Europe Outlook Third Quarter 2015
Main messages 1 2 3 4 5 Moderation of global growth and slowdown in emerging economies, with downside risks The recovery continues in the eurozone, but still marked by the uncertainty around Greece Exports recover after a weak 1Q15 and despite lower demand from China Inflation clearly below the ECB target, that will maintain the QE until September 2016 The situation in Greece hasn t been resolved and the debate on the European integration process will continue Page 2
Index Section 1 Softer and heterogeneous global recovery with risks tilted to the downside Section 2 Eurozone: domestic factors are conducive to growth, external drivers less so Section 3 Forecast: the pace of recovery is firming up Section 4 Challenges remain: low potential, large imbalances Annex Country breakdown
4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 Europe Outlook, Third Quarter 2015 Global growth slows, especially in emerging economies World GDP growth forecast based on BBVA-GAIN (%, QoQ) Source: BBVA Research 1,6 World GDP growth forecast (%, YoY) Source: BBVA Research and Haver 6 5,4 1,4 1,2 1,0 5 4 3 3,1 4,1 3,4 3,4 3,4 3,4 3,8 0,8 2 0,6 1 0,4 0 0,0 0,2-1 0,0-2 2008 2009 2010 2011 2012 2013 2014 2015 2016 Developed Emerging Jul-15 20% CI 40% CI 60% CI Point estimates Page 4
Source: BBVA Research Europe Outlook, Third Quarter 2015 Main features of the global economy USA Uncertainty in the short term Labour market progresses as desired, but inflation doesn t Fed s first hike in September LatAm Less favourable global environment (China, raw materials prices, Fed) Uncertainty on economic policies Europe Strong domestic demand, lower global demand and more resilient euro Low inflation: QE until September 2016 Grexit avoided, but uncertainty persists Emerging Response to Fed s hike Carry-over effect from China China Lower growth and higher risks after the stock market crisis Page 5
World growth: global moderation, especially in emerging USA 2015 2016 Spain 2015 2016 2015 China 2016 2.5 2.8 Mexico 3.2 2.7 Eurozone 2015 2016 6.7 6.2 2015 2016 1.5 1.9 2.5 2.7 2.7 LatAm 7 2015 0.3 2016 1.2 Brazil 2015 2016-1.5 0.5 World 2015 2016 3.4 3.8 Revisions: Downward None Upward Source: BBVA Research See: Global Economic Outlook 3Q15
Index Section 1 Softer and heterogeneous global recovery with risks tilted to the downside Section 2 Eurozone: domestic factors are conducive to growth, external drivers less so Section 3 Forecast: the pace of recovery is firming up Section 4 Challenges remain: low potential, large imbalances Annex Country breakdown
Drivers of growth Lower oil price increase Limited contagion from Greece in the short term Neutral fiscal policy QE until Sep 16 / OMT The situation in Greece remains uncertain China: downward revision; emerging markets slowdown Solid domestic factors (confidence, labour market, credit) Positive impact of structural reforms in the periphery Lower than expected depreciation of the euro Page 8
Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Exports to CH+RU / Total Europe Outlook, Third Quarter 2015 Exports to China and Russia are decreasing The slowdown in China and Russia is having a negative impact on exports, with different effects across countries EMU: exports (% QoQ) and exchange rate Source: BBVA Research and Eurostat 6% 5% 4% 3% 2% 1% 0% -1% -2% 1,50 1,45 1,40 1,35 1,30 1,25 1,20 1,15 1,10 1,05 1,00 Total Excluding China and Russia EURUSD (rhs) Exports: weight on GDP and share to China and Russia Source: BBVA Research and Eurostat 10% 9% 8% 7% 6% 5% 4% 3% France Italy Spain Germany More vulnerable to a slowdown in China and Russia Eurozone 2% 20% 25% 30% 35% 40% 45% 50% Exports/GDP Page 9
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Europe Outlook, Third Quarter 2015 The euro with less room to run on the downside and moderation in global growth Exchange rate (EURUSD) Source: BBVA Research 1,5 1,4 1,3 1,2 5% 0.1 and 0.2% 1,1 1,0 Jul-15 Apr-15 EUR vs USD GDP in the eurozone in 2015 and 2016 0,9 Page 10
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Europe Outlook, Third Quarter 2015 Limited contagion from the Greek crisis. So far, Grexit has been avoided, but with many hurdles ahead EMU: financial tensions index Source: BBVA Research 8,5 7,5 Portugal Spain Italy 1200 1000 Limited contagion thanks to the ECB and the improvement of European governance 6,5 800 5,5 4,5 600 400 The uncertainty could weigh on the expected rebound in investment 3,5 2,5 200 0 It affects the architecture of EMU. Debate over the future of the euro (further integration) Spread (rhs) - - - - - Int. rate new loans NFC<1M Page 11
1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Europe Outlook, Third Quarter 2015 The fall in oil prices reinforces domestic drivers Oil price (Brent, USD/barrel) Source: BBVA Research 120 110 Oct-14 Lower oil prices, with respect to three months ago, could boost GDP growth in 2016 100 90 80 Apr-15 0.1-0.2% 70 Jul-15 60 50 Page 12
Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 Europe Outlook, Third Quarter 2015 Strength of private consumption Retail sales continue to grow at a robust pace Real earnings increased again in 1Q15 driven by employment, moderate wages and lower prices EMU: retail sales (% QoQ) and ESI consumer confidence Source: Eurostat, European Commission and BBVA Research 1,0% 0,5% 0,0% -0,5% -1,0% -1,5% 0-5 -10-15 -20-25 -30 EMU: private consumption and real labour earnings (% YoY) Source: Eurostat and BBVA Research 5 4 3 2 1 0-1 -2-3 Retail sales* ESI Consumer confidence *up to May HH disposable income Private consumption Page 13
More favourable fiscal policy than in previous years EMU: structural deficit adjustment 2010-2015 (%GDP) Source: BBVA Research and IMF 11 9 Almost neutral fiscal policy in 2015 7 5 European Commission wiser not to force a procyclical adjustment 3 1 Relaxation of fiscal effort in exchange for structural reforms -1 Eurozone Germany France Italy Spain Portugal Ireland Struct.Def. at the end of 2015 2015 2014 2013 2012 2011 Structural adjustment Page 14
Structural reforms are starting to bear fruit in the periphery Labour market efficiency index, ranking Source: IMF, WEO, 2014-2015 160 140 120 100 80 60 Improvement Peripheral countries begin to benefit from the approved reforms Implementation in countries under programme has progressed rapidly 40 20 0 Italy Greece Spain Portugal France Ireland 2014-2015 2011-2012 Spain will grow 3.2% in 2015, compared with 1.5% in Germany, 1.3% in France and somewhat below 1% in Italy Page 15
Index Section 1 Softer and heterogeneous global recovery with risks tilted to the downside Section 2 Eurozone: domestic factors are conducive to growth, external drivers less so Section 3 Forecast: the pace of recovery is firming up Section 4 Challenges remain: low potential, large imbalances Annex Country breakdown Page 16
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Europe Outlook, Third Quarter 2015 Some convergence in the pace of recovery among countries in the first half of 2015 EMU: GDP based on MICA-BBVA short term model (% QoQ) Source: Haver and BBVA Research 1,2 1,0 0,8 GDP growth (QoQ) 3Q14 4Q14 1Q15 2Q15 (f) 0,6 0,4 0,2 0,0-0,2-0,4-0,6 Eurozone 0.2% 0.4% 0.4% 0.4% Germany 0.1% 0.7% 0.3% 0.5% France 0.2% 0.1% 0.6% 0.3% Italy -0.1% 0.0% 0.3% 0.4% Spain 0.5% 0.7% 0.9% 1.0% Source: Eurostat and BBVA Research CI 20% CI 40% CI 60% Observed Page 17
Forecast: investment will begin to support growth EMU: annual GDP growth contributions (pp) Source: Eurostat and BBVA Research 2013 2014 6 4 2 0-2 -4-6 2015 (f) 2016 (f) Activity Real GDP (% YoY) -0.3 0.9 1.5 1.9 Private consumption -0.6 1.0 1.7 1.7 Public consumption 0.2 0.6 0.8 0.8 Investment -2.3 1.2 1.9 3.9 Domestic demand (contr. %) -0.7 0.9 1.5 1.9 Exports 2.1 3.7 4.4 5.1 Imports 1.3 4.0 4.8 5.6 Net exports (contr. %) 0.4 0.0 0.0 0.0-8 -10 2008 2009 2010 2011 2012 2013 2014 2015 2016 Domestic Demand Exports Imports Net exports GDP Current account balance (% GDP) 1.8 2.1 2.6 2.5 Public deficit (% GDP) -2.9-2.4-2.2-1.8 HCPI, % average 1.4 0.4 0.3 1.3 Source: Eurostat and BBVA Research Page 18
2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016 Europe Outlook, Third Quarter 2015 Among countries, Germany will continue stronger than France and Italy EMU: GDP forecast by country (%) Sources: Eurostat and BBVA Research 2,5 2,0 1,5 Germany: solid growth based on domestic factors, but the slowdown in global demand will be noticeable 1,0 0,5 0,0-0,5-0,4 0,9 1,5 1,9 0,2 1,6 1,5 1,9 0,4 0,4 1,3 1,7-0,4 0,7 1,3 France: more stable growth in 2016, with investment taking over the strong support of consumption -1,0-1,7-1,5-2,0 Italy: oil price and ongoing reforms will boost the role of domestic demand recovery EMU Germany France Italy New projection (Jul-15) Previous projection (Apr-15) Page 19
1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 Recession Recession Europe Outlook, Third Quarter 2015 Very low inflation in 2015, below the ECB's target in the forecast horizon EMU: demand and inflation Source: Eurostat and BBVA Research 2,5 2,0 1,5 1,0 0,5 0,0-0,5-1,0-1,5-2,0-2,5 4,0 3,0 2,0 1,0 0,0-1,0-2,0-3,0-4,0 Slight upward revision to 0.3% in 2015 (+ 0.2 pp), unchanged in 2016 (1.3%) Positive surprise in 1Q15 due to energy and food. This increases the forecast for 2015, but would be offset by lower oil prices and somewhat stronger euro Downside risks in the short term, but deflation risk vanishes Domestic demand (1Q08=100, LHS) Core (% YoY, RHS) Headline (% YoY, RHS) Page 20
Europe faces significant challenges and risks China: financial shock and risk of instability Emerging: low prices of raw material, trade channel with China, financial volatility Greece: open situation; can weigh on confidence USA: complications for the Fed s rate hike Russia: financial, political and energy impact Page 21
Index Section 1 Softer and heterogeneous global recovery with risks tilted to the downside Section 2 Eurozone: domestic factors are conducive to growth, external drivers less so Section 3 Forecast: the pace of recovery is firming up Section 4 Challenges remain: low potential, large imbalances Annex Country breakdown Page 22
Lower growth potential in the eurozone than in the US GDP growth potential projection (pp) Sources: Eurostat and BBVA Research 2,8 US 2,3 Potential well below US figures 1,8 EMU 1,3 0,8 Slower dynamics of population growth and productivity are the main reasons for the gap 0,3-0,2 2014-2024 2014-2024 Capital growth Higher participation rate Population 15-65 growth Fall of structural unemployment Productivity growth Page 23
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Europe Outlook, Third Quarter 2015 Where do we stand after the crisis? GDP per working age population (Q1-2008=100) Sources: Eurostat, Haver and BBVA Research 105 105,9 105,2 100 102,3 101,2 98,8 95 90 94,2 93,3 92,2 91,1 85 Eurozone Germany France Italy Spain USA Portugal Ireland UK Page 24
Few imbalances haven t been corrected yet Net International Investment Position Non-Financial Corporations Debt Public Debt Public Deficit* Unemployment rate Current Account Real effective exchange rate Nominal Unit Labour Cost Household Debt % of GDP % of GDP %AP % of GDP % of GDP % YoY chg. % YoY chg. % of GDP % of GDP Q1-2015 2014 Latest Q1-2015 2014 Q4-2014 Q1-2015 Latest Latest Eurozone 92,7-2,4 11,1 2,3-12,2 1,0 1,1 63,9 81,5 GER 74,4 0,7 4,7 7,8 36,4-0,3 2,0 55,1 49,4 FRA 97,5-4,0 10,3-0,5-16,4-1,2 0,4 54,7 96,4 AUT 84,9-2,4 6,0 1,7 2,1 1,9 1,7 50,3 80,3 BEL 111,0-3,2 8,6 2,5 54,7-0,5-1,3 56,5 140,1 NED 68,9-2,3 6,9 10,9 65,8 0,8-1,0 115,7 113,8 FIN 60,3-3,2 9,4-1,5 0,4 2,7 1,3 64,5 91,1 ITA 132,1-3,0 12,4 2,0-27,7 0,2 1,4 42,8 69,1 SPA 98,0-5,8 22,5 1,0-93,5-1,0 0,8 70,7 109,1 POR 129,6-4,5 13,2 1,0-111,6-1,8 0,1 79,7 106,1 IRE 109,7-4,1 9,8 6,2-97,5-3,5 0,3 88,5 194,6 GRC 168,8-3,5 25,6 0,3-121,9-5,6 1,2 62,3 66,0 CYP 106,8-8,8 16,0-4,6-165,1-1,4-1,7 123,1 220,9 SLV 81,9-4,9 9,2 6,8-44,7 1,2-1,5 28,3 70,4 SLK 54,0-2,9 11,8-0,1-70,0 1,3 0,4 29,2 44,2 DEN 44,4 1,2 6,2 6,8 41,8-1,2 0,9 133,0 84,0 SWE 44,0-1,9 7,8 7,1-4,0-3,7 1,7 83,3 145,0 Colour criterion: Higher than 130 Lower than -6 Higher than 16 Lower than -6 Lower than -100 Greater than 6 Greater than 9 Greater than 110 Greater than 140 110/130-6/-5 13/16-6/-4-100/-50 4/6 6/9 90/110 120/140 90/110-5/-4 10/13-4/-2-50/0 2/4 3/6 75/90 100/120 60/90-4/-3 7/10-2/0 0/20 0/2 0/3 60/75 80/100 Lower than 60 Higher than -3 Lower than 7 Greater than 0 Greater than 20 Lower than 0 Lower than 0 Lower than 60 Lower than 80 *Excluding assistance to financial sector Source: Eurostat, ECB, Haver and BBVA Research Page 25
Greece Ireland Spain Portugal EA 17 Denmark Germany Italy France Netherlands United Kingdom Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Austria Finland Belgium Europe Outlook, Third Quarter 2015 Unit labor costs and current account deficits have been adjusted in the periphery ULC adjustment, 2009-2013 (%) Source: Haver and BBVA Research 15 10 Current account (% GDP) Source: Eurostat and BBVA Research 10 5 0-5 -10 5 0-5 -15-20 -10-15 Germany France Italy Spain Portugal Ireland Labour Productivity (Sign switched) Wages Unit Labour Cost Page 26
EA18 GER FRA AUT BEL NLD FIN ITA SPA POR IRE GRC CYP SLV SLK DEN SWE UK Europe Outlook, Third Quarter 2015 High unemployment remains the main problem of economic policy Unemployment since the beginning of the crisis (%) Source: Haver and BBVA Research 30 25 20 The unemployment rate is much higher than in 2008 (except in Germany) 15 10 Still, it has begun to decline earlier than in past recoveries 5 0 Last Feb-08 Feb-13 Page 27
Europe Outlook Third Quarter 2015
Index Section 1 Softer and heterogeneous global recovery with risks tilted to the downside Section 2 Eurozone: domestic factors are conducive to growth, external drivers less so Section 3 Forecast: the pace of recovery is firming up Section 4 Challenges remain: low potential, large imbalances Annex Country breakdown Page 29
Germany: robust domestic fundamental 2013 2014 2015 (f) 2016 (f) Activity Real GDP (%YoY) 0.2 1.6 1.5 1.9 Private consumption 0.9 1.2 2.0 1.8 Public consumption 0.7 1.1 1.4 0.9 Investment -0.4 3.4 1.9 3.8 Domestic demand (contr. %) 0.7 1.2 1.7 1.9 Exports 1.7 3.8 4.1 5.2 Imports 3.2 3.3 5.2 6.0 Net exports (contr. %) -0.5 0.4-0.2 0.0 External sector Current account bal. (% GDP) 6.5 7.6 7.7 7.2 Public finances General Govt. balance (% GDP) 0.1 0.7 0.3-0.1 Prices HCPI, % average 1.6 0.8 0.5 1.4 Source: Eurostat and BBVA Research Private consumption continues to grow at rates consistent with favorable labour market conditions Lower demand from Russia and China hampers the growth of exports The uncertainty caused by geopolitical conflicts could lead businesses to further delay their investment plans to 2016 Page 30
Germany: solid labour market Deviation from EZ18 average (pp) Source: BBVA Research and Eurostat +18.2pp GDP per working age population The positive divergence with the average of the area is gradually expanding -2.5pp Public consumption Increased public investment would help correct the current account surplus +4.8pp ULC evolution 2008-2014 The competitive advantages of German companies from the rest of EMU have been reduced, mainly since 2012 Page 31
France: more balanced growth in 2016 2013 2014 2015 (f) 2016 (f) Activity Real GDP (%YoY) 0.7 0.2 1.3 1.7 Private consumption 0.5 0.7 1.9 1.4 Public consumption 1.7 1.5 1.7 1.0 Investment -0.4-1.2-0.3 3.3 Domestic demand (contr. %) 0.8 0.7 1.5 1.7 Exports 1.8 2.4 4.9 5.0 Imports 1.8 3.9 5.1 4.7 Net exports (contr. %) 0.0-0.5-0.2 0.0 External sector Current account bal. (% GDP) -1.4-0.8-0.9-0.8 Public finances General Govt. balance (% GDP) -4.1-4.0-3.6-3.0 Prices HCPI, % average 1.0 0.6 0.3 1.2 Source: Eurostat and BBVA Research The recovery in 2015 and 2016 will be based on internal factors, especially consumption The delay in the adjustment of the deficit should also help The loss of competitiveness is the main problem in the medium term Page 32
France: the easing of fiscal targets will help the economy recover Deviation from EZ18 average (pp) Source: BBVA Research and Eurostat +12.4pp GDP per working age population Stable income above average +1.6pp Public deficit Timid reforms underway -4.6pp Current account balance France has failed to correct the current account deficit in recent years, as other countries did Page 33
Italy: moderate growth in 2015 2013 2014 2015 (f) 2016 (f) Activity Real GDP (%YoY) -1.7-0.4 0.7 1.3 Private consumption -2.8 0.3 0.6 0.8 Public consumption -0.3-1.0-0.3 0.0 Investment -5.8-3.2 0.6 3.0 Domestic demand (contr. %) -2.5-0.6 0.5 0.9 Exports 0.7 2.4 3.5 4.3 Imports -2.2 1.7 2.9 3.4 Net exports (contr. %) 0.8 0.2 0.3 0.4 External sector Current account bal. (% GDP) 0.9 1.9 2.1 2.4 Public finances General Govt. balance (% GDP) -2.9-3.0-3.0-2.4 Prices HCPI, % average 1.3 0.2 0.2 1.1 Source: Eurostat and BBVA Research We continue to expect a slow recovery in 2015 (0.7%), driven by exports and investment Investment will continue to improve as reforms aimed at improving the business environment are implemented The declaration of unconstitutionality of cost-cutting measures can slow fiscal adjustment Page 34
Italy: reforms are needed to increase the growth potential Deviation from EZ18 average (pp) Source: BBVA Research and Eurostat -9.5pp GDP per working age population Income has deteriorated sharply in the past two decades and getting worse +40.2pp Public debt A slow privatization program is delaying debt reduction (132.1% of GDP in 2014) -44pp Private debt The private sector has been able to correct the high debt imbalance more rapidly Page 35
Spain: upward growth revision in 2015 2013 2014 2015 (f) 2016 (f) Activity Real GDP (%YoY) -1.2 1.4 3.2 2.7 Private consumption -2.3 2.4 3.3 2.5 Public consumption -2.9 0.1 1.3 0.6 Investment -3.8 3.4 5.2 5.8 Domestic demand (contr. %) -2.7 2.2 3.0 2.7 Exports 4.3 4.2 4.7 7.1 Imports -0.5 7.6 4.5 7.5 Net exports (contr. %) 1.4-0.8 0.1 0.0 External sector Current account bal. (% GDP) 1.4 0.8 1.3 1.4 Public finances General Govt. balance (% GDP) -6.3-5.7-4.5-3.0 Prices HCPI, % average 1.4-0.2-0.2 1.3 Source: Eurostat and BBVA Research Both in 2015 and in 2016, activity will grow significantly, supported by domestic factors The recovery of the fundamentals and the change in the tone of fiscal policy will contribute to the sustained recovery of domestic demand The contribution of net exports to growth will be negligible Page 36
Spain: the labour market is improving, but challenges remain Deviation from EZ18 average (pp) Source: BBVA Research and Eurostat -22.4pp GDP per working age population Incomes are still well below the average for the eurozone +10.8pp Labour productivity 2008-14 Most of the gains in labour productivity due to job losses -7.9pp Employment But 1,000,000 jobs will be created in 2015-16 Page 37
Europe Outlook Third Quarter 2015