QUARTERLY REPORT Perspectives on Global and Spanish Economy Q3-2018

Transcription

1 QUARTERLY REPORT Perspectives on Global and Spanish Economy Q3-218 July 218

2 GLOBAL

3 Economic growth in 218 and forecasts for 219 Robust economic growth, but with downward and less synchronised outlook Real GDP % RUSSIA 219 US MEXICO LATIN AMERICA EURO AREA 1, BRAZIL AFRICA CHINA GLOBAL 218 Downward revision Source: Círculo de Empresarios based on IMF, July 218 3

4 Solid global growth, but gloomy prospects for 219 Countries with growth forecasts of >2% % of total countries in the world as of 218 Countries with growth < 2% Countries with growth >2% 17.7% Real GDP growth forecast % pp 2.4 Downward revision % Advanced Global Emerging Note: the % of countries in recession in 218 stands at 4.2% Source: Círculo de Empresarios based on IMF, July 218 4

5 Global situation In recent months, global risks are on the rise Consolidation of the expansion phase of the economic cycle Trends (+) Trends (-) Loss of momentum in global trade and threat of trade war High global debt Monetary policy normalisation Episodes of volatility Downward trend in unemployment rates Source: Círculo de Empresarios, July 218 Turbulence in emerging economies Impact of inflation on wages 5

6 Timeline of global trade war US trade actions (June 218) Effective date: 1 June 218 US The US imposes tariffs on steel (25%) and aluminium (1%) which affects $46 billion worth of US imports (.2% of its GDP) China Effective date: 6 July 218 $32-34 billion on Chinese technology goods + Threatens tariffs on... China s retaliatory tariffs on imports from US $14-16 billion on Chinese technology goods China Effective date: 6 July 218 $ 3 billion on agricultural products + + Threatens tariffs on... $15 billion on automobiles and auto parts, chemical products, petroleum products, and medical equipment Note: Trump announced that he is ready to impose tariffs on $5 billion of Chinese goods Source: Círculo de Empresarios based on Economic and Security Review Commission, 218 6

7 Trade scenario In 217, the US ran a deficit in the balance of trade for goods & services of 2.9% of its GDP (4.1% of its GDP if only goods) with its trading partners around the world US $2,342 billion (12.1% of GDP) Exports of goods to the US Rest of the world Exports of US goods $1,546 billion (8% of GDP) Countries with which the US runs the biggest trade deficit in its balance of trade for goods in % of GDP.4% of GDP.35% of GDP.33% of GDP Source: Círculo de Empresarios based on United States Census Bureau, 218 7

8 Global debt reaches 318% of global GDP The increasing debt at a faster pace hits a record high of $247 trillion (Q1 218) Global Sectoral Indebtedness $ trillion Global debt % of global GDP Q Q1 23 Q1 28 Q1 213 Q1 218 Q Households Non-financial companies Public sector Financial companies Total global GDP estimated by the IMF for 218: $87.5 trillion Source: Círculo de Empresarios based on IIF & Bloomberg, 218 8

9 Imbalances in Emerging Market Economies (I) 1 2 The tightening of US monetary policy + The trade war started by Trump Destabilising financial effects for Emerging Market Economies (EMEs)* Which has resulted in a stock market correction in emerging markets... MSCI Emerging Markets January 218= Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Emerging Market currencies in 218 Variation between January July (218) * These countries account for 6% of global GDP, and two thirds of global GDP growth since 21 Source: Círculo de Empresarios based on Bloomberg, 218 9

10 Mar- Feb-1 Jan-2 Dec-2 Nov-3 Oct-4 Sep-5 Aug-6 Jul-7 Jun-8 May-9 Apr-1 Mar-11 Feb-12 Jan-13 Dec-13 Nov-14 Oct-15 Sep-16 Aug-17 Mar- Jan-1 Nov-1 Sep-2 Jul-3 May-4 Mar-5 Jan-6 Nov-6 Sep-7 Jul-8 May-9 Mar-1 Jan-11 Nov-11 Sep-12 Jul-13 May-14 Mar-15 Jan-16 Nov-16 Sep-17 Imbalances in Emerging Market Economies (II) Vast proportion of debt held in dollars in EMEs (mainly Mexico, Turkey, and Argentina) EM debt denominated in dollars $ trillion 4 EM debt denominated in dollars, by country $ billion 3 3,5 3 2, Mexico Turkey Argentina 1,5 1,5 1 5 Source: Círculo de Empresarios based on BIS, 218 1

11 In China, the signs of slowdown are accentuated......although data reveals performance was well above the government s target of 6.5% economic growth for 218 China GDP growth % year-on-year Signs of growth deceleration 9.9 Government target: 6.5% - In May, the growth of retail was at its lowest since June Fall of investment in fixed assets due to the negative impact of oil on global demand, the reduction of credit, and the fall of confidence due to the trade war with the US - Industrial production decelerates markedly faster than forecasted Q2 211 Q2 212 Q2 213 Q2 214 Q2 215 Q2 216 Q2 217 Q2 218 Source: Círculo de Empresarios based on OECD,

12 Financial crisis in Argentina: IMF bailout request The IMF agrees to loan $5 billion (7.8% of GDP*) in wake of the Argentine financial crisis to reduce its main imbalances: inflation and deficit. Causes of the financial crisis External factors Falling export revenues due to the severe drought Oil price increase Tightening of US monetary policy (dollar appreciation and interest rates hike) Internal factors High levels of deficit and public debt High inflation rate Argentine pesos per dollar (USD/ARG) IMF bailout Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Lagging economic indicators forecast, 218 Inflation Unemployment Budget deficit 27% 8.5% -5.1% * In cumulative terms with respect to the GDP of 218 in the 3 years in which the loan will be given Source: Círculo de Empresarios based on Bloomberg & IMF,

13 Mexico: Obrador wins the elections Scoring a historic landslide victory (receiving more than double the total of his closest rival who had 22% of the votes) In terms of trade Mexico s exports to US account for 8% of its total exports $314 bn Mexico s trade surplus in its balance of trade for goods: $7.9 billion: (6.2% of GDP) $243 bn Trump's immigration speech and the NAFTA renegotiation may severely harm investor confidence in Mexico Mexico exports to US US exports to Mexico Source: Círculo de Empresarios based on IMF, Bloomberg, & PREP,

14 USA: robust growth Fiscal reform and private consumption boost economic growth Real GDP (%) Forecast Forecast Source: Círculo de Empresarios based on IMF,

15 Saptember 192 May 197 January 191 January 1913 August 1918 January 192 May 1923 October 1926 August 1929 May 1937 February 1945 November 1948 July 1953 August 1957 April 196 December 1969 November 1973 January 198 July 1981 July 199 March 21 December 27 June 29 The current US expansion phase is the 2 nd longest in its history Since the Great Depression, the US has had 14 periods of economic expansion Length of economic expansion in the US Months US economic weight & economic growth % of global GDP & annual change Real GDP Growth (left axis) World GDP weight (right axis) End date of expansion phase Start date of expansion phase Since the recovery in 21, the annual growth rate has been 2.3% Source: Círculo de Empresarios based on J.P. Morgan & NBER,

16 Sep-76 Oct-78 Nov-8 Dec-82 Jan-85 Feb-87 Mar-89 Apr-91 May-93 Jun-95 Jul-97 Aug-99 Sep-1 Oct-3 Nov-5 Dec-7 Jan-1 Feb-12 Mar-14 Apr-16 May-18 Jan- Dec- Nov-1 Oct-2 Sep-3 Aug-4 Jul-5 Jun-6 May-7 Apr-8 Mar-9 Feb-1 Jan-11 Dec-11 Nov-12 Oct-13 Sep-14 Aug-15 Jul-16 Jun-17 May-18 Apr-19 Although some leading indicators point to an unsettling possibility of the economy overheating 1Y/2Y US Treasury spread % Historically, an inverted yield curve has been an indicator that a recession is coming in the next 12 to 24 months Flattening of the yield curve, but continues to remain in positive territory 3bp Probability of recession in the US % (next 12 months) 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % [1-13%] Source: Círculo de Empresarios based on Federal Reserve Bank of New York, and Federal Reserve of St. Louis,

17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Inflation rate hits Fed goal The indicator (core PCE*) that is most often followed by the Fed stands at 2% with an unemployment rate of 4% US inflation indicators Year-on-year change US wage growth & unemployment rate Year-on-year change, % of active population 2,4 2,2 2, 1,8 1,6 1,4 Target ,2 1, 2 Core PCE Core CPI Swap 5y5y * Personal consumption expenditures excluding food and energy Wage growth Unemployment rate Swap 5y5y: Measure of inflation expectations Source: Círculo de Empresarios based on BEA, Focus Economics, & St. Louis Fed,

18 May-7 Nov-7 May-8 Nov-8 May-9 Nov-9 May-1 Nov-1 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 The Fed increases the benchmark interest rate again The Federal Reserve raises rates for the second time this year (218) or the seventh time since the beginning of the monetary policy normalisation Fed benchmark interest rates % A total of four rate hikes are expected to happen throughout all of 218, two are still pending [-.25%] [ %] Central bank account balance $ and (trillion) Gradual reduction in the balance sheet of the Fed 1 1 Fed ECB Source: Círculo de Empresarios based on St. Louis Fed,

19 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 US 1-year Treasury yield climbs toward 3% Evolution of 1-year US bond (%) Causes... 3,2 3, 2,8 1 The core PCE hits 2%, and the unemployment rate and growth are at robust levels 2,6 2,4 2,2 2 Falling demand for US government bonds on the part of China and the Fed 2, US Treasury yield curve* (%) 3 Supply of bonds increases due to Trump s tax reform, with a forecast that deficit widen from 3.9% of GDP in 217 to 4.5% in * July 218 Source: Círculo de Empresarios based on Arcano & CBO, 218 1M 3M 1Y 2Y 3Y 5Y 1Y 2Y 3Y 19

20 US: trade protectionism* From January to May 218, the deficit has widened with both China (+1% year-on-year) and with the EU (+15%) US-China trade of goods $ billion US-EU trade of goods $ billion % of GDP % of GDP Exports US-China Imports US-China Trade deficit Exports Imports Balance * In the last 5 years, global trade has gone from representing 1% of GDP to 6% of the world economy (BlackRock) Source: Círculo de Empresarios based on BBVA Research, US Census, The Economist, Bruegel,218 2

21 Robust growth in the euro area with prospects on the decline in 219 Real GDP growth (%) % 1,8 217 Growth enabling factors Internal demand Employment creation Growth limiting factors 219 Forecast 218 Note: a darker colour represents greater growth Source: Círculo de Empresarios based on IMF, July 218 Forecast Ageing population & pensions Low productivity & debt Euroscepticism

22 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 ECB: end of Quantitative Easing (QE) in December while a stark divergence of the interest rate hikes between the ECB and the Fed is maintained, as observed in the debt issues Yields on 1-year government bonds in advanced economies % ECB net monthly asset purchases 3,5 3, 2,5 2, 1,5 US DE 251 bp 3 bn Until September 218 1,,5 15 bn October-December 218, -,5 bn 219 Japan UK Germany US Source: Círculo de Empresarios based on Bloomberg, 218 Interest rates will remain at their current level until the summer of 219 Mario Draghi 22

23 Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18 Germany: business climate deteriorates Escalating trade tensions with the US take a toll on business owner expectations Ifo Business Climate Index, Germany Germany ZEW Economic Sentiment Index Note: the index value of 1 indicates the threshold between good and poor conditions. Note: a positive number means that the share of optimists outweighs the share of pessimists Source: Círculo de Empresarios based on Zew & CESifo Group, 218

24 Brexit: two years since the referendum in the UK (I) Looming uncertainty remains over UK exit, especially after the resignations of Davis (Brexit secretary) and Johnson (Foreign secretary) The impact of Brexit on the depreciation of the pound persists......which has boosted the growth of the stock market GBP/USD (Dollars per pound) 1,55 1,5 1,45 1,4 1,35 1,3 1,25 1,2 1,15 FTSE All-Share Index Brexit 3. Source: Círculo de Empresarios based on Bank of England, ONS, Schroders,

25 Brexit: two years since the referendum in the UK (II) Negative impact on economic growth and inflation, conditioning its future to the terms of the final Brexit agreement Real GDP growth % Rate of increase in prices Annual change UK 2 EU ,5 2 1,5 1,5 EU-28 UK -, Source: Círculo de Empresarios based on OECD, IMF,

26 Raw materials (I): oil prices on the rise The actions of OPEC*, a greater global demand, and geopolitical instability condition the movements in oil price Brent barrel spot price $ 85 Increase in crude oil production Also, in the face of US sanctions, Iran has threatened to block the Strait of Hormuz (3% of global crude oil traffic) 8 75 US stocks drawdown and speculation on sanctions being imposed on Iran** Oil traffic (millions of barrels per day) 7 65 US exit from the Iran agreement, conflicts in the Middle East and oil production falls in Venezuela Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul *OPEC accounts for approximately 7% of total oil reserves (BP) **OPEC s third-largest producer Source: Círculo de Empresarios based on EIA & Bloomberg, Strait of Hormuz Strait of Malacca Suez Canal Strait of Mandeb Danish straits

27 Currency market: dollar strength The dollar appreciates against the main currencies of advanced and emerging economies Main causes... 1 Solid economic growth in the US Exchange rate of the dollar against the major currencies of advanced economies (1975=1) Interest rate hikes by the Fed Repatriation of foreign profits made possible by the tax reform Weight of the dollar in the International Monetary System % of total 82 Debt and international loans Forex market transactions Means of payment Reserve currency Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 6% 43.8% 39.9% 62.7% Source: Círculo de Empresarios based on Bloomberg, St. Louis Fed, & ECB,

28 Financial markets (I) Uncertainty increases financial instability In the last 6 months, in the financial markets... Financial conditions of financial markets Dollar appreciation Episodes of stock market losses, -,2 -,4 -,6 -,8 Volatility spike 35, 3, 25, 2, -1, 15, Risk premium instability Interest rates on the rise -1,2-1,4-1,6-1,8 1, 5,, St. Louis Fed Financial Stress Index (left axis) VIX (right axis) Source: Círculo de Empresarios based on Bloomberg & Caixabank Research,

29 Financial markets (II) Technology companies spearhead the stellar rise in US stock markets (98% of the rise of the S&P 5 in H1 218) Contribution to the S&P 5 return, by sectors H1 218, % Contribution of the FAANG to the S&P 5 return, H1 218, (%) 3 2,5 2 H1 S&P 5 return: 2.65%: 4 3 H1 S&P 5 return: 2.65%: 1,5 1 2,5 1 -, FAANG Resto S&P 5 FAANG: Facebook, Apple, Amazon, Netflix, & Google Source: Círculo de Empresarios based on S&P, Bank of America Merrill Lynch US Equity,

30 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 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Financial markets (III) Valuations higher than the historical average, although the earnings of S&P 5 in Q1 grew at their fastest rate in seven years S&P 5 and CAPE (Cyclically Adjusted Price-to-Earnings ratio*) S&P 5 growth vs S&P 5 Real Earnings Growth March 213= CAPE Schiller (left axis) SP 5 (right axis) Average CAPE for period analysed: SP 5 SP 5 earnings *CAPE Shiller: relation between the price of stock market and the average of 1 years of earnings adjusted for inflation Source: Círculo de Empresarios based on Yale, 218 3

31 31

32 Growth forecast at a slower rate The European Commission has reduced Spain's growth by one-tenth for 218 to 2.8%, maintaining the figure for 219 at 2.4% 3.1% % 218* 2.4% IMF forecasts unaltered: 2.8% in 218 and 2.2% in 219, compared to the three-tenths downgraded for France, Italy and Germany 219* The Spanish government upholds its forecasts for 218 (2.7%) and 219 (2.4%), while reducing them for 22 (2.2%) and 221 (2.1%) * Forecast Source: Círculo de Empresarios based on European Commission & IMF (WEO Update, July),

33 Factors that curtail growth Paralysis of the reform impulse in the wake of a minority government and the near future electoral period Impact of the easing on the fiscal consolidation policy Persistent structural unemployment Stagnation of productivity Announcement of increase in corporate tax Monetary policy normalisation Impact of inflation on the purchasing power Rise in the prices of raw materials 33

34 Domestic demand sustains growth and the contribution of the external sector has slowed Q1 218 Year-on-year GDP growth= 3% In April, growth eased = 2.8% year-on-year GDP (year-on-year change) and contribution of domestic and foreign demand (pp) 2.8 pp contribution to growth Domestic demand Domestic demand % year-on-year change External demand Private consumption = 2.8% Public consumption = 1.9% Gross Capital Formation = 3.5% pp contribution to growth External demand of goods and services % year-on-year change Exports = 3.2% Imports = 2.8% Source: Círculo de Empresarios based on Bank of Spain & FUNCAS, July

35 The construction sector and the residential market recover Evolution of the construction sector % of GDP and annual change Construction GVA in %GDP (right axis) % annual change % GDP Construction GVA annual change (left axis) Average construction affiliation annual change (left axis) Q Q1 21 Q1 211 Q1 212 Q1 213 Q1 214 Q1 215 Q1 216 Q1 217 Q1 218 Evolution of sales transactions and the price of housing Millions and % change year-on-year Millions Strengthening demand causes the price of housing to soar Sales transactions (left axis) Price Index (right axis) % annual change 7,5 6,5 5,5 4,5 3,5 2,5 1,5 Source: Círculo de Empresarios based on Bank of Spain, Ministry of Labour, Migrations & Social Security, and INE, July

36 Q2 24 Q2 25 Q2 26 Q2 27 Q2 28 Q2 29 Q2 21 Q2 211 Q2 212 Q2 213 Q2 214 Q2 215 Q2 216 Q2 217 Q2 218 The real estate effort* is greater in the Balearic Islands, Catalonia, and Madrid National total Galicia 7.2 Asturias Cantabria Basque C. 5.3 Navarra La Rioja 4.8 Aragon Catalonia Castille and Leon Madrid Extremadura Castilla-La Mancha Valencia Balearic I * Real Estate Effort Index 5. Number of years of full salary that an average citizen would need to allocate for the purchase of a medium-sized home It is calculated using the quotient of the market value of the home and the gross annual average income published by the INE (Wage structure survey) Andalusia 7. Murcia Canary I. 7.3 Source: Círculo de Empresarios based on Sociedad de Tasación, July

37 Job creation drops off Evolution of affiliation, registered unemployment and unemployment benefit expense % change year-on-year June/June and % of GDP % annual change Unemployment benefit expense (right axis) Affiliation (left axis) Unemployment (left axis) % GDP 3,5 3, 2,5 2, 1,5 1,,5, In June, the pace of unemployment reduction and affiliates growth in year-onyear terms slows down From all-time highs in 213, with more than 5 million unemployed, unemployment has fallen by almost 2 million to 3.16 million At the same time, unemployment benefits expenses have been reduced since million more affiliates than 5 years ago, up to a total of 19 million The affiliates-pensioners ratio has recovered to levels of 216, standing at 2.29 Source: Círculo de Empresarios based on Ministry of Labour, Migrations & Social Security, and Treasury,

38 212Q2 212Q3 212Q4 213Q1 213Q2 213Q3 213Q4 214Q1 214Q2 214Q3 214Q4 215Q1 215Q2 215Q3 215Q4 216Q1 216Q2 216Q3 216Q4 217Q1 217Q2 217Q3 217Q4 218Q1 218Q2 Unemployment rate falls (LFS Q2 218) Unemployment rate & evolution of the number of employed % of active population & number of people (thousands) Q2 218 vs Q The unemployment rate fell by 1.46 points to 15.28% of the active population, to a total of 3,49,1 unemployed people The number of employed people increased by 469,9 people (+2.49%) to 19,344,1 79% of the increase in employment is concentrated in the service sector Employed (right axis) Unemployment rate (left axis) In year-on-year terms, unemployment was reduced by 424,2 people and 53,8 jobs were created, 21.5% in the public sector Source: Círculo de Empresarios based on Labour Force Survey Q2 218 (INE),

39 Q3 26 Q1 27 Q3 27 Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 215 Q3 215 Q1 216 Q3 216 Q1 217 Q3 217 Q1 218 The lack of reforms allow for duality to exist in the labour market in Spain Spain is the EU country with the highest rate of temporary contract employment: 26.2% Rate of temporary employment % of employed aged 16 to 65 years Evolution of rate of temporary employment % of employed aged 16 to 65 years , , 36.4% 19.1% , 2, 22 Source: Círculo de Empresarios based on Eurostat,

40 Spain Italy France Euro area Portugal EU-28 Sweden Ireland UK Netherlands Poland Germany And unemployment continues to double the euro area average Unemployment EU 28 May 218, % over active population Unemployment Unemployment under 25 years Spain continues to have very high rates of unemployment nd country of the EU 28 in total and youth unemployment after Greece Total < 25 years Greece 2.1% 43.2% Spain 15.8% 33.8% Italy 1.7% 31.9% Source: Círculo de Empresarios based on Eurostat, 218 4

41 The Social Security Reserve Fund is running out Accumulated balance of the Social Security Reserve Fund Millions (at acquisition price) Position at year end 31 December of each FY Endowments(1) Withdrawal(2) Yield(3) Balance 6,22 64,375 66,815 63,8 53,744 41,634 32,481 15,2 8,95.7% GDP Between 2 & 217, 94.2 billion have been used along with the SS contributions to pay pensions: Provisions of the Reserve Fund: 74.4 bn Surplus from the Contingency Reserve Fund: 9.6 bn Loan of the Treasury to the Social Security in 217: 1.1 bn ( 5.9 bn in July & 4.2 bn in December) In 218, a new loan of 15.1 billion is requested (1) From its creation in 2 to December 31, 217 (2) From 212 to December 31, 217 (3) Since its creation in 2 until December 31, 217. Profitability accumulated in the period stands at 4.27% in annualized terms Source: Círculo de Empresarios based on Ministry of Labour, Migrations & Social Security,

42 Risk for Spanish competitiveness: rise in inflation In June, for the second consecutive month, inflation in Spain exceeds that of the euro area Evolution of prices % change year-on-year Since January, inflation has 3 2,5 2 1, General CPI Core CPI* Euro area's CPI accelerated in Spain by 1.7 pp. Increase in fuel prices (+11.9%) and its impact on: Transport (+6.1%) Housing (+2.6%) 1, Rise in fresh produce The difference with the euro area stands at.3 points, the highest in 8 months * General index without unprocessed foods or energy products Source: Círculo de Empresarios based on INE & Eurostat,

43 Private debt maintains its downward trend In Q1 218, the private debt of non-financial corporations and households reached 1.83 trillion, accounting for 156.4% of GDP, 9.4 pp less than in Q1 217 Evolution of debt of non-financial corporations & households Unconsolidated debt* Trillion and % of GDP Debt of non-financial corporations & households % of the total debt of non-financial corporations & households % GDP Public debt in trillions (right axis) Public debt %GDP (left axis) Trillion 1,4 1,2 1,,8,6 38.7% 61.3% Non-financial companies Households 55, ,2, 6.5% of GDP 95.9% of GDP * In consolidated terms, the debt of both sectors amounts to 1.6 trillion in Q1 218, which is 137% of GDP Source: Círculo de Empresarios based on Financial Accounts of the Spanish Economy Q1 218, Bank of Spain,

44 while public debt remains at similar levels Public debt stood at 98.2% of GDP in May, exceeding the target set for 218 (96.8%) Evolution of public debt % of GDP and trillion Volume in May 218: 1.15 trillion % GDP Public debt in trillions (right axis) Public debt %GDP (left axis) Trillion 1,4 1,2 +2.7% year-on-year, mainly due to an increase in the State's debt: 4.3% Objective 6% 1,,8,6,4,2, By Administrations (May 218) % of total General Government Autonomous communities Local corporations Social Security Source: Círculo de Empresarios based on Bank of Spain,

45 The new deficit targets delay the reduction in public debt The government slows down fiscal consolidation: The deficit widens to 2.7% in 218 and 1.8% in 219 (where the objectives of the Stability Program are 2.2% and 1.3%, respectively) Balance and deficit targets % of GDP Balance 217 Target 218 Target 219 General Government Autonomous communities Local corporations.6.1, Social Security Total Public administration Note: data without financial help It would mean an increase of the public debt in almost 4 billion in gross terms (the largest since 214) Lowering of the Autonomous Communities deficit target in 219 to.3% (as opposed to the.1% forecast) Proposed expenditure cap for 219 = 125 billion (+4.4% year-on-year) Source: Círculo de Empresarios based on Mineco, Minhafp & AMECO, 218 Evolution of the public budget balance % of GDP * Forecast Spain's budget balance Spain's primary budget balance Euro area's primary budget balance * 45

46 Risk of changing the tax policy New measures announced - Tax increase on diesel, technology and banking Rule of law & competitiveness - Set a minimum Corporate Tax rate for large companies: 15% Income & consumption Inflation IMPOSITION - Dispose of the upper limit on Social Security contributions Employment Investment Source: Círculo de Empresarios,

47 Fiscal situation compared to the European average Although Spanish rates are in line with the European average, between 27 and 216 the greatest difference in collection with the EU28 occurred in income tax and VAT Average tax collection % of GDP Tax collection 216 % of GDP Gap Spain EU-28,6 Gap 216 Spain EU-28 1, ,2 6,8 5,6 VAT 1,8 7,4 9,2 Personal Income tax Corporate tax 12,6 13,2,1 8 6,4 6 2,5 2,6 4 Social Security contributions ,6 VAT 7 7,3 2 9,3 Personal Income tax 2,3,3 2,6 Corporate tax 12,2 13,3 Social Security contributions Source: Círculo de Empresarios based on Spanish Tax Agency & Eurostat,

48 Corporation tax collection begins to recover Between 211and 217, collection has increased from 1.3% to 11.9% of total tax revenues, despite the fact that 54.7% of companies presented losses in 215 and the destruction of 3, companies during the crisis Corporation tax collection Million Tax income Corporate tax Effective corporation tax rate On Consolidated Accounting Result 1 On consolidated tax base 1% 22.5% 193,951 23,143 1 Does not take into account the taxation of companies in third countries nor the negative tax bases accumulated in prior years Companies filing for tax 2 Earnings Consolidated tax base Source: Círculo de Empresarios based on Spanish Tax Agency, & DIRCE (INE), 218 Medium & large sized companies 55.4% collection 2 2 Data for 215 (latest available) Pre-crisis 65% of total file for tax 1.4% of medium and large sized companies with positive tax bases or.6% of total respondents % of total file for tax bn 84.2 bn Due to accumulation of prior year losses and destruction 3, companies between (DIRCE, INE) 48

49 The trade deficit widens Exports Imports Balance of trade, Sectorial distribution Change with respect to the same period of the previous year Exports 2.8% 94.9 bn Imports 4.4% 14.9 bn BALANCE Deficit 23.5% bn Energy deficit 5.3% Evolution of trade in goods, January May 218 % of GDP Goods exports Goods imports Balance * * GDP stimated in 218 by IMF Sectorial distribution, January May 218 % of total Geographical distribution, January May 218 % of total Capital goods Automobile Food, beverages and tobacco Capital goods Chemical goods Energy goods Exports Imports Europe EU America Asia China Africa Others Source: Círculo de Empresarios based on Ministry of Industry, Trade and Tourism, July

50 Tourism contributes less to growth In Q2 218, the growth of tourism GDP in Spain slowed down to 2% year-on-year (vs 3.1% in Q1 218), reducing the growth forecast for the whole year to 2.6% Annual tourism GDP growth & general GDP of the Spanish economy % change year-on-year 6 Tourism GDP Spanish GDP Determining factors of downward correction: Slowdown in Q2 due to the worst * weather conditions and lower national demand Recovery of the market share by the Eastern Mediterranean competitors Fewer tourist arrivals from Germany and the UK * Forecast Source: Círculo de Empresarios based on EXCELTUR, 218 5

51 Tourists increase their spending Between January and May, 28,573,668 international tourists arrived in Spain, 2% more than in the same period of the previous year, and spent 29.5 billion, 4.1% more than in 217 TOP 3 sender countries, January-May 218 United Kingdom % of total tourists 21.9% % change YoY -2.3% % of total spending 19.2% TOP 3 host Autonomous Communities, January-May 218 Catalonia % of total 23.2% % change YoY -2.1% Germany 13.8% -2.7% 13.4% Balearic isles 13.8% % France 13.7%.6% 7.8% Andalusia 13.7% 2.4% Catalonia continues to lead the reception of tourists between January and May of 218, but the influx is reduced by 2.1% in year-on-year terms 84.6% come to Spain for holidays, and the remaining 15.4% for professional reasons and others Source: Círculo de Empresarios based on FRONTUR & EGATUR (INE),

52 Competitiveness of Spain Spain is not ranked among the 2 most competitive countries in the world Advantages and difficulties identified in the Barometer of the Circles 218 Advantages Quality assessment and cost of skilled labour Quality of physical infrastructure Size and location of the domestic market Important and growing export sector Source: Barometer of the Círculos 218 Difficulties Quality of the Spanish education system Effort put into innovation and technological adaptation Inefficient functioning of the public administrations Duality of the labour market Corruption and shadow economy Sustainability of the pension system 52

53 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Apr-1 Nov-1 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Apr-17 Nov-17 Jun-18 Interest rates and risk premium The risk premium exceeds 9 basis points, although it still maintains the gap with Italy Risk premiums from Spain and Italy compared with the 1-year German bond bp 3 25 Prima ItalianItalia risk premium Prima Spanish España risk premium Evolution of Spain s rating Grade Aaa AAA Moody s S&P Fitch 2 Aa1 Aa2 Aa3 AA+ AA AA- 15 A1 A2 A3 A+ A A- 1 5 Baa1 Baa2 Baa3 BBB+ BBB BBB- Source: Círculo de Empresarios based on Bank of Spain & Bloomberg,

54 Financial markets The stock markets face an environment of higher volatility and greater political uncertainty Evolution stock market January 218=1 18 IBEX 35 Eurostoxx 5 S&P Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 * Includes: Continuous market, trading floors of the four stock exchanges, MAB (The Alternative Spanish Equity Market), & Latibex Source: Círculo de Empresarios based on BME,

55 The quarterly report, is a publication of the Círculo de Empresarios produced by its Department of the Economy, contains information and opinion from reliable sources. However the Círculo de Empresarios does not guarantee its accuracy and does not take responsibility for any errors or omissions. This document is merely informative. As a result, the Círculo de Empresarios is not responsible for any uses that may be made of the publication. The opinions and estimates of the Department can be modified without prior warning.