QUAR. October 2017 SPANISH ECONOMY REPORT MINISTERIO DE ECONOMÍA, INDUSTRIA Y COMPETITIVIDAD GOBIERNO DE ESPAÑA

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1 QUAR October 217 SPANISH ECONOMY REPORT GOBIERNO DE ESPAÑA MINISTERIO DE ECONOMÍA, INDUSTRIA Y COMPETITIVIDAD

2 The Spanish Economy: recent developments and prospects: October 217 Elaboración y coordinación, Dirección General de Análisis Macroeconómico y Economía Internacional. Madrid: Ministerio de Economía, Industria y Competitividad, Centro de Publicaciones, 217 V; 26 cm. 1. España-Situación económica I. España. Subdirección General de Análisis Coyuntural y Previsiones Económicas II. España. Ministerio de Economía, Industria y Competitividad. 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 y Economía Internacional Subdirección General de Análisis Coyuntural y Previsiones Económicas Impresión: Centro de impresión digital y diseño. Ministerio de Economía, Industria y Competitividad.

3 RECENT EVOLUTION OF THE ECONOMIC INDICATORS Financial markets The financial markets evolution in October was conditioned by the monetary policy meetings of the major central banks, especially by the decision of the European Central Bank (ECB) to extend its debt purchase programme in 218 and by the rate increase of the Bank of England (BoE). Furthermore, the political uncertainty in Catalonia, the approval of the tax reform proposal by the US Senate and the presentation of business results had an impact as well. In this context, the main stock indices rose, except for the Spanish one, public debt yields fell and the euro depreciated against the dollar The ECB maintains the interest rates and extends its asset purchase programme in 218, reducing it by half The Governing Council of the European Central Bank (ECB), in its meeting held on 26 th October 217, maintained 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 ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. As regards non-standard monetary policy measures, the Governing Council approved that the purchases under the asset purchase programme (APP) will continue at the current monthly pace of 6 billion euros until the end of December 217. From January 218, the net asset purchases are intended to continue at a monthly pace of 3 billion until the end of September 218, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the APP in terms of size and/or duration. The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance. The main refinancing operations and the three-month longer-term refinancing operations will continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 219. The Fed maintains the interest rates and begins the gradual reduction of its balance sheet The Federal Open Market Committee (FOMC) of the Federal Reserve (Fed), in its two day meeting held on 31 st October and 1 st November, decided to maintain the Federal Funds interest rates within the target range of 1.%-1.25%, set in the meeting held in June. The FOMC believes there is still room for a new rate increase before the end of the year and expects three rate hikes in 218, two in 219 and one in 22, in a context of solid economic growth and strong labour market. Likewise, the Fed announced that the gradual reduction of its bond portfolio and mortgage-backed assets -MBS- which started in October, is proceeding. These currently stand at $ 4.2 trillion. The reduction started with $ 1 billion per month, $ 6 billion in bonds and $ 4 billion in MBS, by not reinvesting all of the maturities. This amount will increase

4 4 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October 217 by $ 1 billion more each quarter until reaching a maximum of $ 5 billion per month. Once this ceiling has been reached, the amounts will remain stable until the treasury securities reach levels considered adequate to articulate the monetary policy. 8 INTEREST RATES G1. MONETARY AND FINANCIAL INDICATORS (1) 12 EURO EXCHANGE RATE January 28 = 1 MADRID STOCK EXCHANGE 31/12/85 = Intervention rate 12 month Euribor rate Dollar/Euro Yen/Euro year government bond yield (1) Daily data. Source: ECB, Banco de España and Bolsa de Madrid. The BoE increases the interest rates and maintains the asset purchase programme The Monetary Policy Committee of the Bank of England (BoE), in its meeting held on 1 st November, decided to increase the Official Bank Rate by 25 b.p., up to.5%, which is the first rate increase since 6 th December 27. Likewise, it decided to continue with the public debt and corporate debt purchase programmes, which stand at 435 billion and 1 billion pounds, respectively, in a context of volatility of the pound sterling and rising inflation. The measure was approved by seven members in favour and two against. The entity expects new rate hikes in a very gradual manner. The BoJ maintains the interest rates and the monetary stimulus plans In the meeting held on 3 th and 31 st October, 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 approximately 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. The 12 month Euribor remains negative and registers record lows In the interbank market of the Eurozone, interest rates continued the downward trend between late September and early November, in a context where the ECB maintained an accommodative monetary policy, and remained negative, until reaching their record low in the last week of the period. Thus, on 3 rd November, the one, six and twelve-month Euribor stood at -.372%, -.276% and -.191%, respectively, versus the -.372%, -.273% and -.172% recorded at the end of September. The 12-month Euribor evolution in this period is due to the expectations of virtual stability in the interest rates (the twelve-month OIS fell by one b.p.) and the fall of risk premiums required in the market (the Euribor-OIS differential fell one b.p. during the period).

5 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October European public debt yields decrease In the secondary debt market, yields decreased in the first half of October, in a context of expectations regarding the ECB's monetary policy meeting and risk aversion. Subsequently, the expectations of an increase in inflation and the depreciation of the euro boosted the yields upwards; however, these edged downwards again during the last week of the month due to the extension of the ECB stimulus program, and to the expectations regarding the monetary policy meetings of central banks outside the Eurozone. Thus, the 1-year Spanish bond yield stood at 1.48% on 3 rd November, 15 b.p. below the figure recorded on 29 th September. On the other hand, the German bond yield fell by 11 b.p. in that period, down to.36%, the Spain-Germany differential standing at 112 b.p., 4 b.p. below the level recorded in late September. Meanwhile, the Spain-Italy differential stood at -31 b.p., falling by 24 b.p. in comparison to that of 29 th September. The yields decrease in Greece, Italy and Portugal in this period, by 55, 39 and 31 b.p., respectively, should be noted. Countries T 1. Public debt yields and differentials (in % and basis points) Yields (%) Differentials with Germany (basis points) Dec-3-16 Sep Nov-3-17 Variation in spreads Dec-3-16 Sep Nov-3-17 Variation in spreads (1) (2) (3) Period (3)-(2) Annual (3)-(1) (4) (5) (6) Period (6)-(5) Annual (6)-(4) Germany Holland Finland Austria Ireland Belgium France Spain Italy Portugal Greece Source: Financial Times. The stock indices rise In the stock markets, the main indices fluctuated during October, in a context of volatility derived from the geopolitical tensions and the business results of different sign. However, towards the end of the month, the indices edged upwards, driven by the ECB decision to temporarily extend the debt purchase programme. In Europe, the Eurostoxx 5 index rose by 2.6% in the period between 29 th September and 3 rd November. On the other hand, in Spain, the IBEX 35 fell by.2% in that period, dragged down by the political tensions in Catalonia, standing at 1,357.8 points. In the US market, the S&P 5 index increased by 2.7%, in the context of the approval of the tax reform proposal by the US Senate and the election of the new candidate for president of the Fed.

6 6 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October 217 T 2. International stock exchange Level % Variation Countries Index Nov-3-17 Sep Dec-3-16 Germany DAX 13, France CAC 4 5, Italy FTSE MIB 23, Spain IBEX 35 1, Eurozone EUROSTOXX 5 3, United Kingdom FTSE 1 7, United States S&P 5 2, Japan NIKKEI , China SHANGHAI COMP 3, Mexico IPC 48, Brazil BOVESPA 73, Argentina MERVAL 27, Source: Bolsa de Madrid, Infobolsa, Stoxx and Financial Times. The euro depreciates against the dollar With respect to the currency market, the euro exchange rate against the dollar during October was affected by the context of high volatility arising from the political uncertainty in Europe, the expectations regarding the future economic policy decisions and the favourable evolution of European macroeconomic indicators. However, towards the end of last month, the extension of the ECB's asset purchase programme, the Fed's prospects regarding the next rate increases and the Senate's approval of the proposed tax reform in the United States, pushed the euro exchange rate against the dollar downward. Thus, in the period between late September and early November, the euro depreciated by 1.3% against the dollar and appreciated by.8% against the pound and its exchange rate remained stable against the yen, trading at the end of the 3 rd November session at dollars,.8892 pounds and yen. In the same period, the euro depreciated by.7% in nominal effective exchange rate terms vis-à-vis the group of industrialised countries. The M3 broad monetary aggregate accelerates slightly in September... The y-o-y growth rate of the M3 broad aggregate rose one tenth in September, up to 5.1%. This evolution was mainly due to the acceleration of overnight deposits (1.8% compared to the 1.6% recorded in August) and marketable instruments (1.2%, compared to the.4% decrease registered in the previous month), partially offset by the higher decrease of other short-term deposits (from -2.7%, down to -3.3%) and the slowdown of currency in circulation (one tenth, down to 3.4%).

7 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October Monetary aggregates T 3. Eurozone monetary aggregates September 217 Balance (Billion ) July 217 % Year-on-year variation August 217 September Currency in circulation 1, Overnight deposits 6, M1 (= 1 + 2) 7, 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) 11, Source: European Central Bank....and financing to the private sector maintains its growth rate stable On the other hand, the main counterpart to M3, the financing to the private sector in the Eurozone, maintained its y-o-y growth rate in September at 2.8%, the same as in the previous month. This evolution is due to the fact that the acceleration of loans (2.5%, compared to the 2.4% registered in August) offset the slowdown of securities other than shares (four tenths, to 5.6%), while the growth of shares and other equity remained unchanged at 2.6%. Within loans, those received by companies rose by 1.5%, one tenth more than in the previous month, those received by households increased by 3.1%, the same figure as the one registered in the previous month, and those received by other financial intermediaries accelerated two tenths, up to 3.7%. T 4. Financing of private sector in the Eurozone (1) September 217 % Year-on-year variation Balance July August September (Billion ) Credit to the private sector 13, Loans 1, 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.

8 8 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October 217 The stock of financing to the private sector in Spain maintains the fall rate in September The stock of financing to the private non-financial sector fell by.4% y-o-y in September, the same figure as the one registered in August. Financing received by firms rose by.1%, as in August, due to the fact that the one tenth acceleration of securities other than shares offset the higher decline of foreign loans, while bank loans maintained their rate of decline stable. On the other hand, financing received by households recorded a y-o-y rate of -1% in September, one tenth higher in comparison to the figure recorded in the previous month, due to the acceleration of other bank loans, while bank loans for housing maintained the fall rate at 2.8%. T 5. Financing of non-financial sectors residents in Spain September 217 Balance (Billion ) % Year-on-year variation July August Non-financial corporations and Households 1, September 217 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 SMEs rise The amount of new loan and credit operations to households, in cumulative terms for the last twelve months, increased by 4.2% y-o-y in September 217, a rate 1.3 points higher in comparison to the figure registered in the previous month. This acceleration is due to the lower decrease of loans for housing (-1.5%, in comparison to the -3.3% registered in the previous month) and for other purposes (-2.4%, versus the -4% registered in the previous month), partially offset by the slight slowdown of loans for consumption (three tenths, down to 18.4%). The amount of new loan and credit operations to SMEs (using as a proxy for these credits those under one million euros) rose, in cumulative terms for the last twelve months up to September this year, by 5.6% y-o-y, four tenths more than in the previous month. On the other hand, the amount of new loan and credit operations exceeding one million euros declined by 9.1% y-o-y, a drop 3.6 points lower than in August.

9 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October Spanish economy Domestic Demand and Production The Spanish economy extends the expansionary trend in the third quarter of 217 According to the INE s flash estimate, GDP, in volume, with calendar and seasonally adjusted data, links sixteen consecutive quarters of positive rates, after recording a q-o-q growth rate of.8% in the third quarter of 217, one tenth below the figure registered in the previous quarter. In y-o-y terms, GDP in volume, with calendar and seasonally adjusted data, grew by 3.1% in the third quarter, a figure equal to the one registered in the second quarter. The IMF and the European Commission revise their growth forecasts for the Spanish economy upwards According to the European Commission (EC) Spring Forecasts and the World Economic Outlook of the International Monetary Fund (IMF), real GDP growth of the Spanish economy would stand at 3.1% in 217. This is three tenths above the figure projected in May, in the first case, and the same to the figure foreseen in July, in the second one. By 218, both institutions envisage the extension of the expansionary trend of the Spanish economy, although at a more moderate rate, foreseeing a real GDP growth rate of 2.5%, one tenth higher when compared with the previous forecast. By components, the IMF forecasts an increase in private consumption of 2.6% in 217 and of 2.4% in 218, rates similar to those foreseen by the EC. The public consumption variation rate increased slightly this year, up to.9% in both scenarios, and moderates half a point in 218 according to the IMF, to.4%, and one tenth, according to the EC, to.8% The IMF forecasts an increase in gross fixed capital formation of 4.3% in 217, similar to that of the EC (4.1%), and of 3.5% in 218 (4% according to the EC). On the other hand, the external balance contributed with.5 percentage points to GDP growth in 217 in the IMF scenario, one tenth less than in the EC's forecast, and.3 points in 218 according to both institutions. Qualitative indicators of global activity continue the expansionary trend Available qualitative indicators point towards the continuation of the dynamism of the global activity in the last quarter of the year. Amongst them, the Economic Sentiment Indicator of the EC stands out, as it rose three tenths in October versus the previous month, reaching 11.2 (average = 1), the second highest value since April 21 (111.8 in December 215). The breakdown by components reflects a rise in construction confidence (5.4 points), services confidence (1.4 points) and industry confidence (.4 points), in comparison to the decline in consumer confidence (.3 points) and retail trade confidence (.1 points). Likewise, the OECD Composite Leading Indicator for Spain, designed to anticipate the turning points in the economic activity with regards to its trend, rose one tenth in September in comparison to the previous month, reaching 99.9, a figure almost identical to its long term average (1). On the other hand, the Composite PMI for Spain registered a level of 55.1 in October, 1.3 points lower in comparison to the figure recorded in September, pointing to a slowdown of global activity. This was due to the more moderate growth in the service sector activity, partially offset by the acceleration in the manufacturing industry. However, in the period from January to October 217, the Composite PMI accumulates an average level of 56.4 (56.1 in the Eurozone), 1.5 points higher than the figure registered in 216 as a whole.

10 1 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October 217 The Spanish economy records net lending vis a vis the rest of the world in the second quarter of the year According to the Financial Accounts of the Spanish Economy, published by the Bank of Spain, the Spanish economy recorded net lending capacity vis a vis the rest of the world in the second quarter of 217, equivalent to 2% of the quarterly GDP, almost half a point lower in comparison to that registered in the same quarter of 216 (2.4%). This evolution is explained by the lower net lending of households and Non-Profit Institutions Serving Households (NPISHs), whose net operations balance was reduced by 5.2 percentage points, down to 3% of the quarterly GDP, partially offset by the lower General Government deficit (2.2 points less, down to 6.9% of GDP) and by the increase of net financial operations balance of non-financial corporations and financial institutions, 1.8 and.8 points, respectively, up to 3.1% and 2.8% of GDP. Private consumption indicators show mixed signals Recently published private consumption indicators show mixed signals. Thus, among the quantitative indicators, retail sales, with work calendar and price adjusted data, accelerated in September by seven tenths, reaching a y-o-y rate of 2.5%. By type of product, the growing trend of retail sales is explained by the higher growth rate of both the food component (3.7% y-o-y, three tenths higher versus the figure registered in the previous month) and the non-food component, which went from recording a 1.9% y-o-y increase in August, up to 2.4% in September. In the same vein, consumer goods apparent consumption, with seasonally and deterministic effects (calendar and outliers) adjusted data, recorded a y-o-y growth of 3.2% in the third quarter of the year (the latest observed data corresponds to August and forecasts to September), almost two points higher when compared to the previous quarter. Likewise, domestic sales of consumer goods and services, with deflated, fixed-sample and calendar adjusted data, intensified the y-o-y growth rate in August by 1.4 points, up to 4.5%, and according to the figures provided by ANFAC (Spanish Association of Vehicles Manufacturers), passenger car registrations accelerated more than nine points in October, up to 13.7% y-o-y. 5, G 2. GROSS DOMESTIC PRODUCT, volume change in %, sac data 5 G 3. CONSUMPTION INDICATORS y-on-y growth rate in % and balances 5 2,5-1, -2,5-5, year-on-year quarter-on-quarter annualized Retail sales Consumer confidence (right scale) Source: INE. Sources: INE and European Commission. Amongst the qualitative indicators, the Consumer Confidence Indicator (CCI), published by the European Commission, fell three tenths in October, reaching a level of -1.4, due to the worsening of the evolution of the general economic situation and unemployment prospects, in comparison to the rise in consumer rating on trends in the household situation and savings. Likewise, the Consumer Confidence Indicator published by the Sociological Research Centre

11 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October (known in Spanish as CIS) fell 3.6 points in October in comparison to the previous month, reaching 99.6, below the 1 threshold (indicative of a negative perception of consumers), after six months above this figure. This fall was due to the worse rating of the current situation indicator, which fell 2.4 points in comparison to September and, to a greater extent, the decrease of 4.7 points in the expectation component. The deleveraging of Spanish households continues In the second quarter of 217, households and NPISHs have continued the deleveraging process that started in mid-21, its debt to GDP ratio standing at 63.1%, 3.4 points below the figure registered in the second quarter of 216. On the other hand, net financial wealth of households increased by 9.3% in the second quarter of 217, compared to a year earlier, up to 119.8% of GDP, due to a decrease in its liabilities (-1.2% y-o-y) and to an increase in its financial assets (5.2% y-o-y). Equipment investment indicators gain momentum With regard to investment in equipment goods, the available information generally shows an expansionary trend. Thus, the equipment goods apparent consumption, with seasonally and deterministic effects (calendar and outliers) adjusted data, rebounded in the third quarter of the year (the latest observed data corresponds to August and forecasts to September), registering a 7.7% y-o-y growth rate, much higher versus the previous quarter (.5%). Similarly, equipment and software sales in large companies accelerated almost five points in August, up to 5.4% y-o-y, and the capital goods productive capacity utilisation registered an increase of four tenths in the fourth quarter, reaching 84.6%. On the other hand, truck registrations, according to figures provided by the General Direction of Traffic, moderated the growth rate in September, registering a 4.7% increase, seven points below in comparison to the figure registered in August....and construction investment indicators maintain a high dynamism The most recent indicators related to residential investment continue to grow strongly. Thus, according to the INE Statistics based on the properties recorded in the Property Registers, housing sales recorded an 11% y-o-y increase in September, five points lower compared to the figure recorded in the previous month. This result was due to the lower growth rate of used housing purchases, which rose by 9.6%, 5.3 points less than in August, and new housing purchases, 3.6 points, to 17.7%. In the third quarter of 217, housing purchases rose by 14.6% y- o-y, 3.1 points more than in the second quarter. Likewise, the number of mortgages on housing rose again sharply in August, registering a y-o-y rate of 29.1%, 3.8 points lower than in the previous month. The average amount per mortgaged house increased by.7%, 3.1 points less than in July, and capital borrowed for mortgages on housing rose by 3%, a rate eight points lower than that of the previous month. Non-financial corporations debt continue to decrease The debt of the non-financial corporations continues the downward trend started in mid- 21, reaching 99.9% of GDP in the second quarter of 217, 4.2 points lower when compared to the same period of last year, reaching levels similar to those registered at the end of 25 and the average of the Eurozone.

12 12 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October 217 On the other hand, the balance of non-financial corporations registered an increase in financial assets ( billion, up to 2,39.6 billion) lower than the one experienced by its liabilities ( billion, to 3,677.6 billion), which resulted in an increase of the net financial liabilities of 4.6% compared to the second quarter of 216. The industrial activity accelerates From the supply point of view, amongst the industrial activity indicators, the Industrial Production Index (IPI), with calendar adjusted data, accelerated more than one point in September, up to 3.4% y-o-y. According to the economic use of goods, the higher IPI y-o-y dynamism in September is explained by the acceleration of equipment and intermediate goods, partially offset by the fall in the energy component and by the slowdown of consumer goods. In particular, equipment goods experienced a 5.4% growth, 3.5 points higher compared to the previous month; intermediate goods rose by 7%, 2.5 points more than in August; energy fell by 1.7%, compared to the slight increase, of.1%, recorded in the previous month; and consumer goods slowed down six tenths, to 1.4% y-o-y. The Industry Turnover Index (ITI) and the Industry New Orders Index (INOI), adjusted for calendar effects, showed a higher dynamism in August. The ITI registered a y-o-y increase of 7.7% and the INOI of 8.1% (5.7% and 7.5%, respectively, in the previous month). By components, the ITI result is due to the favourable evolution of all its components, particularly energy, whose growth rate stood at 15.8%, 2.7 points higher than in the previous month, followed by intermediate goods, which registered a rate of 12.2%, three points higher than that registered in July, and consumer and equipment goods, which accelerated by 1.2 and.5 points, respectively, up to 4.4% and 2.2%. Likewise, the higher expansionary trend of the INOI in August is explained by the acceleration of consumer goods, up to 5.4%, versus the 2.6% registered in the previous month, and the rebound in energy (15.8%, compared to the 13.1% recorded in July), while equipment goods grew at a rate similar to that of the previous month, 6%, one tenth less than in the previous month, and intermediate goods slowed down 1.8 points, down to 1.2%. G 4. PRODUCTION AND PMI IN THE INDUSTRY year-on-year growth rate in % and index G 5. SERVICES: SALES AND PMI y-on-y growth rate in % and index IPI PMI (right scale) Large Firms Sales PMI (right scale) Sources: INE and Markit group. Sources: AEAT and Markit Group. The most recent qualitative indicators of the industry activity continue to show the extension of the growing trend of the sector. Thus, the Manufacturing PMI for Spain reached 55.8 in October, 1.5 points higher versus that of the previous month (54.3), and the second highest since April 27. In the first ten months of the year, the Manufacturing PMI accumulated an average value of 54.5, 1.3 points higher than the figure recorded in 216. In the same vein, the Industrial Confidence Index published by the European Commission rose four tenths in October,

13 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October due to the reduction of the net balance of finished products stocks (9 points) and the increase of almost one point in the order portfolio balance, partially offset by a less favourable valuation of the production forecasts, whose balance fell by 8.5 points. Similarly, the productive capacity utilisation in the industry in the fourth quarter of the year stood at 8%, almost one point above that of the previous quarter. The activity in the construction sector moderates In the construction sector, the most recent activity data, corresponding to August, show a slightly contractive trend, after the strong increases registered in the two previous months. Thus, the Construction Production Index (CPI), with deflated and calendar adjusted data, published by Eurostat, registered a.4% y-o-y decrease in August, compared to the 3.4% increase recorded in the previous month. This CPI result is mainly explained by the slowdown of the building component, of 4.1 points, to 1% y-o-y and, to a lesser extent, by the higher fall rate of the civil works component (-5.9%, compared to the -5.1% recorded in July). In the first eight months of the year as a whole, the CPI registered an average annual variation of -1%, compared to the 5.1% increase registered in 216 as a whole. On the other hand, construction activity leading indicators show mixed results. Thus, according to construction new permits of the Ministry of Public Works, floorage approvals in new construction rose by 5.7% y-o-y in August, versus the 38% rise registered in July. This significant slowdown was due to the non-residential component, which fell by 48.4% y-o-y, after the 77% increase of the previous month, while the residential component accelerated almost 11 points, registering a rate of 39%. On the other hand, the official tenders registered a strong increase in August, of 38.2% y-o-y, following the 15.1% rise recorded in July, due to the favourable evolution of the civil works component (which registered a growth rate of 48.7%, after the 4.5% fall recorded in the previous month), while the building component lost momentum (2.5%, compared to the 61.6% registered in July). Likewise, confidence in the sector, according to the European Commission indicator, registered an improvement of 5.4 points in October, following the 9.7 points increase recorded in the previous month, reaching -14. The two components of the indicator improved, the employment expectations in the sector component by 7.6 points and the order portfolio component, by 3.1 points. Activity and price prospects in the sector also advanced. The strong dynamism of activity in services continues With regards to the services sector, the Business Turnover Index (BTI), with work calendar adjusted data, intensified the growth rate by almost two points in August, up to 6.2% y-o-y. The BTI acceleration is explained by the higher dynamism of the trade sector, which grew by 6.3%, a rate 2.5 points higher than in July, as well as of other services, which increased by 6%, versus the 5.4% registered in the previous month. Amongst the qualitative indicators, the Services PMI continues to show an increase in commercial activity, although at a slower pace. Thus, the level 54.6 was registered on this indicator in October, 2.1 points lower versus September, and four tenths below that of the Eurozone. According to Markit, this new increase in the services activity confirms the sound growth trend of the Spanish economy, although the uncertainty generated by the political situation in Catalonia during the last month would have helped to moderate the growing trend.

14 14 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October 217 boosted by the tourism sector The published indicators related to the tourism sector provide evidence of the good situation that this sector is experiencing. The arrival of over 8.8 million international tourists to Spain in September 217 stands out, a figure 11.4% higher than the one recorded a year earlier, according to the Tourist Movement on Borders Survey, published by INE, which represents an acceleration of 7.4 points in comparison to that registered in the previous month. Likewise, the total expenditure by tourists who visited Spain in September reached 9.4 billion, according to the Tourist Expenditure Survey, which implies a y-o-y increase of 12.3%, two points higher in comparison to the figure registered in the previous month. The expenditure growth rate has been greater than that of tourist arrivals, resulting in an increase in the average expenditure per tourist of.8%. Similarly, overnight stays in hotels accelerated 1.7 points in September, up to 2.2% y-o-y. This was due to the increase of domestic overnight stays, of.9%, following the 1.2% fall recorded in the previous month, as well as due to the higher dynamism of foreign overnight stays, which experienced a 2.7% increase, a rate 1.2 points higher in comparison to that recorded in August. This more expansionary trend is also observed in air passenger traffic, which experienced a y-o-y growth of 8.2% in September, almost two points higher compared to the previous month, due both to the evolution in domestic traffic, which increased by 7.7%, 2.5 points more than in August, and international traffic, which registered an increase of 8.3%, 1.7 points above that the figure observed in the previous month. Prices Inflation rises by two tenths in September, up to 1.8% The Consumer Price Index (CPI) rose by 1.8% y-o-y in September 217, a rate two tenths higher than in the previous month. The higher inflation in September is due to the rise of nonprocessed food prices, after the fall experienced in August and, to a lesser extent, to the acceleration of services and non-energy industrial goods (BINE), partially offset by the growth rate moderation of the energy products and processed foods prices. Energy products prices increase by 5.8% y-o-y Energy products prices rose by 5.8% y-o-y in September, five tenths less than in August. This evolution was due to the slowdown of electricity prices, which went from recording a 5.4% y-o-y rate in August to 4.4% in September, and gas prices, which moderated the growth by 1.2 points, to 11.4%. On the other hand, the fuels and lubricants prices accelerated by one tenth, up to 5.5%. Non-processed food prices rose by 2.2%, after falling by 1.6% in the previous month, with fresh fruits standing out, as they moderated their rate of decline by 12.1 points, to 2.7% and, to a lesser extent, fresh vegetables and legumes, whose prices accelerated 6.5 points in September, up to 8.6% y-o-y. The moderation of fresh fruits prices fall is mainly explained by the base effect associated with the sharp m-o-m reduction recorded in September 216.

15 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October G 6. CPI GROWTH CONTRIBUTION BY SECTORS in percentage points 4 CPI (%) Processed food Non-processed food 2 Non-energy ind.goods Energy Services 4 2 G 7. GENERAL CPI AND CORE INFLATION y-o-y change in % General CPI Core Inflation Sources: INE and SGACPE. Source: INE. Core inflation remains at 1.2% in September Core inflation, which excludes the most volatile elements from the CPI (non-processed food and energy products), remained at 1.2% in September, as the higher growth rate of services and BINE was offset by the lower increase in processed food. Services prices accelerated by one tenth, up to 1.8%, mainly as a result of the evolution of tourist packages prices, which accelerated 2.6 points, up to 8.8% and inter-urban public transport services prices, which increased their growth rate by 1.8 points, up to 4.3%. On the other hand, non-energy industrial goods prices grew by.1% in September, following the stabilisation registered in August. The one tenth acceleration of clothing and footwear prices should be noted, up to.6%. Lastly, prices of processed food rose by.9% y-o-y, two tenths less than in the previous month. According to the CPI flash estimate, inflation fell by two tenths in October, down to 1.6% According to the flash estimate published by the INE, the y-o-y rate of the national CPI stood at 1.6% in October 217, two tenths less in comparison to September. According to the INE, the slowdown in fuels prices (diesel and petrol) stands out in this performance. The harmonised inflation, estimated by the Spanish HICP flash estimate, stood at 1.7% y- o-y in October, one tenth below the figure registered in September. On the other hand, the Eurozone s HICP flash estimate, published by Eurostat, recorded a y-o-y variation of 1.4%, one tenth below the figure registered in September, so Spain s inflation differential against the Eurozone is three tenths, the same as in September. The PPI accelerates slightly in September, one tenth, up to 3.4% y-o-y The Producer Price Index (PPI) registered an increase in September 217, of.5% versus the previous month, compared to the.3% rise recorded in September 216. In y-o-y terms, the PPI y-o-y variation rate stood at 3.4%, one tenth higher than the one registered in August. This is mainly explained by the higher growth of intermediate goods prices and, to a lesser extent, to

16 16 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October 217 equipment goods prices, partially offset by the slowdown of energy prices. On the other hand, consumer goods prices maintained their growth rate unchanged. 4 G 8. HARMONISED CPI y-o-y change % Spain 9 G 9. INDUSTRIAL PRODUCER PRICES (PPI) y-o-y change in % All items 2 EMU Differential (p.p.) 5 Non-energy Sources: INE and Eurostat. Oct. 217 data are prov Source: INE. Energy production prices slowed down by one tenth in September, down to 6% y-o-y. In this evolution of the energy component, and according to the NACE classification, the electricity, gas, steam and air-conditioning supply stands out, whose prices rose by 3.7% y-o-y, 1.1 points less than in the previous month, while those of coke and oil refining accelerated three points, up to 13.3%. The non-energy PPI accelerated three tenths in September, up to 2.4% y-o-y, due to the evolution of intermediate goods prices, which increased by 3.5%, six tenths more than in the previous month. In turn, this acceleration is explained by metallurgy prices, which grew by 14.9%, 2.2 points more than in August and, to a lesser extent, by those of the chemical industry, which rose by 3.2 %, a rate nine tenths higher in comparison to the figure recorded in the previous month. Consumer goods prices increased by 2% in September for the third consecutive month. By components, non-durable consumer goods prices rose by 2.2%, the same as in August, and durable consumer goods prices by.2%, following the stabilisation registered in the previous month. Consumer prices of food, beverages and tobacco increased by 2.6% one tenth less compared to August. Lastly, the equipment goods prices grew by.9% y-o-y, one tenth more than in the previous month. Labour market According to the Labour Force Survey (LFS), employment rose by 2.8% in y-o-y terms in the third quarter of 217, as in the previous quarter, while unemployment decreased by 13.6%, eight tenths less than in the second quarter. On the other hand, the number of Social Security covered workers rose by 3.5% y-o-y in October, a rate equal to that registered in September and registered unemployment fell by 7.9%, which implies a rate of decrease four tenths less pronounced than in the previous month. With regard to costs, agreed wages in collective bargaining grew by 1.4% up to October.

17 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October The pace of job creation remains strong in the third quarter of 217 According to LFS data, published by the INE, the number of employed people increased by 235,9 in the third quarter of 217 (226,5 in the same quarter of 216). The employed population amounted to 19,49,2 people, a figure higher, by 1.3%, than the one of the previous quarter, and the highest since the third quarter of 29. With seasonally adjusted data, the q-o-q variation rate stood at.75%, slightly below that of the previous quarter. In comparison to the same quarter of 216, employment increased by 521,7 people, which implies a y-o-y rate of 2.8%, a figure equal to the one recorded in the previous quarter. As a result, the employment rate rose six tenths in the quarter, reaching 49.3%, a figure 1.2 points higher than a year earlier. By main activity branches, employment fell by 55,6 people in agriculture and increased in all the other branches, mainly in services, where it rose by 236,3 people. Employment increased by 34,1 people in industry and by 21, in construction. Compared to the third quarter of 216, the rise in employment affected all branches, particularly the services one, where it increased by 31,7 employed people (2.1% y-o-y), followed by industry, with 139,4 more (5.5%), construction with 47,4 employed people (4.3%) and agriculture with 33,2 (4.5%). The stability of the employment y-o-y rate, at 2.8%, is due to the fact that the acceleration in services employment has offset the lower employment growth in the other sectors, mainly in agriculture. By NACE sections, the most relevant accelerations took place in public administration, defence and compulsory social security (grew by 3.6% y-o-y, compared to the.5% rise recorded in the previous quarter); in households activities as employers of domestic personnel, activities of households as producers of goods and services for their own use (increased by 3.6%, after the 2% decrease recorded in the second quarter); and in hotel business (increased by 2.8%, 1.9 points more than in the previous quarter). The employment increase in the third quarter of 217 has mainly concentrated in the private sector (75%), with 177,6 employed more, while employment in the public sector rose by 58,3 people. In the last twelve months, 88.8% of the employment created has been private, increasing by 463,6 people (3% y-o-y, a rate three tenths lower when compared to the previous quarter), and public employment has increased by 58,2 (1.9% y-o-y, after the.3% rise registered in the previous quarter). Focusing on the professional status of workers, the quarterly increase in employment largely corresponded to employees, with 216,4 more employed, while the number of selfemployed workers increased by 19,5. Compared to a year earlier, the number of employees increased by 52,1, registering a y-o-y variation rate of 3.3%, as in the previous quarter, and self-employed workers increased by 19,7,.6%, compared to the.3% registered in the previous quarter. By type of contract, the increase of employees in the third quarter of 217 mainly corresponded to temporary employment, which rose by 149, people, largely due to seasonal factors, while the number of permanent employees increased by 67,5. Thus, compared to a year earlier, almost 6% of the increase in employees was of a permanent nature (299,3), with the temporary employment rate standing at 27.4%.

18 18 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October G 1. EMPLOYMENT AND UNEMPLOYMENT RATE y-on-y in % and percentage of labour force Employment Unemployment rate (right-hand scale) 28 1 G 11. LABOUR FORCE AND ACTIVITY RATE y-on-y in % and percentage of population Activity rate (16 years and over) Labour force (left-hand scale) Source: INE (LFS). Source: INE (LFS). Regarding working hours, all employment created in the third quarter of this year was fulltime, with 38,2 employed people more, while part-time employment decreased by 144,3. Compared to the same quarter of 216, full-time employment increased by 3.1%, a rate two tenths higher compared to the previous quarter, and part-time workers by 1.1%, 1.4 points less than in the former quarter. As a result, the weight of part-time workers in total employment decreased by one point during the quarter and by three tenths in comparison to a year earlier, standing the partiality rate at 14.3%. The proportion of those who work part-time because they could not find a full-time job ( involuntary ) stood at 8.3% of the total employed people, which is half a point lower than in the previous quarter and six tenths less compared to the third quarter of 216. Considering the workers nationality, the employment creation in the third quarter of 217 mainly affected Spanish workers, which increased by 196,5 compared to the previous quarter, versus the 39,3 more foreign workers. In y-o-y terms, Spanish workers increased by 2.6% and foreign workers by 4.9%. By age groups, it is worth noting the strong increase in youth employment (people aged between 16 and 24), 15% y-o-y, the highest rate in the time series. LFS unemployment falls by 13.6% y-o-y Unemployment fell by 182,6 people in the third quarter of 217, compared to the decrease of 253,9 people in the same period of 216. Thus, the total number of unemployed people stood at 3,731,7, below four million for the second consecutive quarter since late 28. With seasonally adjusted data by the INE, the q-o-q variation in the number of unemployed people stood at -2.3%, (-4.6% in the previous quarter). During the last year, unemployment has fallen by 589,1 people, which results in an annual decline rate of 13.6%, eight tenths more moderate compared to that of the previous quarter (-14.4%). By activity branches, compared to the previous quarter, unemployment decreased mainly in services, with 96,8 unemployed less, and in industry, with 15,7 less, while it increased in agriculture and construction, with 29,1 and 4,2 more unemployed, respectively. The group of unemployed looking for their first job, or that have quit their last job more than a year ago, decreased by 13,4 people.

19 Ministry of Economy, Industry and Competitiveness / Spanish Economy Report / October The unemployment rate fell.84 points in the quarter and 2.53 points compared to the figure registered a year earlier, reaching 16.38% of the labour force, the lowest since the fourth quarter of 28. By age groups, it is worth noting the fall in youth unemployment (people aged between 16 and 24), by 1.5% y-o-y, with the youth unemployment rate standing at 36%, 5.9 points lower than a year earlier. The fall rate of the labour force moderates The labour force rose by 53,3 people in the third quarter of 217, while it has decreased by 67,4 during the last year, reaching 22,78,9 people. In y-o-y terms, it decreased by.3% (-.6% in the previous quarter). On the other hand, the activity rate stood at 58.9%, one tenth higher compared to the figure registered in the previous quarter and four tenths lower versus that of the third quarter of 216. The y-o-y increase of Social Security covered workers remains at 3.5% in October The average number of Social Security covered workers rose by 94,368 people in October 217 compared to the previous month, reaching 18,43,529. By branches of activity and with gross data, the number of Social Security covered workers rose in October in all sectors, registering 72,367 covered workers more in services, 18,62 in construction, 2,86 in industry and 1,295 more Social Security covered workers in agriculture. By NACE activity sections, and for the General (excluding Agrarian and Domestic Workers Special Systems) and Self-employed Regimes, it is worth noting the m-o-m increase in education as it usually happens in October due to the start of the academic year (142,152 covered workers more, compared to 127,882 registered in the same month last year, in which a marked growing trend can be observed since 213), followed by public administration, defence and compulsory social security (26,748 more, following the increase of 14,537 covered workers in October 216). Conversely, the number of Social Security covered workers fell in hotel business (65,199 fewer, in line with the fall of 6,957 recorded in the same month of the previous year) and in health and social services activities (32,671 fewer covered workers, a decrease similar to that of October 216, of 31,67). With seasonally adjusted data, Social Security covered workers increased by 11,479 people in October,.6% m-o-m, thus extending the trend of more than three and a half years of positive m-o-m rates (since December 213) only interrupted in August 217 (-.1%, equivalent to 14,976 fewer Social Security covered workers). In y-o-y terms, Social Security covered workers rose by 617,173 people in October, 3.5%, a rate identical to that registered in September. By activity branches, the stability of the Social Security covered workers y-o-y rate was due to the fact that the lower variation rate in agriculture (-1.6% compared to.7% in the previous month) and industry (3.1%, one tenth lower than in the previous month) have been offset by the acceleration in services and construction, one tenth and a half point, up to 3.7% and 6.8%, respectively. On the other hand, non-agricultural Social Security covered workers accelerated one tenth, up to 3.8%. It should be noted that the y-o-y growth rate of Social Security covered workers in the construction sector has been the highest since January 27.