Banco Sabadell Investor Relations Spanish economy A spotter s guide to the Spanish economy This document has been prepared by: Investor Relations at Banco Sabadell - investorrelations@bancsabadell.com
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1. Economic overview 2. Spanish economy: not only about construction 3. Export sector: main positive support 4. Labour market adjustments 5. Real estate 6. Fiscal budget considerations 3
Economic contraction after an extended period of economic growth GDP (real terms, 2Q1995 = 1) GDP (real terms, 1Q28=1) 17 Between 1995 and 27, the Spanish economy grew at an annual rate of 3.6% 12 The economic downturn in Spain has not been more intensive compared to the Euro Zone 15 1 13 Spain 98 Spain 11 Euro zone 96 Euro zone 9 1995 1998 2 23 26 94 mar-8 jun-8 sep-8 dic-8 mar-9 jun-9 Source: Eurostat. The Spanish economy has consistently been expanding at a faster pace than the Euro zone Quarterly GDP numbers including 3Q9 4
Current situation: Rapid correction of imbalances Net lending (+) / borrowing (-) of the economy (Euros in million) Household savings rate (as % of the available gross income) -5, 18-1, -15, -2, -25, -3, -35, 25 26 27 28 29 16 14 12 1 8 21 22 23 24 25 26 27 28 29 Source: Bank of Spain, INE. Bank of Spain: The elevated household savings rate already achieved could trigger a significant improvement in consumption once other economic uncertainties decrease 5
Current situation: Easing credit conditions Survey showing contraction in the credit supply to non financial corporations Survey of credit demand by non financial corporations Net % weighted of banks reporting % of banks stricter reporting lending stricter lending conditions 5 3 Large corporations 1-1 SMEs -3 22 23 24 25 26 27 28 Net % weighted of banks reporting % of banks reporting increase in an increase in credit credit demand 3 SMEs 1-1 Large corporations -3-5 22 23 24 25 26 27 28 Source: Survey to credit entities regarding banking credits (Bank of Spain). About 7% of the companies that applied for bank financing received all or part of requested amount in the first semester (ECB survey of companies regarding credit facilities) 6
Current situation: Reduced intensity of the recession GDP (QoQ in %) 4 2-2 -4-6 -8 GDP 2T9 3T9 Household consumption Inv. in equipment Inv. in construction Exports Imports Recent data suggests a continued slowdown in the pace of the recession Retail sales in October was down -2.7% (YoY) compared to -3.4% (YoY) in the previous month Car production increased +5.7% (YoY) in October vs. +3.4% (YoY) in September Industrial production (work days adjusted) in October was down -9.2% (YoY) compared to -12.7% (YoY) in September Source: INE. 7
21: Gradual stabilisation of the economy Business confidence (by levels) and real GDP (YoY in %) Outlook for 21: 7 6 5 4 3 2 1-1 -2-3 -4-5 GDP (rhs) Business confidence 1998 2 22 24 26 28 Consumer confidence (by levels) and private consumption (YoY in %) Private consumption (rhs) Consumer confidence 1998 2 22 24 26 28 8 6 4 2-2 -4-6 8 6 4 2-2 -4-6 -8 Positive impact on activity due to: Economic measures taken (fiscal and monetary) year-to-date Better behaviour of the global economy Progressive normalisation of the financial markets and the gradual improvement in the availability of credit Positive impact on the purchasing power as a result of restrained inflation Unemployment will remain high and the public accounts will operate under elevated deficit levels Source: Bloomberg and European Commission. 8
1. Economic overview 2. Spanish economy: not only about construction 3. Export sector: main positive support 4. Labour market adjustments 5. Real estate 6. Fiscal budget considerations 9
Performance of the Spanish economy excluding construction During its expansion phase the Spanish economy performed ahead of the Euro zone even when excluding construction investments and the multiplier effects of construction on the overall economy GDP excluding construction investments (real terms, YoY %) GDP average growth excluding construction investments (1997-27) 6 5 4 3 2 1 Source: AMECO. Spain Euro Zone 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 Euro zone +2.4% Spain +3.5% 1
The role of investments in equipment Investments in equipment showed a very strong evolution during the economic expansion with a growth rate well above GDP Investment in equipment (real terms, YoY %) Average growth rates (1997-27) 2 15 1 5-5 Source: AMECO. Spain EU-15 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 Investment in equipment, Spain +7.3% Investment in equipment, UE-15 +5.% GDP, Spain +3.8% Investment in construction, Spain +6.% Source: AMECO. 11
The service sector has been the major growth driver During the last cycle, all the major sectors of the Spanish economy (agriculture, industry, construction and services) showed stronger growth rates compared to the European Union. The service sector was by far the most important contributor to the overall economic growth of Spain Supply. Constant prices as of 2. YoY in % (Average 1997-27) Agriculture & fisheries Industry Construction Services Spain 1.1 2.7 5.4 3.9 EU-15.5 2. 1.4 2.7 Supply. Constant prices as of 2. Growth contribution (Average 1997-27) Agriculture & fisheries Industry Construction Services Spain..5.5 2.6 EU-15..4.1 1.9 Source: AMECO. 12
Tourism continues to be important, but its relative importance has been reduced Total tourism (domestic and foreign) represented 1.7% of the GDP in 27 versus 11.6% in 2. Foreign tourism represented 4.7% of the GDP versus 5.8% in 2 World's Top Tourism Destinations Ranking 27 1 2 3 4 5 Source: World Tourism Organization. Million of tourists Market share France 81.9 9.1% Spain 59.2 6.6% USA 56. 6.2% China 54.7 6.1% Italy 43.7 4.8% Final Tourist Demand (real terms, % YoY) 5 4 3 2 1-1 -2 GDP Final tourist demand 21 22 23 24 25 26 27 Source: INE. * 13
1. Economic overview 2. Spanish economy: not only about construction 3. Export sector: main positive support 4. Labour market adjustments 5. Real estate 6. Fiscal budget considerations 14
Good performance of the export sector in recent years Compared to other major European countries, Spain has had a favourable trend in exports Spain s market share has remained stable in spite of economic globalisation and a reduced competitive advantage in pricing Exports (real terms, 2Q1995 = 1) Spanish companies exporting regularly (number of companies) 29 25 21 25, Outside the UE-27 In the UE-27 17 13 2, 9 1995 1998 2 23 26 29 Spain Germany France Italy 15, 23 24 25 26 27 Source: Eurostat. Source: Departamento de Aduanas. Exports represent 28% of Spanish GDP, similar to levels in France (27%) and Italy (25%) but below Germany (46%). 15
Spain has a strong presence in several aspects Ranked 5 th worldwide in FDIs in the last 3 years 7 th exporter of services worldwide 17 th exporter of goods worldwide Spanish direct investment outstanding abroad (as % of the GDP) 5 4 3 2 1 Source: UNCTAD. 199 2 27 28 16
The recovery in exports has begun First component of GDP to show positive quarterly growth Synthetic indicator of the export activity (ISAE) 5 3 1-1 28. 22. 2.4 46% of the companies expect that its portfolio of orders improves in the next 12 months 18.4 7.9-1.7 2.3 7.9 In the last two quarters, exports were positive in quarterly terms Going forward, exports should be supported by the improvement in international trade -23.2-3 -38. -41. -5 Mar-7 Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Source: Ministerio de Industria, Turismo y Comercio. 3T9 2T9 Spain +2,3% +,6% Germany +3,4% -,8% France +2,3% +,6% 17
1. Economic overview 2. Spanish economy: not only about construction 3. Export sector: main positive support 4. Labour market adjustments 5. Real estate 6. Fiscal budget considerations 18
The labour market is experiencing an important adjustment The economic crisis is having a severe impact on the Spanish labour market: Most of the reduction in employment is affecting temporary workers As a result of recent developments, labour reform is being debated in Spain Unemployment compared to GDP Employees by contract (YoY in %) 24 19 14 9 4-1 -6 mar-7 Euro Zone GDP (YoY) Source: Eurostat. Spain Unemployment rate may-7 jul-7 sep-7 nov-7 ene-8 Euro Zone Unemployment rate Spain GDP (YoY) mar-8 may-8 jul-8 sep-8 nov-8 ene-9 mar-9 may-9 +1pp +2pp 1 5-5 -1-15 -2-25 Jan-7 Jan-8 Jan-9 Source: INE. Unlimited Temporary Spanish unemployment increased from 8.% to 17.9% in 2 years while the unemployment in the Euro zone climbed from 7.3% to 9.3% whilst experiencing similar levels of GDP contraction 19
The relatively weaker performance of the employment figures is in large part due to the (labour intensive) construction sector Employment (1Q28 = 1) Employment excl. construction (1Q28 = 1) 15 15 1 1 95 95 9 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Spain Germany France Italy United Kingdom 9 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Spain Germany France Italy United Kingdom Employment Occupationevolution % QoQ 2QQ8 3Q8 4Q8 1Q9 2Q9 Spain.1 -.4-2.4-3.9 -.8 Germany.3 2.3. -2.1.3 France.9.5 -.9 -.9 1. Italy 1.8 -.3 -.7-1.6 1. United Kingdom.2.1 -.2-1. -.9 Source: Eurostat (Labour force survey). Employment Occupation evolution evolution excl. excl. construction construction % QoQ 2QQ8 3Q8 4Q8 1Q9 2Q9 Spain.8.3-1.4-3.2 -.5 Germany.3 2.2.2-2.3.5 France.8.2 -.8 -.7 1.1 Italy 1.7 -.4 -.9-1.5 1.2 United Kingdom.3 -.2 -.2 -.5 -.6 2
Signs of stabilisation in the labour market: Employment excluding construction remained stable in the last quarter (3T9) In the third quarter of 29, employment fell by.4% QoQ. Excluding construction, employment would have remained almost unchanged. The unemployment rate remained stable at 17.9% Employment (QoQ in %) 2 1 Total Excl. construction -1-2 -3-4 -5 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Source: INE. 15 1 Employment in current and previous economic downturns (base 1 = peak previous to the recession) 95 9 85 1 5 9 13 17 21 25 29 33 37 Trimestres Source: INE. 3Q/27 4Q/1991 4Q/1977 21
Spain can grow in spite of high level of unemployment History shows that Spain has been able to combine economic growth and high levels of unemployment Spain s employment as a percentage over total population is similar to that of France and Italy Historic comparison Spain vs. Euro zone Averages during the period (%) Employed vs total population (in %) Spain Euro zone Labour Force Survey 1995-1998 1999-27 28-29 GDP growth 3.9% 3.8% -1.1% Unemployment rate 17.% 1.3% 14.3% GDP growth 2.9% 2.2% -1.7% Unemployment rate 1.4% 8.5% 8.3% (2Q9) Spain 41.3 Germany 47.1 France 4.2 Italy 38.6 United Kingdom 46.7 Source: Eurostat. 22
Geographic distribution of unemployment shows important differences Regions representing 65% of the Spanish economy have an average unemployment rate of 14%, significantly below the country average 3% Unemployment rate (% of active population) 25% 2% 15% 1% Size: GDP ( m) Ceuta Madrid País Vasco Andalucía Islas Canarias Melilla Murcia Valencia Extremadura Cataluña Castilla La Mancha Castilla León La Rioja Asturias Galicia Aragón Cantabria Navarra Weight in the economy: 35% Unemployment rate: 23.3% Unemployment rate average: 17,93% Weight in the economy: 65% Unemployment rate: 14.% 5% 7% 9% 11% 13% 15% 17% Weight of construction (as a % of Gross Value Added) Source: INE. 23
1. Economic overview 2. Spanish economy: not only about construction 3. Export sector: main positive support 4. Labour market adjustments 5. Real estate 6. Fiscal budget considerations 24
Real estate: Not all construction is residential Part of the real estate boom in Spain is explained by demographic factors like immigration Investment in construction (in % of total) House prices vs Population (in %) 1% 9% 2 8% 7% 6% 5% 4% 3% 2% 1% Average housing prices variation (1999-27) 15 1 5 BE GR IT NL PT AT FR MT ES DE 5 1 15 2 IE % -5 199 1995 2 25 28 Accumulated population growth (1999-27) Source: AMECO. Residential Other Source: Eurostat and ECB. 25
Real estate: Newly constructed property in context Excess supply relates mostly to second residences (coastal areas) The regions of Madrid and Barcelona represented 14% of newly constructed properties during 26 and 27, while their contribution to the Spanish GDP was 32% 26-27 Initiated houses(%) GDP contribution by areas (%) Rest of Spain 4% Barcelona 7% Madrid 7% Rest of Spain 37% Barcelona 14% Madrid 18% Costal areas (excl.barcelona) 46% Costal areas (excl.barcelona) 31% Source: Ministerio de Vivienda. 26
Real estate: Property transactions stabilizing The number of new and second hand property transactions is showing signs of stabilization in recent months Number of housing transactions (in ) Number of housing transactions (YoY in %) 18 16 Second hand property transactions 14-1 12 1-2 8 6 4 New property transactions -3-4 2 mar- 4 sep- 4 mar- 5 sep- 5 mar- 6 sep- 6 mar- 7 sep- 7 mar- 8 sep- 8 mar- 9 sep- 9-5 ene-9 mar-9 may-9 jul-9 sep-9 Source: Ministerio de Vivienda. Source: INE. 27
Real estate: Initiated and finished property The number of housing starts has stayed below the number of housing completions since 27 The reduction in number of housing starts has continued in 29 and is now below the number of new housing sales 8. 7. 6. 5. 4. 3. 2. 1. 24 25 26 27 28 29 New housing sales New housing starts New housing completions * Source: Ministerio de Vivienda. * June 29 data annualized. 28
Real estate: House prices and affordability Recent trends show a reduction in the pace of house price declines and an improvement in affordability House prices (% QoQ) -1 Theoretical affordability (post-tax, in %) 5 4-2 3-3 2-4 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 1 1995 1997 1999 21 23 25 27 29 Source: Ministerio de Vivienda. Source: Bank of Spain. 29
Real estate: Lower interest rates are having a positive impact on households Spanish households are currently benefiting from the low interest rate environment due to the high percentage of floating rate compared to fixed rate mortgages Variable rate mortgages (in % of total) 1% Mortgage rates (in %) 9% 8% 7% 6% 5% 4% 3% 2% 1% % Spain Ireland Italy UK USA Source: European Mortgage Federation; OECD. France Germany 7 6 5 4 3 2 1-1 23 24 25 26 27 28 29 Source: Bank of Spain. 3
1. Economic overview 2. Spanish economy: not only about construction 3. Export sector: main positive support 4. Labour market adjustments 5. Real estate 6. Fiscal budget considerations 31
Expansive fiscal policy in 28 and 29 The comfortable situation of the public finances ahead of the crisis offered room to manoeuvre in the implementation of a significant expansive fiscal policy Public debt (% of GDP) Fiscal stimulus actions (% of GDP) 14 12 27 28 29 21 211 5 4 28 29 1 8 6 3 2 4 2 Spain Euro Zone Germany France Italy Source: European Commission. 1 Italy Holand France Source: Bank of Spain. EMU Germany United Kingdom USA Japan China Spain Russia Current estimates by the European Commission show that Spain will keep its public debt in relation to GDP below that of other major European countries 32
Fiscal stability targeted in the medium term First steps towards a contained budget deficit in the medium term: Increase in VAT as of second half of 21 Tax revenues represented 34% of GDP in 28 compared to 41% in the Euro zone Tax revenues (% of total) Indirect taxes Direct taxes Taxes on capital Social security taxes Euro zone 31,8 3,,6 37,5 Spain 28,9 31,6 1,2 38,3 Capacity (+) or need (-) to finance the public sector (en % del PIB) 26 2, 27 1,9 28-4,1 29-9,5 21-8,1 211-5,2 212-3, Source: Eurostat. Source: Ministerio de Economía y Hacienda. 33
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