Quarterly report Global and Spanish economy Q Círculo de Empresarios Madrid, April 2017

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Quarterly report Global and Spanish economy Q1-217 Círculo de Empresarios Madrid, April 217

217 GDP forecast Global USA 1.6 2.3 216 217 Russia -.2 1.4 216 217 3.1 3.5 1.6 1.7 217 GDP distribution Advanced 41.2% Emerging -1,8 58.8% Source: Círculo de Empresarios based on IMF, 217-1 1.1 Latin America Eurozone 1.4-3,3 2.6 Sub-Saharan Africa 4.9 5 ASEAN (Indonesia, Malaysia, Philippines, Thailand, Vietnam. 3

Global trends 217 (I) Inflationary pressures Populist movements A more synchronised and upturn global growth Emerging and advanced economies expand in a higher synchronised way 63% of GDP faces political uncertainty Expansionary fiscal policies, oil prices rebound, low interest rates * Brexit, elections in Germany and France, Italian political instability Source: Círculo de Empresarios, 217 4

1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Global trends 217 (II) Higher economic stability in a turmoil political cycle with populist waves Economic Policy Uncertainty Index 1997=1 35 3 Brexit Trump France Elections 25 2 Financial crisis German elections 15 1 5 Developed World Populism Index show historical trend Source: Círculo de Empresarios based on Policy Uncertainty, Bloomberg, 217 5

A more synchronised and upturn global growth Higher optimism of global economic activity Political risks reduce potential economic growth Brazil, Argentina and Russia come out of recession UE economic sentiment at highest level Lower fears in China (currency, overcapacity...) Trump economic policy Le Pen, Beppe Grillo... Brexit negotiations Diplomatic tensions Source: Círculo de Empresarios, 217 6

Emerging economies are gaining momentum Brazil and Russia come out of recession and contribute to global growth Emerging countries GDP growth % 1 8 6 216 217 218 Economic growth in emerging economies(%) 4,2 4,5 4,8 4 2-2 -4 China India Indonesia Brazil Mexico Russia Turkey 216 217 218 Other positive data Strong capital flows to emerging markets ($29,8 billion in March) MSCI increased by 1% during Q1 Source: Círculo de Empresarios based on IIF, CaixaBank Research, 217 7

India: soft deceleration but brilliant economic growth Population: 1.3 billion Nominal GDP: 2.2 tn$ Real GDP and GDP per capita in India %, $ 12 Real GDP (Left axis) Forecast 8. PIB pc: 6,187 $ PPP Exceptional deceleration due to the elimination of the largest banknotes 1 8 6 GDP per capita PPP (right axis) 7,9 7,9 9,3 9,3 9,8 8,5 1,3 6,6 6,9 7,3 7,6 6,8 7,2 7. 6. 5. 4. In the last 17 years, India s GDP per capita multiplied by 3 4 2 3,8 4 3,8 3,9 5,1 3. 2. 1. 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Note: Since 1993, poverty rate has reduced by 5% to 22% of indian population Source: Círculo de Empresarios based on IMF and World Bank, 217 8

2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 China: less negative surprises Economic growth stabilized at 6.7% Real GDP and GDP per capita in China $ % 18. 16 16. 14 14. 12 12. 1 1. 8 8. 6. 6 4. GDP per capita $, PPP (left axis) 4 2. Real GDP (right axis) 2 Since 2, GDP per capita multiplied by 5 China's external sector Annual change, % ($ terms) 5 4 3 2 1-1 -2-3 6,1,5 Exports -1,8-13,2 Imports -7,7-5,5-11,2-18,8-25,4-13,8 7,9 16,7 1,3 38,1 214 215 216 Jan.-16 Feb.-16 Jan.-17 Feb.-17 A possible change on the trend of China s external sector * Data affected by Chinese New Year Source: Círculo de Empresarios based on Reuters and Safe, 217 9

China: poverty and inequality have diminished Great progress but there is a still long way to go Rural poverty rate in China % rural population 12 1 8 6 4 2 198 1985 199 1995 2 25 21 215 Gini coefficient Index 49,5 49, 48,5 48, 47,5 47, 46,5 46, 45,5 45, 44,5 Since 198, 7 million people out of poverty Sourcee: Círculo de Empresarios based on, OECD, 217 1

European Union: economic growth although political risks Political uncertainty 63% of GDP affected by political uncertainty... Brexit negotiations Elections in Germany and France Economic and political instability in Italy Real GDP growth, 216 % Spain Germany France Italy 1.9% 3.2% 1.2%.9% (2.5) (1.8) (1.4) (1) Note: The darker the colour, higher uncertainty Source: Círculo de Empresarios based on OECD, 217 217 forecasts in brakets 11

European Union: Brexit (I) After art. 5, it will take at least 2 years of negotiation UK faces a payment between 4-6 billion in terms of budget agreements United Kingdom Spain s economy extra contribution will be aproximately 96 million EU-27 EU revenue impact Billion EU revenue without UK 138 7 1 UK contributions that used to flow back into the UK Source: Círculo de Empresarios based on Bertelsmann, 217 EU net revenue loss from Brexit 12

European Union: Brexit (II) Pound depreciation has accelerated UK exports Pound performance against the euro and dollar 1,6 GBP/USD GBP/EUR 1,5 1,4 Real GDP growth and inflation Annual change 3 2,5 2 1,5 1,5 Real GDP Brexit Inflation 1,3 215 Q1 215 Q2 215 Q3 215 Q4 216 Q1 216 Q2 216 Q3 216 Q4 1,2 UK merchandise exports Billion 1,1 1 24 23 22 21 2 19 Brexit Source: Círculo de Empresarios based on Bertelsmann, ONS, 217 18 13

Eurozone: stronger confidence despite the political election calendar Economic sentiment Index Eurozone Germany Eurozone PMI composite 111 France Trump 58 19 Brexit 57 Germany Eurozone France 17 56 55 15 54 13 53 11 52 51 99 5 49 Jan-16 Jun-16 Sep-16 Ene-17 Mar-17 Poltical noise did not affect European confidence, yet Source: Círculo de Empresarios based on European Commission and Markit, 217 14

Eurozone: growth and labor market Contribution to GDP by components Percentage points +.4 Government expenditure 217 unemployment rates % active population +.5 Private consumption 22 17,7 EMPLEO 11,6 1,1 9,9 9,5 8,6 8 7,8 7 6,1 5,2 4,1 Investment +1 Private consumption continues as the key driver of economic growth whereas investment remain weak Since May-29 Eurozone registered its lowest unemployment rate Source: Círculo de Empresarios based on European Commission, 217 15

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar.-17 Eurozone: prices Increase in headline inflation but core remains stable Eurozone HICP evolution 214-16 Annual change, % Headline Core 2,5 2, 1,5 ECB medium term objective Since the second half of 216, headline inflation pressures have increased due to higher commodity prices 1,,5, -,5-1, HICP projection, 217 % 1.7 Source: Círculo de Empresarios based on Eurostat, 217 16

Eurozone: France Real GDP in France Annual change, % 4 3 2 1-1 -2-3 -4-5 France * Equivalent to the annual military budget Eurozone 27 28 29 21 211 212 213 214 215 216 217 Source: Círculo de Empresarios based on Eurostat, Bank of Spain and Banque de France, 217 Unemployment rate projection for 217: 9.9% (1% in 216) Frexit would cost France 3 billion a year aproximately France and Germany 1 years debt (%) France 1,4 1,2 1,8,6,4,2 -,2 26 Risk premium Germany -,4 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 68 17

US: higher growth but risks of protectionism Hihg uncertainty surrounding the new US economic policy Main US uncertainty factors Expansionary fiscal policies Exchange and interest rates Symptoms of economic acceleration Full employment Higher corporate earnings Stronger core inflation Inflation pressures Trade relations/ protectionism Source: Círculo de Empresarios based on BBVA Research, 217 18

US: strengthening growth GDP forecast: 2-2,5% pending the New US Administration Economic growth Unemployment rate +1.6% +2-2.5% 4.7% 4.5% (216) (217) (216) (March 217) Headline Inflation +2.7% (February 217) Core inflation +2.2% (February 217) Employment creation +98, (Marzo 217) Wages +2,7% (Febrero 217) Source: Círculo de Empresarios based on BLS, BEA, Pimco, 217 19

US: 3 increases in 217 The Fed expects 2 more increases in 217, due to the great improvement in the labour market US interest rate % [.5-.75] 15 Dic 216-16 Mar 216 [.75-1] 16 Mar 216- actual Fed dot plot March 217 % 4 3,75 3,5 3,25 3 2,75 2,5 2,25 [.25-.5] 16 Dic 215-15 Dic 216 [,25-,5] 2 1,75 1,5 1,25 1,75,5 Source: Círculo de Empresarios based on Fed, 217,25 217 218 2

ene.-14 mar.-14 may.-14 jul.-14 sep.-14 nov.-14 ene.-15 mar.-15 may.-15 jul.-15 sep.-15 nov.-15 ene.-16 mar.-16 may.-16 jul.-16 sep.-16 nov.-16 ene.-17 mar.-17 Oil: stable prices at 5$ WTI price evolution 12 1 8 6-75%...leading to a greater investment in the US oil sector US oil producers capital expenditure Annual change 6 4 2 4 2 +95% -2-4 -6-8 1Q-16 2Q-16 3Q-16 4Q-16 During the first 3 months of 217, the OPEC compliance is 1 % Active oil-directed rig count reached 662 on March-17, up from 525 at the end of 216 Source: Círculo de Empresarios based on EIA, Bloomberg 217 21

Commodities Gradual acceleration of commodity prices Commodity prices Index 25=1 Commodity prices change since Trump won elections(%) 159 149 139 129 119 19 99 89 79 69 59 No-energy Energy Metals Steel Oil Copper Aluminium Corn Gold -5 5 1 15 2 25 3 35 The increase in commodity prices has contributed to a recovery of emerging markets The future Trump policies impact on today s commodity market Source: Círculo de Empresarios based on IMF and Bloomberg, 217 22

Currency market Political risks and Central Banks influenced in global currencies Currency perfomance against $ 1Q-217 The euro, dollar and pound lost share of currency market due to higher importance of the yuan 1 8 6 4 2 Basket of currencies, SDR % 215 33 48 Euro Yuan Dolar Yen Pound -2-4 -6-8 Argentine peso Turkey Lira Mexican peso British pound Chinese yuan Euro Japanese yen Russian ruble Brazilian real 7 12 217 3 11 43 8 Source: Círculo de Empresarios based on Bloomberg, 217 8 23

Financial markets Higher valuation of stocks during Q1 Stock market performance 216 vs 1Q-217 % 5 4 38,9 216 Q1-217 IBEX-35 change 1Q-17 +12-8.6 +11.9 215: 216: 217: 3 2 1-1 -2 7,9 14,4 13,4 2,5 4,6 6,9 11,9 7,3 5,3 5,9 4,9 5,4 6,4 6,5 3,8,7,4-1,1-2, -1,2-12,3 CBOE volatility index 3 26 22 18 14 Brexit Trump 1 CBOE: Chicago Board Options Exchange Source: Círculo de Empresarios based on Bloomberg, St Louis Fed, 217 24

Tailwinds Lower macroeconomic imbalances Employment creation Lower private indebtedness Monetary stimulus and better financing conditions Exports upturn 26

Forecasts: the expansion is extended but at a moderate pace 3.2% 2.6% 2.1% 216 217* 218* Source: Círculo de Empresarios based on IMF, 217 27

Forecasts 217: composition of growth 217 GDP Interanual growth projection = 2.8% 2.3 pp growth contribution Domestic demand % annual change Private consumption = 2.4% Public consumption =.8% Gross fixed capital formation = 3,3%.5 pp External demand Goods and services % anual change Exports = 6.1% Imports = 5.2% growth contribution Source: Círculo de Empresarios based on Bank of Spain, April 217 28

Current growth GDP (annual change) and contribution of domestic and external demand (pp) 4 2-2 -4-6 -8 Domestic demand Spain External demand Spain Spain GDP Eurozone GDP OECD GDP Spain keeps the positive growth differential with the OECD and the Eurozone 4 th consecutive quarter of positive contribution of external demand Source: Círculo de Empresarios based on Bank of Spain, Eurostat and OECD, 217 29

Feb-13 Apr 13 Jun-13 Aug 13 Oct-13 Dec 13 Feb-14 Apr 14 Jun-14 Aug 14 Oct-14 Dec 14 Feb-15 Apr 15 Jun-15 Aug 15 Oct-15 Dec 15 Feb-16 Apr 16 Jun-16 Aug 16 Oct-16 Dec 16 Feb 17 Domestic demand: households Consumer spending moderates its growth and residential investment slows down Consumer confidence remains stable Spending decisions % quarterly change 1 8 6 4 2-2 -4 Residential investment Private consumption Confidence indicators Normalized indicators (difference between the indicator and its average, divided by its standard deviation) 2,5 2 1,5 1,5 -,5-1 -1,5-2 -2,5 Retail trade Consumers Source: Círculo de Empresarios based on Bank of Spain, 217 3

1995Q1 1995Q4 1996Q3 1997Q2 1998Q1 1998Q4 1999Q3 2Q2 21Q1 21Q4 22Q3 23Q2 24Q1 24Q4 25Q3 26Q2 27Q1 27Q4 28Q3 29Q2 21Q1 21Q4 211Q3 212Q2 213Q1 213Q4 214Q3 215Q2 216Q1 216Q4 GDP by sectors Tertiarisation of the economy GDP mp by sector (% total) 4Q 216 1 9 Net tax 9,2 7,3 1,1 9,2 8 SERVICES 67 7 6 6,2 61,2 67, 5 4 3 2 1 PRIMARY SECTOR CONSTRUCTION MANUFACTURE INDUSTRY ENERGY 5,1 3,4 12,8 2,5 8,5 3,4 9,8 5,1 3, 3,4 16,5 13,4 12,8 4,1 2,5 2,5 1995Q4 27Q4 216Q4 Source: Círculo de Empresarios based on INE, 217 31

Employed by sectors Tertiarisation of employment Employed by sector (% total) 1 4Q 216 9 8 7 6 SERVICES 78,5 65,3 69,4 78,5 5 4 3 2 1 CONSTRUCTION ENERGY MANUFACTURE INDUSTRY PRIMARY SECTOR 1995Q1 1995Q4 1996Q3 1997Q2 1998Q1 1998Q4 1999Q3 2Q2 21Q1 21Q4 22Q3 23Q2 24Q1 24Q4 25Q3 26Q2 27Q1 27Q4 28Q3 29Q2 21Q1 21Q4 211Q3 212Q2 213Q1 213Q4 214Q3 215Q2 216Q1 216Q4 5,6 1,2 1,7 4, 9, 1,3 12,7 17,3 1,1 5,6 1,2 12,9 1,7 7,1 3,9 4, 1995Q4 27Q4 216Q4 Source: Círculo de Empresarios based on INE, 217 32

Labour market (I) Unemployment rate in Spain Feb. 217 = 18% of labour force vs. Eurozone average = 9.5% (Eurostat) Unemployment EU28 % labour force 25 2 18 15 1 9,5 8 5 Source: Círculo de Empresarios based on Eurostat, 217 33

27 28 29 21 211 212 213 214 215 Dec-16 Jan-17 Feb-17 Mar-17 Affiliates Labour market (II) Evolution of the affiliation to Social Security and registered unemployed Persons 2.. 19.5. 19.. 18.5. 18.. 17.5. 17.. 16.5. 16.. 16.393.866 4.763.68 3.72.974 17.849.55 Affiliates 3.72.317 17.91.7 Unemployed 6.. 5.. 4.. 3.. 2.. 1.. Unemployed SEPE data - March 217: employed = 48,559 r/ Feb. affiliates = 161,754 r/ Feb. new contracts = 1,732,773 Between 213 and 216 unemployment has been reduced by 1 million people and affiliates have increased by almost 1.5 million. Source: Círculo de Empresarios based on Ministry of Employment and Social Security, April 217 34

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Prices General and core inflation % annual change 3,5 3 2,5 2 1,5 1,5 -,5-1 -1,5-2 CPI Spain Core inflation Spain* CPI Eurozone 2,3 1,5,9 March 217: Annual CPI decreases to 2.3% (vs. 3% in February), mainly because of the increase in energy prices. * W ithout energy and non-processed food Contribution to monthly CPI 3 2 1 Services Industrial non-energy services Processed food Non processed food Prices are rising above the Eurozone average Core inflatin is around 1%. -1-2 Source: Círculo de Empresarios based on INE, Eurostat and Bank of Spain, 217 35

Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Financial conditions Credit increases Credit to households % annual change Total House purchase Consumption and other Credit to business % annual change Total Resident business 5 3 1-1 -3-5 -7-9 6 4 2-2 -4-6 -8-1 -12 Others Note: Credit to households and business measured in stock terms Source: Círculo de Empresarios based on bank of Spain, 217 36

2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 Public debt Public debt was 99.4% of GDP in 216 Public debt % GDP 1,4 99,8 99,4 95,5 85,7 58, The fall is mainly explained by the real GDP increase 54,2 51,3 47,6 45,3 42,3 6,1 69,5 52,7 38,9 35,5 39,4 Source: Círculo de Empresarios based on Bank of Spain, European Commission and Ministry of Economy, 217 37

Exports Imports Imports Exports External sector 216 (anual change) Trade balance Exports 1.7% 254,53 M Imports.4% 273,284 M BALANCE Deficit 22.4% -18,754 M Million Exports Imports Balance goods goods 3. 25. 2. 15. 1. 5. -5. -94.159,9-18.754, -1. 27 28 29 21 211 212 213 214 215 216 Top 3 sectors (% of total) Capital goods Automotive industry Food, beverages and tobacco 2.3 17.7 16.9 Capital goods Chemical products Automotive industry 37,8% energy deficit 22 15.6 13.6 Exportaciones Importaciones Geographical distribution (%) Asia 9,4 America 1,4 Africa 6,4 Other 1,8 Africa 7,3 America 1,4 Asia 19,5 China 8,7 Other,2 Europe 72 EU 66,3 Europe 62,6 EU 57 Source: Círculo de Empresarios, based on Ministry of Economy and Competitiveness, February 217 38

Foreign investment in Spain 216 Gross productive investment = 23.476 million Foreign Gross productive direct investment investment in Spain Million 25. 2. 15. 1. 5. 14.686 17.282 2162 23.766 23.476 212 213 214 215 216 In contrast with international context, with investements between countries decreasing Source: Ministry of Economy and Competitiveness, 217 Investors (% over total investment and anual change) OECD countries 85% ( 4.5%). EU 5% ( 21%). Latin America 1% ( 14%). Lux (1.5%) USA (21.1%) 1 2 3 Main sectors of destination (% over total investment and anual change) Supply of gas and electricity = 17.3% ( 1.1%) Real estate activities =13.7% ( 11.2%) Financial services = 7.8% ( 242%) Netherlands (9.5%) 39

Interest rates and risk premiums The risk premium remained stable around 11 bp Ten years bond yield. Spain and Germany (%) Risk premium (bp) Interest rate 3 2,5 2 1,5 1,5 Spain Germany Risk Premium Risk premium 18 16 14 12 1 8 6 4 2 -,5 7-Apr-15 7-May-15 7-Jun-15 7-Jul-15 7-Aug-15 7-Sep-15 7-Oct-15 7-Nov-15 7-Dec-15 7-Jan-16 7-Feb-16 7-Mar-16 7-Apr-16 7-May-16 7-Jun-16 7-Jul-16 7-Aug-16 7-Sep-16 7-Oct-16 7-Nov-16 7-Dec-16 7-Jan-17 7-Feb-17 7-Mar-17 7-Apr-17 Source: Círculo de Empresarios based on Bank of Spain and national Central Banks, 217 4

Spain s position in international rankings The Travel & Turism Competitiveness Index 217 (136 countries) The Energy Architecture Performance Index 217 (127 countries) Bloomberg 217 Healthiest Country Index (163 countries) 1 SPAIN 1 Switzerland 1 Italy 2 France 2 Norway 2 Iceland 3 Germany = Sweden 1 SPAIN SPAIN (216) 7 = (216) 3 3 6 Switzerland SPAIN 1 (215) Source: WEF, 217 Source: WEF, 217 Source: Bloomberg, 217 IMD World Talent Ranking 216 (61 countries) 217 Index of Economic Freedom (181 countries) Corruption Perception Index 216 (176 countries) 1 Switzerland 1 Hong Kong 1 Denmark 2 Denmark 2 Singapore 2 New Zealand 3 Belgium 3 New Zealand 3 Finland 32 SPAIN 7 (215) 69 SPAIN 26 (216) 41 SPAIN 5 (215) Source: IMD, 216 Source: Heritage Foundation, 216 Source: Transparency International, 217 41

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