European and Spanish Economic Outlook

Transcription

1 European and Spanish Economic Outlook Rafael Doménech EUI-nomics 2014 Debating the Economic Conditions in the Euro Area and Beyond Firenze, 22nd of April, 2014

2 Main messages The global economic cycle is improving and we expect a moderate acceleration in growth in supported by the developed economies Some economic policy uncertainties have been resolved but there are still risks, although not of a systemic nature, as it was the case in the past For the first time since the beginning of the crisis the risks to our forecasts for the Spanish economy are to the upside. The recovery is being driven by exports, import substitution and the recovery in new lending. In addition, both financial tensions and fiscal consolidation are less intense The reforms agenda should continue to increase economic growth and reverse the jobs destroyed during the crisis within a reasonable period Página 2

3 Index Section 1 Global economy: a gradual acceleration supported by developed economies Section 2 Spain: upside risks for the first time since the beginning of the crisis Section 3 Commitment to the reforms is crucial to consolidate recent market improvement and increase potential growth Página 3

4 Global growth will increase in 2014 an The global expansion will continue in this time around with higher contributions from advanced economies Growth risks are more balanced with upward risks in the US and downward risks that remain: the exit from QE and flows to emerging markets, the uneven recoveries and vulnerabilities in EMs, and the Eurozone Global GDP growth (%) Source: BBVA Research Adv. Economies Baseline Jan (e) (f) (f) Emerging economies Baseline Oct Page 4

5 but not yet out of the woods Business Expectations (PMI) Source: BBVA Research based on Markit Economics BBVA Financial Stress Index Source: BBVA Research 0,04 1, ,00-0,04-0,08 0,7 0,3-0,1 46 Nov 10 Apr 11 Sep 11 Feb 12 Jul 12 Global Advanced economies BBVA Eagles HSBC Emerging Markets Index Dec 12 May 13 Oct 13 Mar 14-0,12 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Emerging Markets, left axis Developed Markets, right axis Mar-14-0,5 Page 5

6 Growth at diverse paces and with different risks GDP growth (%yoy) Source: BBVA Research and IMF Growth cycle strengthens, mainly in advanced economies and in some emerging economies. Economic policy remains as a supportive factor for growth in To reinforce the baseline scenario, policymakers have to tackle domestic vulnerabilities: banking issues and disinflation risks in the Eurozone, financial vulnerabilities in China, and private domestic demand in emerging economies World US EMU BBVA-EAGLES The impact of FED s tapering over global funding conditions, in the US and beyond, remains as a factor of uncertainty Baseline Nov-13 Page 6

7 but with some important uncertainties for 2014 World: (1) risk of a sudden slowdown in emerging countries and its ability to rebalance its growth path (e.g., China), (2) effects on capital flows and financial conditions from Fed exit strategy, and (3) geopolitical U.S.: (1) risks in Fed exit strategy, (2) debt ceiling and fiscal consolidation in the long run, and (3) growth potential and doubts on secular stagnation EMU: (1) persistence of sovereign risk and financial fragmentation, (2) process to the Banking Union Bank (AQR and stress tests), and (3) risk of deflation and the burden of a recovery with very low inflation Page 7

8 Asymmetric shocks and an incomplete union in EMU Complete union Incomplete union Symmetric USA Shocks Asymmetric EMU Differences in the asymmetry of shocks and institutions have resulted in very different economic policies during the crisis, which now are affecting the effectiveness of the ECB to ensure its inflation target and to anchor inflation expectations Page 8

9 Asymmetric shocks and an incomplete union in EMU GDP per working age population 2Q08=100 Source: Eurostat and BBVA Research As a result of the imbalances accumulated before and during the crisis, and the lack of banking, fiscal and economic union EMU countries exhibit large differences in unemployment rates and in GDP per workingage population, which are correlated with creditor and debtor positions of each country -> consensus on European economic policy is difficult 90 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 EMU Germany France Italy Spain Portugal USA Page 9

10 1. Financial uncertainties Banking union effects on financial fragmentation Eurozone: interest rates of government bonds and new loans to non-financial firms, 2013 Source: BBVA Research based on ECB Interest rates on new business loans up to 1y, 2H ,5 5 4,5 4 3,5 3 2,5 FI DE 2 NL BE 1,5 FR AT 1 SK IE IT ES SI PT y = 0,96x + 1,75 R² = 0, Government bond rates (1 to 3y), 1H2013 Despite the significant fall of financial tensions, financial fragmentation is still important interest rates of government bonds and new loans to non-financial firms highly correlated: sovereign and banking risks spillovers still remarkable particularly in countries where inflation is low -> differences in real interest rates larger than in nominal ones Real interest rates in EMU countries with high unemployment rate much larger than in countries with low unemployment rate Page 10

11 2. The costs and risks of a low inflation recovery Trend inflation & expectations well below the ECB target Eurozone: unemployment rate and inflation Source: Eurostat and BBVA Research The double-dip recession (unemployment) and M3 growth partially explain the low rate of inflation in EMU If 3 pp of higher unemployment explain 0.4 pp lower inflation, inflation expectations are currently less than 1% -> drag for the economic recovery Inflation expectations in swaps and trimmed mean inflation (optimal selection in terms of inflation prediction for next 2/3 years) are slightly below 1% Although inflation will be above 1% in 2015 in our base scenario and the probability of deflation is low (<10%), adverse shocks could increase this probability The regression coefficient of the inflation rate on the unemployment rate is equal to 0.125, statistically significant and robust to the exclusion of Cyprus, Greece and Spain. Page 11

12 2. The costs and risks of a low inflation recovery Trend inflation & expectations well below the ECB target Spain: trend inflation (trimmed mean inflation, % y/y) Source BBVA Research based on INE Eurozone: trend inflation (trimmed mean inflation, % y/y) Source BBVA Research based on Eurostat feb-04 ago-04 feb-05 ago-05 feb-06 ago-06 feb-07 ago-07 feb-08 ago-08 feb-09 ago-09 feb-10 ago-10 feb-11 ago-11 feb-12 ago-12 feb-13 ago-13 feb-14-2 feb-04 ago-04 feb-05 ago-05 feb-06 ago-06 feb-07 ago-07 feb-08 ago-08 feb-09 ago-09 feb-10 ago-10 feb-11 ago-11 feb-12 ago-12 feb-13 ago-13 feb-14 90CI 80CI 60CI 40CI 20CI Optimum trim Headline (official) Core (official) 90CI 80CI 60CI 40CI 20CI Optimum trim Headline (official) Core (official) Page 12

13 2. The costs and risks of a low inflation recovery ECB: ready for further action? Latest What do we expect? Policy pause until 2016 Rates unchanged, but with dovish tone. Another twist to verbal intervention, "unanimous" commitment to using unconventional instruments to cope with risks of a too prolonged period of low inflation QE is definitely on the table. Increasing concern about euro strength. Once it has become clear that the ECB is ready to accept inflation of 1.5% in 2016 without taking further action, the expectation of decisive measures depends on further negative shocks or the persistence of very low inflation Liquidity measures are possible in the event of an unwarranted tightening in money markets. The ECB would exhaust other measures before implementing QE Will the ECB change its mind towards QE? Page 13

14 3. The risks of a sudden stop in emerging economies EMU fragile recovery may be affected by external factors EMU: historical decomposition of GDP per wap (%, y/y) Source: BBVA Research The first part of the double-dip crisis in EMU was driven by financial tensions and the collapse of external trade Although of a milder magnitude, a sudden stop in emerging countries could have significant effects on EMU recovery Similarly, Fed exit strategy may affect financial conditions in EMU Page 14

15 Index Section 1 Global economy: a gradual acceleration supported by the developed economies Section 2 Spain: upside risks for the first time since the beginning of the crisis Section 3 Commitment to the reforms is crucial to consolidate the improvement in the markets and increase potential growth Page 15

16 The recovery of the Spanish economy is confirmed Spain: GDP growth and MICA-BBVA forecasts (% QoQ) Source: BBVA Research based on INE After three years in recession, domestic demand started to make a positive contribution to growth again in the second half of as a consequence of improved fundamentals, less restrictive fiscal policy, reduced uncertainty and increased import substitution Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 (f) -1.5 The available information points to growth of at least 0.4% in 1Q14, in line with the Bank of Spain forecast CI at 60% CI at 40% CI at 20% Data (f: MICA-BBVA Research forecast) Page 16

17 the risks are to the upside for the first time Spain: GDP growth forecasts, 2014 (% YoY) Source: BBVA Research based on Consensus Forecast Inc BBVA Research FEB-2014 Economic policy decisions have eliminated the risk scenarios Relative frequency The differential performance of the Spanish economy confirms this improvement in the trend If this trend is confirmed, GDP growth could be even stronger than our forecasts: slightly above 1% in 2014 and close to 2% in (< -0,25) (-0,25;0) (0;0,25) (0,25;0,5)(0,5;0,75) (0,75;1) (1;1,25) (1,25;1,5) (>1,5) GDP Growth forecast March-2014 (mean: 0,9%) December-2013 (mean: 0,6%) March-2013 (mean:0,3%) Page 17

18 the risks are to the upside for the first time 1. Exports will continue to expand: above 6% y/y in 2014 and An increase in savings and financial wealth (+25% from 2H2012) 3. More certainty and fewer financial tensions: 10y risk premium below 160bp 4. More dynamic investment in machinery and equipment: above 6% y/y in 4Q Improvement in new lending flows: growth above 6% y/y in Feb for SME 6. A smaller fiscal effort needed in 2014: 0.5 pp in 2014 (2pp in 2013 and 5pp in 2012) 7. Net job-creation started sooner than expected: +2.4% saar in 1Q2014, above 2% accumulated in 2014 and 2015 and social security flat rate Page 18

19 Index Section 1 Global economy: a gradual acceleration supported by the developed economies Section 2 Spain: upside risks for the first time since the beginning of the crisis Section 3 Spain: commitment to the reforms is crucial to consolidate the improvement in the markets and increase potential growth Page 19

20 The reform agenda should continue GDP growth and job-creation Source: BBVA Research and Lebergott (1964) #Employment#level#at#the#begining#the#crisis#=100# 105# 100# 95# 90# 85# USA,#2007B2014# USA,#1929B1940# EMU,#2007B2017# Spain,#2007B2025# +2% acc. in After destroying 18% of total employment in 6 years, its recovery will be very sensitive to future structural reforms The objective should be to introduce the necessary reforms to increase employment growth close to or above 2% Job-creation will be limited and the recovery slow if the reform agenda does not continue 80# Peak# 2# 4# 6# 8# 10# 12# 14# 16# 18# years# Assumptions for the USA and the EMU are consistent with BBVA Research s scenario. The Spanish scenario has been built assuming both that producvity per worker rises 0,6% (as it was the case between 1992 and 2007) and that GDP grows on average 2,5. Page 20

21 The reform agenda should continue Potential effects on GDP and employment of the social security flat tax rate for new permanent contracts Source: BBVA Research 1" 0,8" New employment policies will have positive effects on the labour market, such as %" 0,6" 0,4" transitory incentive to permanent contracts, a a new Activation for Employment Strategy , a new Training Strategy, 0,2" 0" Employment" GDP" but other still needed: fiscal devaluation, permanent incentives for indefinite contracts, promote W bargaining at firm-level for SME, Page 21

22 An efficient tax system and fiscal sustainability Spain: unemployment and public deficit Source: BBVA Research based on INE and MINHAP Public budget blance (% GDP) % (2006) 99 18% (2013) % Unemployment rate (%) Tax revenues dropped sharply in Spain as a consequence of the recession and the fiscal consolidation process requires sufficient resources to ensure that Spain s finances remain in good health, with a fiscal structure that drives economic growth and job-creation, two key factors for reducing the deficit Page 22

23 An efficient tax system and fiscal sustainability Spain: general government expenditures and revenues in per capita terms Source: BBVA Research based on INE and MINHAP Since 2009 primary expenditures have fallen 11.7% and revenues increased 4.2% -> reduction of 42.6% in the budget deficit These adjustments have been made in years of GDP reductions and employment destruction Now the adjustment should be made mainly taking advantage of economic growth: revenues increases and constant expenditures Page 23

24 The reform agenda should continue 1. Deleveraging and improvement in the finances of the Spanish economy: finalising the restructuring of the financial sector (improve profitability) and attracting foreign direct investment 2. Public-sector reform, fiscal consolidation through growth and long-term sustainability of public finances, with an efficient tax system that create incentives to growth and job-creation -> Report of the Experts Committee 3. Reforms to improve competitiveness further (keeping internal devaluation), increase the international attraction of Spain in terms of physical, human and technological capital 4. To continue with the reforms that reduce the duality in the labour market, improve intermediation process efficiency and increase employability -> more jobs and with better quality Page 24

25 European and Spanish Economic Outlook Rafael Doménech EUI-nomics 2014 Debating the Economic Conditions in the Euro Area and Beyond Firenze, 22nd of April, 2014

26 Macroeconomic scenario (% YoY) (f) 2014 (f) 2015 (f) Spain EMU Spain EMU Spain EMU Spain EMU Households final consumption expenditure - 2,8-1,4-2,5-0,5 0,9 0,7 1,3 1,2 General government final consumption exp. - 4,8-0,5-1,2 0,3-1,1 0,5 1,3 0,7 Gross fixed capital formation (G.F.C.F.) - 7,0-3,9-5,9-3,1 0,2 1,6 5,2 5,0 Equipment and cultivated assets - 3,9-4,4 0,8-2,5 6,0 2,8 7,8 7,1 Equipment and machinery - 3,9-4,4 0,7-2,5 5,8 2,9 7,8 7,1 Housing - 8,7-3,4-8,4-3,0-3,4 1,0 5,0 3,6 Other constructions - 10,6-4,8-11,8-4,9-4,2-0,7 1,5 2,9 Changes in inventories (*) 0,0-0,5 0,0-0,1 0,0 0,0 0,0 0,0 Domestic Demand (*) - 4,1-2,1-2,8-0,9 0,4 0,8 2,0 1,7 Exports 2,1 2,7 5,2 1,2 6,5 3,5 6,7 4,9 Imports - 5,7-0,8 0,3 0,2 5,2 3,3 7,4 5,1 External Demand (*) 2,5 1,5 1,6 0,5 0,6 0,3-0,1 0,2 GDP mp - 1,6-0,6-1,2-0,4 0,9 1,1 1,9 1,9 Pro- memoria GDP excluding housing - 1,2-0,5-0,8-0,2 1,2 1,1 1,8 1,8 GDP excluding contruction - 0,4-0,2-0,1 0,0 1,5 1,2 1,8 1,7 Total employment (LFS) - 4,5-0,7-3,1-0,8 0,4 0,1 1,0 0,7 Unemployment rate (% Active pop.) 25,0 11,4 26,4 12,1 25,6 12,0 24,8 11,6 Current account balance (% GDP) - 1,1 1,2 0,9 2,1 1,6 2,1 1,7 2,0 Public debt (% GDP) (**) 86,0 93,0 94,7 95,6 99,1 96,1 101,4 95,7 Public deficit (% GDP) - 6,8-3,7-7,0-2,8-5,8-2,4-5,1-2,1 CPI (average) 2,4 2,5 1,4 1,4 0,5 1,0 1,0 1,4 CPI (end of period) 2,9 2,2 0,3 0,8 0,7 1,3 1,2 1,5 (*) C ontribution to GDP Growth (**) E xcluding aid to the banking s ector in S pain (f): forecas t Página 26

27 The eurozone: positive growth with an increasing role of domestic demand Eurozone: GDP growth (y/y) Source: BBVA Research Exports will remain as the main driver of growth in both 2013 and Domestic demand has weighed on growth in 2013, but will contribute to the recovery in Overall: lower financial tensions, higher global growth, lower fiscal drag, ECB s loosening bias and Banking Union Baseline Jan-2014 Baseline Oct-2013 Page 27

28 Drivers of (still slow) growth in the eurozone 1) The external environment remains positive 2) Financial conditions have improved, especially in the periphery 3) The fiscal stance is less restrictive 4) The banking union is advancing, with bank exams and single supervision in 2014 Página 28

29 with a widespread recovery across EMU countries GDP growth by country (%) Source: BBVA Research 2,5 2,0 1,5 1,0 0,5 0,0-0,5-1,0-1,5-2,0-2,5 1,9 1,8 2,0 1,9 1,6 1,5 1,1 1,1 0,5 0,8 0,9 0,2-0,4-1,2-1, EMU Germany France Italy Spain Current Forecast (February 14) Previous Forecast (November 13) Germany: slight upward revision. Recovery on track supported by domestic fundamentals France: GDP virtually flat in 2013 while the moderate recovery for 2014 will depend on the economic policy implementation Italy: very slow exit from recession, but more positive medium term perspectives thanks to new reform initiatives. Página 29

30 1. Financial uncertainties Banking union: key to reduce financial fragmentation Setting up a robust supranational framework Pillar I Common Rules Prudential (Basel III), resolution framework (bail-in), harmonised deposit protection rules Start: Pillar II Single Supervision ECB as the ultimately responsible regulatory authority for all eurozone banks Direct supervisor of top 130 banks National authorities will supervise the less significant entities Start: 04/11/2014 Pillar III Single Resolution New Single Resolution Authority in co-operation with national resolution authorities Single Resolution Fund funded by bank contributions Start: Pillar IV Single Depo Guarantee Scheme Start: unknown Página 30

31 Upside risks: 1. Exports will continue to expand Spain: exports growth Source: BBVA Research 14,0 12,0 We expect the recovery to continue driven by the increase in exports 10,0 8,0 6,0 4,0 2,0 The deceleration in exports is a temporary phenomenon and will reverse in a scenario of stronger global growth The slowing momentum in EMs has been offset by the recovery in the EMU 0, (p) 2015 (p) Página 31

32 Upside risks 2. An increase in savings and financial wealth Spain: net real household financial wealth (Deflated by the private consumption deflator; seasonally adjusted data) Source: BBVA Research based on Bank of Spain and INE Q12-3Q13: +24.8% The increase in corporate and household savings has been an essential part of the recoveries in Spain that has helped in the deleveraging process and in the improvement in the financial situation of the private sector and these, together with the stabilisation and improvement in the value of wealth, has driven an increase in consumption and investment 600 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 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 Real net financial wealth (billion ) Página 32

33 Upside risks 3. More certainty and fewer financial tensions Spain: 10Y bond yield (Difference vs. our November 2013 forecast in bp) Source: BBVA Research Improved international perceptions of the Spanish economy have allowed Spain to reduce its dependence on ECB funding Reduced financial tensions are reflected in the economy with a lag of 6-9 months A permanent 100bp drop in sovereign interest rates implies up to one percentage point more growth for the economy Página 33

34 Upside risks 4. More dynamic investment Spain: exports and investment in equipment and machinery (2008=100) Source: BBVA Research based on INE The recovery we expect in the EMU and the continuing export growth Goods and services exports should translate into an increase in privatesector investment Investment in equipment and machinery Dec-99 Sep-00 Jun-01 Mar-02 Dec-02 Sep-03 Jun-04 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 In fact, the investment in equipment and machinery had grown 6.3% by 4Q13 Goods and services exports Página 34

35 Upside risks 5. Improvement in new lending flows Spain: new lending and credit to households, NPISH and non-financial entities Source: BBVA Research based on Bank of Spain (February 2014) 40% 30% The Spanish economy is going through an evitable deleveraging process Yoy % change 20% 10% 0% -10% -20% -30% that is compatible with new lending for financially viable projects There has been a turning point and an improvement in corporate lending, which we expect to consolidate in 1H14-40% Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Total Trend Corrected trend Página 35

36 Upside risks 6. A smaller fiscal effort needed in 2014 Public sector: breakdown of the public deficit excluding aid to the financial sector (% GDP) Source: BBVA Research based on MINHAP The significant fiscal consolidation efforts in 2012 and ,0 5, ,1 Deficit 2011 Passive fiscal policy Fiscal effort 6,8 Deficit ,8 2,0 Passive fiscal policy Fiscal effort 6,6 Deficit ,3 0,5 Passive fiscal policy Fiscal effort 5,8 Deficit ,7 Passive fiscal policy 0,0 Fiscal effort 5,1 Deficit 2015 have resulted in containment of the public deficit at 6.6% of GDP therefore allowing for a smaller fiscal effort needed in 2014 (e) advance; (f) forecast (a ) 2014 (f) 2015 (f) Página 36

37 Upside risks 7. Changes in the labour market Spain: LFS employment (Variation in annual average, %) Source: BBVA Research based on INE 1,5 1, Net job-creation has started sooner than we expected, partly as a reflection of wage moderation 0, ,0-0,5-1,0-1,5-2,0-2,5-3,0-3, Had labour institutions been better at the beginning of the crisis, millions of job losses could have been avoided Employment growth in Additionally the fixed social security contribution for permanent contracts can boost employment Spain Outlook 4Q13 Spain Outlook 1Q14 Página 37

38 Banking sector in better position after restructuring 16% 14% 12% 10% 8% 6% 4% 2% 0% Liquidity Apelación from ECB al BCE (target (criterio >5% below de los activos) 5% of total assets) Source: BBVA Research Greece Portugal Spain Italy Ireland Belgium France Germany Finland Luxembourg Austria Cyprus Estonia Latvia Malta Netherlands Slovenia 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Impaired NPL+PD loans+90d.a./(equity+provisions) +90d bni/(equity+provisiones) (criterio >100%) > 100% Source: BBVA Research Cyprus Greece Slovenia Ireland Italy Spain Netherlands Latvia Austria Belgium 35% 30% 25% 20% 15% 10% 5% 0% Core Tier I (criterio <10%) Slovenia Cyprus Italy Malta Spain France Austria Greece Portugal Germany Portugal Finland Germany Luxembourg Netherlands Ireland Latvia Belgium Estonia Malta France Finland Estonia Luxembourg Core Tier I (target above 10%) Source: BBVA Research 500% 400% 300% 200% 100% 0% -100% -200% Loans-loss provisions/pre-provision income <100% Source: BBVA Research Loans loss provisions/pre provision income Ireland Portugal Slovenia Greece Cyprus Italy Spain Austria Latvia Germany Netherlands France Belgium Malta Luxembourg Finland Estonia

39 Changes in the corporate insolvency law will facilitate corporate debt restructuring New measures announced last week remove obstacles to agreements between financial creditors and debtors New RDL on corporate debt restructuring Source: BBVA Research based on BOE Spanish Financial System Measures ü Possibility of individual debt refinancing agreements ü Simplified procedures for collective debt refinancing agreements ü Reduction in the level of required majorities to impose refinancing agreements on dissident creditors ü BoS needs to develop new provisioning framework for refinanced loans ü In case of insolvency, fresh money with privileged status and old debt non-subordinated ü Takeover exemption when creditors convert into equity ü Other measures: including fiscal benefits Increases legal certainty If restructuring ends in insolvency, financial creditors are not in a worse position Foreseeable better provisioning framework Conversion of debt into equity raises new issues (management, capital consumption..) Corporates Deleveraging of worst quality loans Adjustment of debt to companies financial capacity New funding for viable business plans Page 39