December 2017 ECONOMIC FORECASTS FOR SPAIN 2018

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1 ECONOMIC FORECASTS FOR SPAIN

2 Contents RECENT EVOLUTION OF THE SPANISH ECONOMY... 4 FORECASTS MAIN RISKS... 7 CONCLUSIONS:... 8 ANNEXES:

3 The following executive report deals with the current economic situation in Spain and its forecast for The analysis has reflected the high potential of the Spanish market and the good future prospects. The data obtained reflects the evolution of the Spanish economy in recent years, analyzing the different quarters of last year, as well as the economic forecast for the following year. Since the Spanish economy emerged from the crisis, the country has experienced an improvement in its main economic indicators. While it is true that there is still much to be done and recover the lost road, Spanish exports have reflected their historical maximum during 2017, also increasing the number of companies that export periodically. However, Spain not only shows a recovery towards the business abroad, but also as an exceptional destination in Europe for foreign investments. During 2018, the Spanish economy will experience the greatest growth in the Euro zone in almost all its sectors. Because of this and because it is a launching platform for any company that wants to commit markets in Latin America, Spain is the springboard for unbeatable access. 3

4 RECENT EVOLUTION OF THE SPANISH ECONOMY According to the provisional advance of the quarterly national accounts, GDP grew by 0.8% in the third quarter of 2017 compared to the previous quarter, and 3.1% over the same quarter of the previous year. This result, which is in line with expectations, represents a slight slowdown compared to 0.9% registered in the second quarter of the year. Most indicators suffered a significant weakening especially in the month of July. In August the results were mixed, while in September a certain recovery was observed. The available information suggests that the slowdown in growth in the third quarter came from a reduction in the contribution of the foreign sector, which could have even been negative, while the contribution of domestic demand could be like that of the previous quarter, if good with a different composition. In this way, consumption indicators, such as car registrations, sales of large companies of consumer goods or retail sales, reflect, in general, a more moderate growth in the third quarter. The investment in capital goods, on the other hand, could have experienced an acceleration, as can be seen from the evolution of the imports of these goods, their availability, or the registration of industrial vehicles. Investment in housing construction would have maintained a dynamic growth path, and public works could have begun to register a recovery. Regarding the foreign sector, exports of goods in July and August suffered a drop compared to the average of the previous quarter, while imports recorded a recovery. However, given the robust growth recorded by exports in previous quarters, its cumulative growth for the year to August compared to the same period last year, shows a solid rise of 9%. This growth came from the good performance of sales of petroleum products, capital goods and food products, while exports of automobiles suffered a slight decline, largely as a result of the sharp decline of those destined for the United Kingdom, a country that accounts for 12% of total exports in this sector. The cumulative growth until August of imports of goods amounted to 6%. The growth in the arrival of tourists in seasonally adjusted terms shows a clear trend of moderation since the high records reached in the first quarter, and the spending of tourists suffered a slowdown in 4

5 the third quarter (with data until August). The number of overnight stays of foreigners in hotels experienced even a decrease (in this case with data for the entire quarter). All this points to the fact that the contribution of the tourism sector to economic growth, in seasonally adjusted terms, has moderated during this period. From the sectoral perspective (with information up to August in some indicators), the slowdown in growth in the third quarter was manifested mainly in the services sector, among which indicators stand out the turnover, which suffered a stagnation, as well as the aforementioned fall in Overnight stays. In the industrial sector, after the bad data of June and July, the indicators experienced a certain improvement in August and September, pointing to a growth rate similar or slightly lower than that recorded the previous quarter. Employment slowed its growth rate in the third quarter, as indicated by both the Labor Force Survey and Social Security affiliation, although this last statistic shows a rise in employment more intense than the first. The unemployment rate stood at 16.4%, two and a half points less than a year earlier. The affiliation to Social Security, meanwhile, maintained a dynamic growth rate. The economic indicators for October are still very scarce. The confidence and economic sentiment indexes rose, as did the manufacturing PMI, which rose to the highest level since May However, the consumer confidence index developed by the Center for Sociological Research suffered a strong decline in October. For the coming quarters, the slight deceleration that has been occurring since the summer will continue to operate. Added to this trend is the impact of the conflict in Catalonia. These forecasts have been made under the assumption of a political risk contained in time. This implies a progressive normalization of the situation, which contains the uncertainties that affect the Catalan economy. Under this assumption, a weakening of the Catalan economy is expected, which would reduce growth in that community in a marked manner, but limited in time and with insignificant effect on the rest of the communities. Thus, the sovereign challenge would subtract half of the growth initially planned between 1-O and March 2018 in Catalonia, from 3.1% to close to 1.6%. Investment, consumption and tourism would be the most affected. 5

6 FORECASTS From the second quarter, however, the GDP would recover the expected rhythm in the previous forecasts. This is because, in spite of the change of the social and fiscal headquarters of many companies, the main centers of activity would remain in Catalonia. In this scenario of progressive normalization, the impact on the rest of the communities would be limited. In this context, a deceleration of household consumption is forecast, which would increase from 2.7% in 2017 to 2.4% in The savings rate, which is close to the historical minimum, will stop its fall in the coming quarters., contributing to the slowdown in private consumption. However, household debt will remain at values close to one year of disposable income. The other components of national demand will maintain their dynamism, especially investment in new housing and rehabilitation. The investment in capital goods, meanwhile, will moderate its expansion as a result of the situation in Catalonia and despite the good financial situation of the companies. A contribution from the foreign sector is expected to be less positive for growth, both in 2017 and Exports of goods benefit from the recovery of international trade. However, lower growth in the tourism sector is anticipated because of the saturation of certain summer destinations and the situation in Catalonia. Imports, on the other hand, will grow close to twice the total demand, recovering the elasticity observed in previous cycles. Overall, GDP will grow by 3.1% in 2017 and 2.6% in Half of the expected slowdown in 2018 is due to the sovereigntist challenge and the other half to other factors. 6

7 A moderate evolution of prices is foreseen despite the rising cost of oil. Consumer prices will increase around 1.5%, 2 tenths more than in the previous forecast. Core inflation (which excludes the most volatile components) will be even lower, reflecting the containment of wages. Also, the GDP deflator will experience a slight increase of 1.2%. The deceleration is also reflected in the creation of employment. By 2018, the number of employed persons is expected to increase by 2.2%, seven tenths less than in Even so, a new significant reduction in the unemployment rate is expected, up to 15.1%. This would be the lowest rate since the end of For 2017, the deficit of the AA.PP. will be at 3.2% of GDP. The deficit would reach 2.4% of GDP in 2018, two tenths above the target. This result would allow an exit from the "excessive deficit procedure", which requires that the deficit falls significantly below the threshold of 3% of GDP. MAIN RISKS The main threat facing the Spanish economy is one of prolonged uncertainty in Catalonia. This situation would have an impact of unpredictable magnitudes on the Catalan economy and would affect the rest of the country. This scenary, although unlikely, cannot be ruled out. The other risk is that of a paralysis in the reforms and in the effort to contain the public debt. In this context, it would be difficult to maintain high economic growth after Finally, in an international environment it may become less favorable. These forecasts have been formulated under the hypothesis of a stable Brent barrel price around its current levels of $ 60. However, a prolongation of the upward trend observed recently would exert downward pressure on domestic demand. On the other hand, changes at the head of the Federal Reserve could accelerate the expected tightening of monetary policy and generate new turbulence in the markets. The Spanish economy is especially vulnerable to this type of turbulence, due to the high level of public debt and household 7

8 Diciembre 2018 CONCLUSIONS: The Foundation of Savings Banks (Funcas) also published a review of its economic forecasts at the beginning of the month. In this, it improves three tenths its estimate of GDP growth for 2017, up to 2.8%. Madrid, the Balearic Islands, Catalonia and Galicia will be the four autonomous communities that will grow the most this year, above the national average. As for the unemployment forecast, 450,000 new jobs will be created this year, which will reduce the unemployment rate by 2.1 percentage points, to 17.5%, the lowest level since At regional level these inequalities will continue to be huge and ranging from 26% unemployment in Andalusia or Extremadura to 10% of communities such as Balearic Islands or Navarra. Regarding the deficit of public administration, the favorable evolution of the economy will allow it to be reduced throughout the year, although not enough to achieve the goal of 3.1% of GDP agreed with Brussels. The forecasts place our country as the locomotive of European growth and above even of countries such as the United States or Japan. According to its forecasts, the GDP of the euro zone will advance 1.8% this year and 1.5% next, while that of the United States will expand by 2.1% and 2.2%, respectively. Economic growth worldwide will be 2.7% in 2017 and In short, it is difficult to imagine a market with such an idyllic situation as that of Spain in For Italy: Spain is one of the countries in the Eurozone that has registered the highest growth in recent years, and one of the countries with the greatest projection for the coming years. The Italian product is viewed with good eyes in Spain, has a great reputation, thanks to the commercial relationships that have been generated in recent years. That is why we encourage Italian companies to take the first step towards internationalization in Spain, a market that offers many aids to foreign companies, and that generates great benefits. In addition, Spain is a turning point for companies wishing to make the leap to Central America, given the similarities it has to the Spanish market. 8

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