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

Transcription

1 QUAR September 218 SPANISH ECONOMY REPORT GOBIERNO DE ESPAÑA MINISTERIO DE ECONOMÍA Y EMPRESA

2 The Spanish Economy: recent developments and prospects: September 218 Elaboración y coordinación: Dirección General de Análisis Macroeconómico Madrid: Ministerio de Economía y Empresa, Centro de Publicaciones, 218 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 Financial markets RECENT EVOLUTION OF THE ECONOMIC INDICATORS The financial markets evolution in September was conditioned by a slight moderation in trade tensions and by the trade agreement reached between the United States, Mexico and Canada, as well as by the uncertainty regarding the budget in Italy and the situation of some emerging economies. Likewise, the markets have been conditioned by the monetary policy meetings of the main central banks, in which the rise of interest rates by the Federal Reserve (Fed) should be highlighted. In a context of rising oil prices, the public debt yields have increased, stock indices have registered a mixed behaviour, with predominance of profits, and the euro has depreciated against the dollar. The ECB maintains the interest rates and confirms the reduction in asset purchases The Governing Council of the European Central Bank (ECB), on its meeting held on 13 th September, decided to maintain the interest rates on the main financing operations, the marginal lending facility and the deposit facility unchanged at.%,.25% and -.4%, respectively. The Governing Council continues to expect the key interest rates to remain at their current levels at least until the summer of 219 and, in any case, during the time necessary to ensure that the inflation evolution remains in line with the current expectations of a sustained adjustment path. Regarding non-standard monetary policy measures, the Governing Council confirmed that it will continue with the net asset purchases at the monthly pace of 3 billion, until the end of September 218. Likewise, it confirmed that, as of September 218, provided that the data confirm the Governing Council inflation outlook in the mid-term, the monthly pace of net asset purchases will be reduced to 15 billion until the end of December 218, and that net purchases will cease from that date on. The Governing Council expects to reinvest the principal payments from maturing securities purchased under the Asset Purchase Program for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary in order to maintain favourable liquidity conditions and a high degree of monetary accommodation. The European Central Bank has maintained its inflation estimates unchanged for the Eurozone, but has revised slightly downward the GDP growth forecasts for this year and the next, highlighting the uncertainty and volatility derived from trade tensions and the problems in emerging countries. The Fed increases the interest rates and continues with the progressive reduction of its balance sheet The Federal Open Market Committee (FOMC) of the Fed, in its two day meeting held on 25 th and 26 th September, unanimously decided to increase the Federal Funds interest rates by 25 b.p., up to the target range of 2.%-2.25%. This is the third rise so far this year and the eighth since December 215. Likewise, the FOMC announced that it will continue with the progressive reduction of its balance sheet, so as of October the amount of monthly maturities exceeding 5 billion dollars will be reinvested (3 billion in bonds and 2 billion in assets backed by mortgages), compared to the current threshold of 4 billion.

4 4 Ministry of Economy and Business / Spanish Economy Report / September 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. In the statement, the FOMC highlighted that the labour market has continued to strengthen, the economic activity continues to grow at a solid pace, household consumption and business investment have grown strongly and inflation remains close to the 2% target. With regard to the future path of the Federal Fund interest rates, the Fed's projections point to an increase of the growth rate similar to that estimated at the meeting held in June, with an additional rate increase expected before the end of the year and gradual increases in 219 and 22. The BoE maintains the interest rates and the asset purchase programme The Monetary Policy Committee of the Bank of England (BoE), in its meeting held on 12 th September, unanimously decided to maintain the Official Bank Rate at.75%, in force since 1 st August. Likewise, it decided to continue with the public debt and corporate debt purchase programmes, which stand at 435 billion and 1 billion pounds, respectively. The Committee recognises that the economic prospects could be significantly influenced by the events related to the United Kingdom leaving the European Union. The BoJ maintains its monetary policy In the meeting held on 18 th and 19 th September, the Bank of Japan (BoJ) decided to keep the negative interest to current accounts that financial institutions hold at the Bank (-.1%). Similarly, the BoJ decided to keep its asset purchase programme unchanged, which expands the monetary base at an annual pace of 8 trillion yen, and the exchange-traded funds programme (ETFs), which was increased to an annual pace of 6 trillion yen in its outstanding balance. In a context of moderate economic growth, the BoJ confirmed its intention to maintain the present rates for a long period of time, until the inflation reaches the 2% target. The 12-month Euribor increases slightly but continues registering negative values In the interbank market of the Eurozone, interest rates registered minor changes during the first weeks of September and, in their longer term, they rebounded slightly in the last week of the month. Thus, on 2 nd October, the one, six and twelve-month Euribor stood at -.371%, -.268%

5 Ministry of Economy and Business / Spanish Economy Report / September and -.157%, respectively, versus the -.369%, -.268% and -.166% recorded at the end of August. The slight increase of the 12-month Euribor in this period is due to the rise in risk premiums required in the market (the Euribor-OIS differential rose one b.p.), in comparison to the expectations of interest rates stability (the OIS did not change during the period). The Spanish public debt differential falls in September In the secondary public debt market, the lower risk aversion and the uncertainty in Italy boosted yields upwards in the period between the end of August and the beginning of October, reaching the highest yields in the last week of September. Thus, the 1-year Spanish bond yield stood at 1.55% on 2 nd October, 5 b.p. above the figure recorded on 31 st August, and the German bond yield rose by 9 b.p. in that period, the differential standing at 113 b.p., 4 b.p. below the level recorded in late August. Meanwhile, the Spain-Italy differential stood at -193 b.p. on 2 nd October, compared to the -174 b.p. registered on 31 st August. The rise in yields in Italy (24 b.p.) in this period should be noted as a result of the uncertainty regarding the approval of its budget. In the United States, the 1-year bond yield increased 21 b.p. in the period, standing at 3.6% on 2 nd October, driven by expectations of interest rate rises. Countries T 1. Public debt yields and differentials (in % and basis points) Yields (%) Differentials with Germany (basis points) Dec Aug Oct-2-18 Variation in spreads Dec Aug Oct-2-18 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. Stock indices register a mixed behaviour In the stock markets, the trade tensions and the uncertainty regarding the currencies of emerging countries increased the volatility and risk aversion in the first week of September, causing the main indices to fall sharply. However, as the month progressed, the reduction in risk aversion, as a result of the moderation of trade tensions, and the favourable evolution of the US economy, boosted most indices upwards. Thus, in the European market, the Eurostoxx 5 fell by.1% in the period between 31 st August and 2 nd October. In the Spanish market, the IBEX 35 fell by 1%, standing at 9,35.5 points on 2 nd October. The rest of European markets registered a mixed behaviour, where gains prevailed: stock indices advanced in Italy, France and the United Kingdom (1.4% and 1.1% and.6%, respectively) and fell in Germany (-.6%). In the US market, the S&P 5 index recorded an increase of.8% in the period, so the cumulative annual profit stood at 9.3%.

6 6 Ministry of Economy and Business / Spanish Economy Report / September 218 T 2. International stock exchange Level % Variation Countries Index Oct-2-18 Aug Dec Germany DAX 12, France CAC 4 5, Italy FTSE MIB 2, 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 49, Brazil BOVESPA 81, Argentina MERVAL 32, Source: Bolsa de Madrid, Infobolsa, Stoxx and Financial Times. The euro depreciates against the dollar With respect to the currency market, the interest rates increase in the United States, the expectations of new increases and the favourable evolution of the US economy, have strengthened the dollar exchange rate against the euro during September. Thus, in the period between late August and early October, the euro depreciated by.9% against the dollar, and by.8% against the pound, and appreciated by 1.9% against the yen, trading at the end of the 2 nd October session at dollars,.894 pounds and yen. In the same period, the euro depreciated by.5% in nominal effective terms vis-à-vis the group of industrialised countries. Monetary aggregates T 3. Eurozone monetary aggregates August 218 Balance (Billion ) % Year-on-year variation July 218 June Currency in circulation 1, Overnight deposits 6, 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. August 218

7 Ministry of Economy and Business / Spanish Economy Report / September The M3 broad monetary aggregate moderates its growth in August by half a point, down to 3.5%,... The European Central Bank published the evolution of the monetary and credit aggregates in the Eurozone for August. The M3 broad aggregate slowed down half a point in August, to 3.5% y-o-y. This evolution is due to the seven tenths moderation registered by the growth rate of overnight deposits (to 6.8%) and the largest decrease in marketable instruments and other short-term deposits (-4.3% and -1.4%, respectively, compared to the -3.3% and -1.1% registered in the previous month), partially offset by the greater increase in cash in circulation (three tenths, up to 3.9%). while financing to the private sector in the Eurozone remains at 3% On the other hand, the main counterpart to M3, the financing to the private sector in the Eurozone, increased by 3% in August, as in July. This evolution is due to the stability in the loans y-o-y rate (3%) and to the fact that the acceleration of the securities other than shares (one point, up to 6.1%) offset the greater decrease of shares and other equity (-1.4%, in comparison to the -1.1% registered in July). Within the loans, those granted to non-financial corporations grew by 3.1% and those granted to households by 3.2%, rates similar to those registered in July (2.9% and 3.3%, respectively). T 4. Financing of private sector in the Eurozone (1) August 218 % Year-on-year variation Balance June July August (Billion ) 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. The stock of financing to the private sector in Spain maintains the rate of decline at.2% in August The stock of financing to the non-financial private sector in Spain fell by.2% y-o-y in August, as in the previous month. Financing received by firms maintained the fall rate (-.5%), due to the fact that the higher decrease registered by foreign loans (-2.3%, versus -1.8% in July) offset the lower decrease in bank loans (they fell by.7%, two tenths less than in the previous month) and the largest increase in securities other than shares (6.1%, a rate six tenths higher than the figure recorded in July). On the other hand, financing received by households increased in August for the third consecutive month,.3% y-o-y, a figure one tenth higher in comparison to the one registered in the previous month, due to the lower rate of decline of bank loans for

8 8 Ministry of Economy and Business / Spanish Economy Report / September 218 housing (-1.6%, compared to the -1.8% registered in July), while bank loans for purposes other than housing grew by 6.1%, one tenth less than in July. T 5. Financing of non-financial sectors residents in Spain August 218 % Year-on-year variation Balance (Billion ) June 218 July 218 August 218 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. New loan and credit operations to households and non-financial corporations continue to grow strongly The amount of new loan and credit operations to households, in cumulative terms for the last twelve months, increased by 17.2% y-o-y in August, one point less in comparison to the figure registered in July. This evolution is due to the slight moderation in the growth of loans for housing (1.5 points, down to 13.8%) and for other purposes (1.6 points, down to 19.2%), partially offset by the slight acceleration of loans for consumption (two tenths, up to 2.6%). The amount of new loan and credit operations to SMEs (using as a proxy for these credits those under one million euros) rose by 7.1% y-o-y, in cumulative terms for the last twelve months up to August, one tenth less compared to the previous month. On the other hand, the amount of new loan and credit operations exceeding one million euros increased by 8.2% y-o-y, four tenths less than that of July. Table 1.6. New loan and credit operations to households and non-financial corporations (1) Balance August 218 (Millions ) June 218 % Year-on-year variation July 218 TOTAL 454, Loan and credit operations to households 97, August 218 House purchase 42, Consumer credit 33, Other lending 21, Loan and credit operations to non-financial corporations 357, Up to 1 million euros 191, Above 1 million euros 165, (1) Accumulated data for the last 12 months. Source: Banco de España.

9 Ministry of Economy and Business / Spanish Economy Report / September Spanish economy Demand and production The Spanish economy maintains a robust growth The Spanish economy maintains a robust growth which is higher than that of the Eurozone. According to the Quarterly National Accounts (QNA) figures, published by the National Statistics Institute (INE, by its Spanish abbreviation), the Spanish economy recorded a q-o-q rate of.6% in the second quarter of 218, coinciding with the rate advanced in July and with that of the first quarter, which has been revised one tenth downwards. In y-o-y terms, GDP increased by 2.5%, a rate three tenths lower than the one recorded in the previous quarter and two tenths below the figure estimated two months ago, extending the slight growth moderation trend initiated at the beginning of this year. However, the Spanish economy continues to grow above the average for the Eurozone. With regards to the composition of growth, domestic demand has continued to boost economic growth, increasing its contribution by two tenths in the second quarter, up to 3.3 percentage points (p.p.), while the external sector has subtracted eight tenths to the GDP growth, half a point more than in the first quarter. Among the domestic demand components, the dynamism of investment stands out, in particular, the equipment component, which in the second quarter has registered a y-o-y rate close to 11%, much higher than the figure recorded in the previous quarter and the highest of the last two and a half years. The investment acceleration has more than offset the moderation of the consumption growth rate, both private and public, resulting in a greater increase in domestic demand. In particular, the final consumption expenditure of households, in volume and with seasonally and calendar adjusted data, registered a 2.3% y-o-y increase, eight tenths lower in comparison to the figure registered in the first quarter, and the final consumption expenditure of the General Government in real terms slowed down half a point, to 1.9% y-o-y. With regards to the external demand, exports of goods and services reduced the y-o-y growth rate in the second quarter, albeit to a lesser extent than the INE flash estimate of July, and imports accelerated, in line with the more dynamic evolution of domestic demand. Employment, in terms of National Accounts, maintains the expansionary trend in the second quarter, registering q-o-q growth of.8%, three tenths higher than the figure registered in the previous quarter. The employment y-o-y growth rate stands at 2.5%, which represents a net creation of almost 441, full-time equivalent jobs in the last year. The IMF forecasts a 2.7% growth rate for the Spanish economy in 218,... In its World Economic Outlook, the International Monetary Fund (IMF) foresees a real GDP growth forecast for the Spanish economy for this year of 2.7%, which implies a slight downward revision, one tenth, compared with the July forecast, and maintains the growth forecast for 219 at 2.2%. By components, for this year it foresees a 2.8 p.p. contribution of the domestic demand to growth and of 2. p.p. for the coming one, while the external balance would subtract one tenth in 218 and contribute two tenths in 219.

10 1 Ministry of Economy and Business / Spanish Economy Report / September and the Bank of Spain, 2.6% According to the macroeconomic forecasts for the Spanish economy published by the Bank of Spain (BoS), the real GDP growth would stand at 2.6% in 218, which is a slight downward revision, one tenth, compared to figure estimated in June. For 219 and 22, the BoS foresees the continuation of the expansionary trend of the Spanish economy, although at a more moderate pace, projecting a real GDP growth rate of 2.2% in 219 and of 2% in 22, these rates are two and one tenth lower, respectively, than those registered in the previous scenario, mainly as a consequence of the worsening outlook for the evolution of Spain's export markets and, to a lesser extent, the rise in oil prices. Domestic demand will continue to support GDP growth, with contributions of 2.7 p.p. in 218, 2.1 p.p. in 219 and 1.9 p.p. in 22. On the other hand, net external demand would subtract one tenth from growth this year and would contribute with one tenth in 219 and in 22. Employment is expected to grow at more moderate rates, 2.4% in 218, 1.9% in 219 and 1.7% in 22, in line with the less expansionary trend of activity. The unemployment rate will continue to fall, reaching levels below 12% by the end of the projection horizon. The indicators of global activity show a slightly less dynamic trend in the third quarter Amongst the qualitative indicators for the Spanish economy, the Economic Sentiment Indicator decreased by one and a half points in September compared to the previous month, down to 15.5 (average = 1) due to the fall in consumer, services and retail trade confidence, while it improved in industry and construction. Thus, the Economic Sentiment Indicator has declined on average by 3.1 points in the third quarter compared to the second quarter, reaching In the same vein, the composite PMI ended the third quarter of the year at 52.7, 2.7 points lower compared to the previous month, and the OECD composite leading indicator for Spain, designed to anticipate the turning points in the economic activity with regards to its trend, recorded an average level of 99.1 in the two-month period from July to August, a figure six tenths lower compared to the figure registered in the second quarter of the year. The Spanish economy records net lending vis a vis the rest of the world in the second quarter According to the Quarterly Non-Financial Accounts for the Institutional Sectors (QNFAIS), in the second quarter of 218, the Spanish economy showed net lending vis a vis the rest of the world, amounting to 3. billion (1% of the quarterly GDP), lower in comparison to the figure estimated for the same period of 217 (2.2% of GDP). With calendar and seasonally adjusted data, the net lending of the economy stood at 1.2% of GDP, four tenths below that of the previous quarter. The lower net lending, in gross terms, is explained by a lower surplus of goods and services exchanges, while the balance of the capital balance increases and the current transfer and income deficit moderates. By institutional sectors, the net lending of households and non-profit institutions serving households (NPISHs) fell down to 4.3% of the quarterly GDP, as well as that of financial institutions (2.6%), while the net borrowing of non-financial corporations (-.2%) and the General Government (-5.8% of the quarterly GDP) decreased.

11 Ministry of Economy and Business / Spanish Economy Report / September Private consumption quantitative indicators extend the expansionary trend in the third quarter Amongst the GDP components on the demand side, private consumption has grown by 2.7% in annual average in the first half of the year, according to the QNA. This rate is two tenths higher than the figure registered in 217 as a whole, and the indicators available for the third quarter indicate, in general terms, an extension of the expansionary trend. Among the quantitative indicators, retail sales, with work calendar and price adjusted data, recorded in August a y-o-y rate of.3%, 1.1 points higher than in the previous month. This more favourable evolution is due to the improvement of both the food and the non-food component. On the other hand, domestic sales of consumer goods and services, with deflated, fixed-sample and calendar and seasonally adjusted data, grew by 3.8% y-o-y in July, in comparison to the 3.1% registered in the previous month, and passenger car registrations, according to the figures provided by ANFAC (Spanish Association of Vehicles Manufacturers), ended the third quarter with a y-o-y increase of 15.9%, 6.2 points higher than in the previous quarter. The Consumer Confidence Indicator (CCI), published by the CIS, registered less favourable figures, as it fell almost twelve points in September, down to 9.6, as a result of the decline in its two components, current situation and expectations. Likewise, the Consumer Confidence Indicator published by the European Commission lost 5.5 points in September, reaching -8, due to the evolution of components such as the unemployment outlook, the household situation and the general situation of the economy, while the trend of savings improved. Thus, both the confidence indicator of the Commission and that of the CIS fell in the third quarter compared to the second. The household savings rate remains at record lows According to the QNFAIS, the gross disposable income (GDI) for households and NPISHs recorded a 1.5% y-o-y increase in the second quarter of 218, as a result of the increase in wage incomes (3.8%) and current transfers received (2.3%), partially offset by the higher payment of current taxes on income and wealth (11.4%) and current transfers (4.1%). Non-wage incomes remained virtually stable. 5, G 2. GROSS DOMESTIC PRODUCT, volume change in %, sac data 8 G 3. HOUSEHOLD SECTOR % GDI (moving year) 1 2,5 4 8, -2,5-5, year-on-year quarter-on-quarter annualized Saving (right scale) Net lending / borrowing Source: INE. Source: INE. As a result of an increase in the GDI of households and the NPISH being lower than that of final consumption expenditure (4% in y-o-y terms), the saving rate fell down to 12.5% of the GDI, a rate two points lower than that registered a year earlier. Household saving was enough to

12 12 Ministry of Economy and Business / Spanish Economy Report / September 218 finance the investment of the sector and other net capital expenditures, recording a net lending equal to 4.3% of GDP in the second quarter, 2.2 points lower than that of a year earlier. Equipment investment indicators register mixed signals after rebounding strongly in the second quarter Equipment investment has grown by 6.2% y-o-y in the first six months of the year, a rate almost one and a half points higher than that foreseen by the INE in July and half a point higher than that of 217 as a whole, investment indicators registering mixed signals in the third quarter of this year. According to the Business Tendency Survey, the Industry Climate Indicator for investment goods improved its balance by almost nine points in September, reaching 2 points, an evolution attributable to the strong increase in the order portfolio and the decline in the stocks level, the expectations on production remaining virtually unchanged. However, this indicator decreased in the third quarter over the second. In the same vein, domestic sales of equipment and software in large companies, with deflated, fixed-sample and calendar and seasonally adjusted data, accelerated by 3.3 points in July, up to 3.9%. Non-financial corporations register less net borrowing in the second quarter In the second quarter of 218, non-financial corporations registered a net borrowing equal to.2% of the quarterly GDP, three tenths lower compared to the figure registered in the same period of the previous year. This result is mainly due to an increase in the gross saving of the sector (5.5% y-o-y) higher than that of investment (3.1%). In turn, the greatest savings are explained by the increase in the gross operating surplus (1%) and, especially, by the fall in net property income paid (-1.7%) and net current transfers paid (-22.3%), despite the increase in payments for income and wealth taxes. 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 non-financial companies nominal gross value included in the sample recorded a 5.2% y-o-y increase in the second quarter of 218, double that of the previous quarter. The greater dynamism of the overall productive activity, slightly attenuated by the acceleration of staff expenses (3.2%, compared to the 2.8% recorded in the previous quarter), resulted in an intensification of almost five points in the gross economic result (GER) growth rate, up to 7.2%. The more expansionary trend of the GER, together with the significant 14.1% drop in financial expenses (.1% in the first quarter of 218), explains the behaviour of the net ordinary income (NOI), which accelerated two tenths up to a rate of 11.1% y-o-y. From the sectoral point of view, the favourable behaviour of the industry stands out, as its y-o-y increase approached 6% in the period from April to June. The ordinary return on net assets for all the companies in the sample stood at 4.5% in the second quarter of 218, 1.2 points higher than the figure recorded in the previous quarter. On the other hand, the ratio that measures the financial cost (financial expenses over liabilities) stood at 2.2%, one tenth lower than in the first quarter, so the differential between them rose 1.4 points, reaching 2.3 percentage points.

13 Ministry of Economy and Business / Spanish Economy Report / September The dynamism of housing investment continues Investment in construction recorded an average annual increase in the period between January and June 218 similar to that of equipment investment, of 6.3%, higher than the figure foreseen by the QNA in July and 217 as a whole (4.6%). The particularly dynamic evolution of housing investment stands out, registering a y-o-y rate of 8.1%, a behaviour that would have been extended in the third quarter of the year. Thus, according to the INE Statistics based on the properties recorded in the Property Registers, the number of housing sales rebounded in July, registering a y-o-y rate of 16.2%, significantly higher than the figure recorded in the previous month (1.8%). This acceleration was due to the greater dynamism of the purchases of new housing, which registered a y-o-y rate of 11.4%, six points higher than in June, and to a greater extent of the used housing purchases, which increased by 17.2% (1% in June). According to the protection system, both the private housing purchases (9% of the total) and social housing purchases increased both by 16.2% y-o-y, rates 14.5 and 13.9 points higher, respectively, than those registered in the previous month. Likewise, the number of mortgages on housing rebounded in July, rising by 14.6% y-o-y, versus the 3.9% registered in the previous month. The average amount per mortgaged house increased by 2.1%, three points less in comparison to the figure recorded in June, and capital borrowed for mortgages on housing rose by 17%, a rate 7.8 points higher than in the previous month. Activity increases in all productive sectors From the supply point of view, in y-o-y rates and with calendar and seasonally adjusted data, the Gross Value Added (GVA) of the agriculture, farming, forestry and fishing sector accelerated one point in the second quarter of 218, up to 3.2%. The GVA of the construction and industrial sectors slowed down three and one tenths, respectively, down to 7.1% and 2.5% and the GVA of the services sector rose by 2.3%, two tenths less than in the previous three months (2.5%). Amongst the industrial activity indicators, the Industrial Production Index (IPI), with calendar adjusted data, rose by 1.2% y-o-y in August, half a point more in comparison to the previous month. By destination groups, the highest growth of equipment (5.4%) and energy goods (1.8%) stood out, while intermediate goods slowed down to.6% and consumer goods fell by 1.2%. On the other hand, the Turnover Index in Industry (ICNI) and the Industry New Orders Index (INOI), adjusted for calendar effects, rose in July, registering y-o-y rates of 5.6%, the former, and of 2.4%, the latter (7.5% and 5.2%, respectively in the previous month). The lower growth rate of both indices was due to the less expansionary behaviour of all its components. The most recent qualitative indicators of the industry activity have registered, in general, favourable signs. Thus, the Industrial Climate Indicator (ICI), published by the Ministry of Industry, Trade and Tourism, improved more than one point in September, registering a balance of -3.7, mainly due to the increase in the order portfolio and the reduction of the stocks level. In the same vein, the Industrial Confidence Index published by the European Commission rose by half a point in September, as a result of a more favourable valuation of its three components. On the other hand, the manufacturing industry PMI for Spain reached 51.4 in September, 1.6 points lower versus the previous month, but maintaining the expansionary trend of the sector.

14 14 Ministry of Economy and Business / Spanish Economy Report / September 218 G 4. PMI AND TURNOVER INDEX IN THE INDUSTRY index and y-o-y growth rate in % G 5. SERVICES: PMI AND TURNOVER INDEX index and y-o-y growth rate in % PMI (right scale) Turnover Index PMI Services (right s.) Turnover Index Sources: INE and Markit group. Sources: INE and Markit group. The activity in the construction sector maintains the expansionary trend The construction sector shows a high dynamism, although the indicators show mixed results. The Production Index in the Construction Industry (PICI), published by Eurostat, deflated and with calendar adjusted data, rose by 2.6% in annual average in the first seven months of the year, after the 1.5% fall recorded in 217 as a whole. In July, the PICI fell by 4.1% y-o-y, following the 1.7% rise registered in the previous month. The PICI fall is due to the decline in the building component (-3.7%, compared to the 3.3% increase recorded in June) and, to a greater extent, by the civil works component, which fell by 1.9%, 5.6 points more than in the previous month. With regards to construction activity leading indicators, according to construction new permits, floorage approvals in new construction maintained in July the strong dynamism of previous months, registering a y-o-y variation rate of 32.6%, almost fourteen points higher than the figure registered in the previous month (18.8%), accumulating an annual average advance in the first seven months of the year of 26.5% (21.8% in the same period of 217). By components, the residential component (with a weight greater than 83% of the total) increased by 48.8%, after the 12.2% growth registered in the previous month, while the non-residential component went from rising by 5.2% in June to falling by 13.6% in July. On the other hand, the confidence in the sector, according to the European Commission indicator, registered an increase of almost thirteen points in September, reaching 2.5, mainly due to the improvement in the order portfolio component, while the expectations related to employment component in the sector fell slightly. Activity in the services sector continues to show a solid growth With regards to the services sector, the Services Sector Turnover Index (SSTI), with work calendar adjusted data, rose by 6.5% y-o-y in July, four tenths less than in the previous month. The slight moderation in the growth rate affected the trade component, which slowed down eight tenths, to 6.9%, while the other services component grew by 5.9%, a rate four tenths above the figure recorded in previous month. Among the qualitative indicators, the Services PMI stood at 52.5 in September, slightly lower than the figure recorded in August. Despite the lower growth in trade activity, both the activity and new orders continued to rise firmly.

15 Ministry of Economy and Business / Spanish Economy Report / September The average expenditure per tourist increases by 3.7% y-o-y in August According to the Survey on Tourist Movements on Border (Frontur), 1.2 million international tourists visited Spain in August, 1.9% less than a year earlier, which represents a moderation in the fall rate of three points compared to July. On the other hand, the total expenditure by tourists who visited Spain in August reached 11.5 billion, a figure 1.8% higher compared to the same month of 217, compared to the.9% fall recorded in the previous month. The increase in tourist expenditure and the fall in tourist inflow has resulted in a 3.7% y-o-y rise of the average spending per tourist. Likewise, the average daily expenses increased by 1.7% y-o-y. Overnight stays in hotels also moderated the y-o-y fall rate in August, by one point and a half, to.6%. This evolution was due to the rebound in domestic overnight stays, which went from falling by 1.1% in July to increase by 2.9% in August, while the foreign overnight stays decreased by 2.5% y-o-y, a rate similar to that of the previous month. On the other hand, air traffic registered a greater dynamism in August, recording a y-o-y increase of 3.3%, one tenth higher compared to the figure recorded in the previous month, due to the evolution of domestic traffic, which increased by 8.9%, one point more than in July, while international traffic increased by 1.4%, one tenth less than in the previous month. Prices Inflation remains at 2.2% in August Inflation, measured by the general Consumer Price Index (CPI), remained at 2.2% y-o-y in August, identical to the one registered in the previous month, mainly due to the fact that the acceleration of electricity prices offset the moderation of fuel, tourism and hospitality inflation. Energy products prices rose by 11.1% y-o-y in August, one tenth less than in July. This slight moderation is mainly due to fuels and lubricants prices, which increased by 13% y-o-y in August, 1.4 points less than in July, as a result of the moderation in the y-o-y growth rate of the Brent barrel price in euros. G 6. CPI GROWTH CONTRIBUTION BY SECTORS in percentage points 6 CPI (%) Non-energy ind.goods Processed food Energy 4 Non-processed food Services 4 2 G 7. GENERAL CPI AND CORE INFLATION y-o-y change in % General CPI Core Inflation Sources: INE and SGCPE. Source: INE. For its part, electricity prices increased by 1.8%, 2.7 points more than in the previous month, in line with the evolution in the generation sources, specifically the lower use of hydroelectric power in that month (low cost source of electricity generation) in favour of higher

16 16 Ministry of Economy and Business / Spanish Economy Report / September 218 cost sources (coal and combined cycle). The high rate of growth observed in the international price of gas and coal may have also exerted an upward pressure, as well as the increase that CO2 emission rights prices have been registering since the beginning of the year, which continued during August. The prices of non-processed food grew by 4.6% y-o-y in August, six tenths more than in the previous month, where the acceleration of fresh fruit prices stood out, 4.3 points, up to 17.3%, the highest rate of y-o-y rise since September 213, which is explained by a base effect associated with the strong m-o-m fall registered in the same month of last year. Core inflation moderates one tenth in May, to.8% Core inflation, which excludes the most volatile elements from the CPI (non-processed food and energy products), moderated one tenth in August, to.8% y-o-y. Among its components, services prices slowed down two tenths in August, to 1.3% y-o-y, mainly due to the tourist packages prices, which intensified the drop rate by two points, to 4.4%. Prices of non-energy industrial goods decreased slightly in August, by.1% y-o-y, after the stabilisation registered in the previous month, and processed food, beverages and tobacco prices slowed down one tenth, to.7%. According to the CPI flash estimate, inflation remains at 2.2% in September According to the flash estimate published by the INE, the y-o-y rate of the CPI remained at 2.2% in September 218, the fifth consecutive month with inflation slightly over 2%. In this evolution, the rise in electricity prices and the stability of food and non-alcoholic beverages prices, compared to the increase observed in September 217, stand out. 4 G 8. HARMONISED CPI y-o-y change % Spain 8 G 9. INDUSTRIAL PRODUCER PRICES (PPI) y-o-y change in % All items 2 EMU Differential (p.p.) 4 Non-energy Last month's figures are provisional. Sources: INE and Eurostat Source: INE. In harmonised terms, if September final data confirm the figures of the flash estimate published by the INE for Spain (2.2%) and by Eurostat for the Eurozone (2.1%), the inflation differential for Spain against the Eurozone would stand at.1 percentage points.

17 Ministry of Economy and Business / Spanish Economy Report / September Industrial prices accelerate six tenths in August, up to 5.2%, due to energy The Producer Price Index (PPI) registered a 5.2% y-o-y increase in August, six tenths higher than in July, mainly due to the acceleration of energy prices, particularly those for production, transport and distribution of electricity, which registered a y-o-y variation rate of 14.4%, four and a half points higher than the previous month, followed by gas production and piped distribution of gaseous fuels, whose prices grew by 9.6% in August, a rate 3.3 points higher than in July and the highest since October 213. For its part, the non-energy PPI extended the trend of gradual slowdown started in mid-217, moderating the y-o-y growth rate by one tenth, to 1.1%, due to the lower increase in the intermediate goods prices, especially metallurgical ones, and, to a lesser extent, those for equipment goods, while consumer goods prices fall rate remained unchanged. Labour Market The number of Social Security covered workers maintains the y-o-y growth rate at 2.9% in September The number of Social Security covered workers, with seasonally adjusted data published by the Ministry of Employment, Migrations and Social Security rose by 5,811 people in September 218,.3% m-o-m, after the virtual stabilisation registered in the previous month. In y-o-y terms, and with unadjusted data, the number of Social Security covered workers increased by 526,551 registrations in September, up to a total of 18.9 million, 2.9% more than in the same month last year, a rate identical to the figure registered in August. By activity sections, more than half increased their contribution to the Social Security covered workers y-o-y growth, with education, health and construction standing out. Among those that reduced their contribution are public administration, agriculture and auxiliary services. In relation to the lower employment growth rate in the public administration and auxiliary services sections, it should be noted that this evolution extends the trend started at the end of 217 and at the beginning of 218, respectively. 1 G 1. SOCIAL SECURITY-COVERED WORKERS change in % 5 2 G 11. REGISTERED UNEMPLOYMENT change in % Original.Annual variation (right-hand scale) 12 Seasonally adjusted. Monthly variation Original. Annual variation (right-hand scale) -1 Seasonally adjusted. Monthly variation Source: MTMS. Source: MTMS. Considering the duration of contracts, among the Social Security covered employees whose contract is specified by the statistics, it can be observed that 92% of the y-o-y increase in September was permanent and 8% temporary, the former recording a 5.4% increase (a rate six

18 18 Ministry of Economy and Business / Spanish Economy Report / September 218 tenths higher compared to the figure registered in August and the highest since December 27) and the latter recording a.9% increase (in comparison to the 2.2% registered in the previous month). In this sense, according to the statistics for new contracts registered in the offices of the State Public Employment Service, in September 218 a figure of almost two million was reached, 11.9% of which were open-ended contracts, the highest percentage in a month of September since 28. In addition, 34.6% of the total registered open-ended contracts were conversions, which represents the highest rate in a month of September since 212. In the last twelve months, the y-o-y rate increase in Social Security covered workers has moderated six tenths, from 3.5% in September 217 down to 2.9% in September this year. By activity sections, auxiliary services, trade, hospitality and public administration are those that contributed the most to the moderation of the employment growth rate, partially offset by the greater dynamism in education. In the third quarter of 218 as a whole, the y-o-y variation rate of Social Security covered workers was 2.9%, a rate two tenths lower than in the second quarter of the year. With seasonally and calendar adjusted data, the q-o-q growth rate of Social Security covered workers moderated four tenths, to.4%. Registered unemployment decreases by 6.1% y-o-y in September The favourable evolution of Social Security covered workers in September was reflected in the registered unemployment figures, which in y-o-y terms, and with unadjusted data, fell by 27,673 people, a rate of -6.1%, standing at 3.2 million people at the end of September. This rate of decline is two tenths higher than the previous month (-5.9%), due to the greater drop in agriculture, while in the rest of the branches the fall was more moderate. In the third quarter of 218 as a whole, the registered unemployment y-o-y rate stood at -6%, similar to that of the second quarter (-6.2%). With seasonally and calendar adjusted data, the q-o-q reduction rate in registered unemployment moderated six tenths, to -1%. The labour cost per worker increases by.7% y-o-y in the second quarter According to the Quarterly Labour Cost Survey, the employment evolution took place in a context of slight nominal growth of labour costs per worker,.7% y-o-y in the second quarter, with seasonally and calendar adjusted data, one tenth more than in the previous quarter. Per effective worked hour, the labour cost increased by.9% y-o-y, a rate one tenth higher than the figure registered in the first quarter. With unadjusted data, the y-o-y increase rate in the labour cost per worker maintained in the second quarter of this year at.7%, as a result of the compensation between, on the one hand, the growth moderation in wage costs, mainly due to the fall of extraordinary payments; and, on the other hand, the rebound of non-wage costs, in turn largely derived from the increase in dismissal costs. It should be noted that the increase in dismissal costs per worker (25.6% y-o-y) is influenced by the strong q-o-q fall registered in the same period last year, compared to the

19 Ministry of Economy and Business / Spanish Economy Report / September moderate decrease registered in the second quarter of 218. Likewise, it should be noted that the cost of dismissal is at lower levels than those during the crisis. 2 G 12. LABORAL COST seasonally and calendar adjusted data quarter-on-quarter change in % 2 G 13. DERIVA SALARIAL variación anual en % y puntos porcentuales Coste salarial ordinario Salarios pactados Deriva salarial Total laboral cost per worker -2 Total laboral cost per hour Source: INE (ETCL). Fuentes: INE y MTMS. External sector The current account surplus falls... According to the Balance of Payments data, in July 218, the Spanish economy generated net lending to the rest of the world of 163 million, compared to the net lending of 2.5 billion recorded a year earlier. The current account balance recorded a 17 million surplus in July, compared to the surplus of 2.2 billion registered in the same month of 217, as a result of the decrease in the surplus of goods and services, which stood at 3 billion, compared to the surplus of 5.2 billion recorded in July 217, while the deficit of primary and secondary income fell by 3%, reaching 2.9 billion. Meanwhile, the surplus in the capital account ended at 56 million, 219 million lower than the figure recorded in July of the previous year....largely due to the rise in oil prices According to Customs data, the trade balance recorded a deficit of 3.2 billion in July 218, compared to a deficit of 2.1 billion registered a year earlier. The trade deficit increase was due to the worsening of the non-energy component balance, which went from registering a surplus of 237 million in July 217 to a deficit of 513 million in the same month of 218, and to the increase in the deficit of the energy component, from 399 million up to 2.7 billion, largely influenced by the evolution of the oil price in euros, which increased by 5.5% y-o-y in July. In cumulative terms for the last twelve months up to July 218, the trade balance recorded a deficit of 29.4 billion, compared with the 23.5 billion deficit accumulated in the twelve months up to July 217. The 25% worsening of the external balance is explained both by the energy component deficit increase, of 8.8%, and by the decrease in the non-energy balance, which went from recording a surplus of 1.7 billion in accumulated terms up to July 217 to a deficit of 2. billion in the same period of 218.