in job creation is largely due to the decreased experienced by employment in agriculture,.4% y-o-y, resuming the path of falls started at the end of 217 and interrupted in the previous month (1.2%), as well as the lower growth in manufacturing and construction. In manufacturing, the number of Social Security covered workers rose by 2.1%, a rate half a point lower than that recorded in October and the lowest since April 215, while the growth rate moderated in the construction sector by eight tenths, although it continues to be high, reaching 6.1%. On the other hand, the number of Social Security covered workers in the public administration section increased the growth rate by three tenths, up to.4%, and one tenth in education, up to 7.4%. G 1. SOCIAL SECURITY-COVERED WORKERS % change 6,6 4 G 11. REGISTERED UNEMPLOYMENT % change Original (% y-o-y, lhs),5 Seasonally adjusted (% q-o-q, rhs) 4,4, 2,2-4 -,5 Original (% y-o-y, lhs), -8-1, -2 Seasonally adjusted (% m-o-m, rhs) , ,5 Source: Social Security. Source: SEPE. According to the professional situation, wage employment grew by 3.2%, two tenths less than in the previous month, while self-employment remained at 1.3%. Among employees, the number of Social Security covered workers with open-ended contracts increased by 5.6%, as in October, which represents the highest rate since December 27, while the number of Social

16 16 Ministry of Economy and Business / Spanish Economy Report / November Security covered workers with a temporary contract fell for the first time since October 213, by.2% By origin, foreigners Social Security covered workers continued to increase at rates higher than those of domestic Social Security covered workers, 7.9% and 2.3%, respectively (8.6% and 2.4% in October). Registered unemployment falls by 6.4% y-o-y Registered unemployment fell in m-o-m terms by 1,836 people at the end of November, compared to the increase of 7,255 registered in the same month last year. As a result, the total number of registered unemployed is close to 3.3 million. The unemployment evolution in November partly had a seasonal nature, just as the number of Social Security covered workers. In fact, with seasonally adjusted data, registered unemployment decreased by 26,258 people,.8% m-o-m, a rate identical to the figure registered in the previous month. In y-o-y terms, and with unadjusted data, unemployment decreased by 221,414 people in November, which represents a rate of -6.4%, compared to the -6.1% registered in the previous month. The largest unemployment decrease is due to the greater fall in the services sector and in the group without previous employment, which more than offset the smaller reduction in the other sectors. The agreed wage increase in collective bargaining stands at 1.7% for The average agreed wage rise stood at 1.7% on average for, for workers covered by collective agreements with effects in and registered up to November (8.5 million, equivalent to 53% of the total 16.2 million employees according to the LFS in the first three quarters of the year), just as the increase published with information available up to October. This rise is three tenths higher than that registered last year, with information up to December 217, and two tenths higher than that resulting from using all the information currently available. G 12. AGREED WAGES % change G 13. AGREED WAGES, BY SECTOR % change 2, 1,5 1, Total collective agreements Signed in previous years Signed in current year 2, 1,5 1, Agriculture Industry Construction Services ,5,5 1 1, , Source: MTMS. (Last month available data for and December data for rest of years). Source: MTMS. (Last month available data for and December data for rest of years).

17 Ministry of Economy and Business / Spanish Economy Report / November 17 Among the agreements signed in (the rest are agreements effective in, but signed in previous years), which affect 33.8% of workers covered by agreements, the wage increase stands at 2% up to November, one tenth higher compared to the figure registered in the previous month. The number of workers affected by opt-outs of the agreement stood at 19,162 with cumulative data up to November, 12.2% less than in the same period of the previous year and the lowest level of the available series, which begins in 212. This is consistent with a reduction of the reliance on this mechanism as the economic recovery progresses. In terms of workers affected, 99.5% of opt-outs were reached by agreement, and 74.9% took place in SMEs. External sector The Spanish economy continues generating net lending vis a vis the rest of the world According to the Balance of Payments data, in September, the Spanish economy generated net lending to the rest of the world for the fifth consecutive month, amounting to 1.2 billion, a figure lower compared to the net lending of 2. billion recorded a year earlier. The lower external balance is explained by the reduction in the surplus of the current account balance, which reached 899 million in September, 967 million lower than the amount registered in the same month of 217 and partially offset by the increase of the capital account surplus, by 187 million up to 327 million. The lower current surplus is due, in turn, to the lower balance of goods and services (it went from 2.6 billion in September 217 to 1.6 in the same month of this year) while the deficit of primary and secondary fell by 14 million, reaching 745 million. The trade deficit rises in September According to Customs data, the trade balance recorded a deficit of 3.3 billion in September, above the deficit of 2.1 billion registered in the same period of 217. This worsening in the trade balance was due to the increase of the non-energy component deficit, 814 million, up to 1.2 billion, and, to a lesser extent, the energy component, 335 million up to 2.1 billion. 3 G 14. TRADE BALANCE accumulated 12 months, billion euros Total 18 G 15. FOREIGN TRADE, VOLUME index 25=1, s.a. 15 Energy Non-energy Exports Imports Sources: DA and SGCPE Sources: DA and SGCPE.

18 18 Ministry of Economy and Business / Spanish Economy Report / November In cumulative terms for the last twelve months, the trade balance recorded a deficit of 3.4 billion up to September, 26.1% higher than the figure recorded a year earlier. This evolution of the trade balance is explained both by the energy component deficit increase, of 12.7%, and by the decrease in the non-energy balance, which went from recording a surplus of 1.3 billion in cumulative terms for the last twelve months up to September 217 to a deficit of 1.7 billion in the same period of this year. Real exports of goods increase in the third quarter According to Customs figures, goods exports decreased in September by 4.6% y-o-y, and their prices, approximated by unit value indices, rose by 2.8% (4.5% in August), resulting in a 7.3% decrease in real terms, after the 3% rise registered in the previous month. Real exports of goods grew by.5% in the third quarter, a growth similar to that registered in the second quarter (.6%). The analysis by product groups in real terms and in y-o-y rates, registered falls in all categories. Exports of food and non-food consumer goods, and energy and non-energy intermediate goods, went from registering positive rates in August (4.9%, 1.3%, 23.5% and 5.6%, respectively) to decreases of 4.3%, 14.5%, 2.5% and 4.5%. On the other hand, capital goods moderated their decline by eleven percentage points, to 9.7%. By geographical areas, exports in volume to the European Union decreased by 6.9% y-o-y in September, following the 8.6% increase registered in the previous month, and exports outside the Union fell by 8%, a drop 2.2 points higher than the one registered in the previous month....while real imports decrease Goods imports increased by.3% y-o-y in nominal terms in September, after the 5.8% registered in the previous month, and their prices rose by 6.7% (6.3% in August). This evolution is mainly due to the growth in the prices of energy goods (23.6) and, to a lesser extent, of other products (4.4%). As a result, imports in real terms, fell by 6% y-o-y, after the.5% fall recorded in the previous month. Real imports of goods decreased by.6% in the third quarter, following the 4.2% rise registered in the second quarter. The analysis by products in real terms and in y-o-y rates shows generalised falls in all groups. Imports of capital goods slowed down by 14.6 points to.2%, and those of food consumer goods and intermediate energy goods registered rates of -3.3% and -6.3%, respectively, after the increases registered in the previous month (3.6% and 1.4%). On the other hand, imports of non-food consumer goods and non-energy intermediate goods, accentuated the fall 1.7 and 2.3 points, respectively, to 3.6% and 8.4%. By geographical areas and in real terms, imports from the European Union fell by 5.6% y-o-y in September in comparison to the 1.6% rise registered in the previous month, and real imports from the rest of the world decreased by 6.5% (-2.6% in August). The "momentum" (change during the last three months in comparison to the previous three months) of exports, in real terms, rose slightly in September (.1%) for the third consecutive month, due to the positive contribution of the EU countries and non-eu members of the OECD. By products, the positive contribution of non-energy intermediate goods and, to a lesser extent, of energy goods stands out. The "momentum" of imports was negative in September (-1.7%), after four months registering positive rates and the negative contribution of EU countries and non-

19 Ministry of Economy and Business / Spanish Economy Report / November 19 OECD countries should be noted. By products, the negative contribution of non-food consumer goods and non-energy intermediate goods stands out. The financial balance generated net capital outflows in September According to the Balance of Payments, in September the financial balance, excluding the Bank of Spain assets, generated net capital outflows of 4.4 billion, versus the net inflows of 12.4 billion recorded a year earlier. This result is explained by the net outflows registered in direct investment ( 1.2 billion), other investments ( 14.3 billion) and financial derivatives ( 267 million), while portfolio investment registered net capital inflows ( 11.3 billion). The assets net variation recorded net capital outflows (investments) amounting to 25.5 billion in September, versus the net outflows of 13.6 billion registered in the same month of 217. On the other hand, the liabilities net variation generated net inflows (investments) of 21.1 billion, in comparison to the net inflows of 26 billion recorded a year earlier. The net debtor position of the Bank of Spain vis-à- vis the Eurosystem increases The net debtor position of the Bank of Spain vis-à- vis the rest of the world rose by 6.1 billion in September, in which the rise of 5.3 billion in the net debtor position vis-à-vis the Eurosystem should be highlighted, while the remaining net assets decreased by 954 million and reserves rose by 167 million. Public Sector On 27 th November, the Ministry of Finance published the data of non-financial transactions of the Central Government, the Regional Governments and the Social Security Funds, in terms of National Accounts and with consolidated data, corresponding to September. The Ministry published as well the State monthly budget execution data corresponding to October, in terms of both National Accounts and Cash. Furthermore, the Ministry of Employment, Migrations and Social Security published the monthly budget execution data of the Social Security, in terms of recognised rights and obligations, corresponding to October. In all cases, the accumulated balance in the period elapsed so far in, as a percentage of GDP, has improved compared to the same period in 217. Likewise, the Bank of Spain (BoS) published the General Government Debt data, following the Excessive Deficit Procedure (EDP) methodology, for September, as well as the Debt data for the State corresponding to October. The Government deficit continues to fall On a consolidated basis, the Central Government, the Regional Governments and the Social Security Funds recorded up to September a deficit, in terms of National Accounts, equivalent to 1.53% of GDP,.51 percentage points (p.p.) less with respect to the same period of the previous year (2.4% of GDP).

20 2 Ministry of Economy and Business / Spanish Economy Report / November C 7. Balance (*) of General Government (GG) non-financial transactions Data accumulated by the end of the period as % of GDP September 217 September Change (pp) GG excluding Local Government (consolidated) National Accounts Central Government Regional Government Social Security Funds STATE October 217 October Change (pp) National Accounts Cash (1) SEGURIDAD SOCIAL Budget Execution (2) (*) Including the net balance of support provided to financial institutions. (1) Includes payments and cash received (from budgetary transactions of both the current exercise and closed exercises) as well as from extra-budgetary transactions. (2) Budget execution in terms of recognised rights and obligations. Sources: IGAE (Ministerio de Hacienda) y Ministerio de Trabajo, Migraciones y Seguridad Social. A primary surplus of 3.2 billion (.26% of GDP) was obtained up to September, compared to the deficit of 2.1 billion registered a year earlier, which represents an improvement of.44 percentage points in the ratio to GDP. The improvement in the General Government balance excluding Local Governments is explained by an increase in resources (6.3% y-o-y) higher than that of uses (4.2%). On the side of non-financial revenue, taxes and social contributions have grown sharply in y-o-y terms, (6.7% and 4.9%, respectively). Among taxes, the evolution of the Personal Income Tax, VAT and Corporate Income Tax mainly stand out. Among the remaining revenue items, the dividends received from the Bank of Spain, ENAIRE and SELAE should be noted, which increased by 264, 293 and 571 million, respectively in comparison to 217. On the side of non-financial expenditure, an increase is observed in virtually all the items, especially in the gross capital formation and in the contribution to the EU budget based on VAT and GNI, which grew by 18.5% and 17.8%, in y-o-y rates, respectively. The net balance of support provided to financial institutions up to September is positive and relatively small ( 33 million), as a result, among other causes, of the lower compensations paid by the BFA. However, the amounts paid by the Deposit Guarantee Fund (DGF) in relation to the Asset Protection Schemes (known in Spanish as EPAs), that are not considered financial aid but affect government expenditure, increase significantly due to the EPAs of the Caja de Ahorros del Mediterráneo (CAM) and Unnim. Expenditure related to contributory pensions continues registering an upward trend (4.7%), due to the rise in the number of pensioners (1.1%) and of the average pension (3.7%), an increase to which the additional increment for pensions included in the State Budget for has contributed. The compensation of employees increased by 2.8% up to September, reflecting the wage increase approved in the State Budget for with retroactive effect both in the State and in the Regional Governments.