eurozone forecast winter 2010 spain

8/7/2019 Eurozone Forecast Winter 2010 Spain

1/8

Ernst & Young

Eurozone Forecast

Spain

Spring edition, April 2011


2/8

Spain

Portugal

France

Ireland

Finland

Estonia

Netherlands

Belgium

Luxembourg

Slovakia

Austria

Slovenia

Italy

Greece

Malta

Cyprus

Germany

Outlook for Spain

Ernst & Young Eurozone Forecast Spring 2011

Published in collaboration with

17 Eurozone countries


3/8

1Ernst & Young Eurozone Forecast Spring 2011 Spain

Highlights

In the nal three months of 2010, Spanish GDP increased by just 0.2%, only a marginalimprovement from the stagnation seen in Q3 2010. In 2010 as a whole, Spanish GDP shrank

by 0.1%: scal consolidation and private sector deleveraging severely constrained domestic

demand and the pull from foreign trade, which was instrumental in lifting growth in the

other large Eurozone countries, proved too weak an offset. Fiscal consolidation has

proceeded on schedule. Downside risks remain to the fore, related to a bleak outlook for

domestic demand and ongoing uncertainty about the future health of the banking sector.

Spanish GDP is expected to grow by just 0.6% in 2011, markedly underperforming theEurozone average. In 2012, growth is unlikely to exceed 1.1%. Private consumption is

expected to remain depressed, as household income should remain under pressure from

stubbornly high unemployment, which is not expected to decline signicantly from its

current levels, and from the adverse effect of the cut in public sector wages and

government transfers that are part of the scal consolidation process. Moreover,

deleveraging and uncertainty about employment are likely to keep the savings rate high.

Investment should continue its fall this year, dropping by 2.8%. Non-residential investment isexpected to slide marginally, thanks to the improvement in foreign demand, but residential

capital expenditure should fall by another 12%, as the construction industry has to grapple

with a difcult nancial situation and lack of demand.

Export growth is expected to remain moderate, as unwinding the huge competitiveness gapwith the main trade partners, accumulated since the adoption of the euro, needs far-

reaching structural reforms to boost productivity that are only implemented gradually and

take time to bear fruit. However, weak import growth should lead net trade to provide a

signicant contribution to growth.

Since the beginning of 2011, the Government has taken new and important measures torestructure the banking system and, in particular, to strengthen capitalization in the ailing

regional savings banking sector. A key concern is the amount of public money needed to

recapitalize the system, which could escalate to 100 billion, far above the resources made

available by the Government (20 billion planned so far). In the meantime, banks are

regaining access to the interbank market but non-performing loans (NPLs) are increasingand the large exposure to Portuguese debt could lead to a signicant worsening in asset

quality in the event of a debt restructure there. Credit conditions remain tight and this is

going to affect domestic demand negatively going forward.

Preliminary data for 2010 shows that the ambitious scal consolidation plan proceedsaccording to schedule. The budget decit for 2010 has been contained to an estimated 9.2%

of GDP. If scal discipline continues (especially at the regional level), the decit is forecast

to shrink to 6.5% of GDP in 2011, not too far from the Governments 6% target. However,

bond markets remain nervous as the Government has to roll over nearly 25% of total debt in

2011. At over 200 basis points (bp) by the end of February, spreads over German Bunds

have fallen by less than 50bp from the peak observed in the nal months of 2010.

Fiscal consolidation on track, but growth is still missing


4/8

2 Ernst & Young Eurozone Forecast Spring 2011 Spain

Fiscal consolidation on track,

but growth is still missing

Table 1

Spain (annual percentage changes unless specied)

2010 2011 2012 2013 2014 2015

GDP -0.1 0.6 1.1 1.8 1.9 1.9

Private consumption 1.2 0.4 0.7 0.8 1.1 1.4

Fixed investment -7.6 -2.8 1.5 3.4 4.4 5.2

Stockbuilding (% of GDP) 0.4 0.5 0.4 0.8 1.1 0.8

Government consumption -0.7 -1.1 -0.9 0.1 1.3 2.3

Exports of goods and services 10.3 6.1 7.0 8.0 6.6 6.7

Imports of goods and services 5.4 1.9 4.7 7.0 7.0 7.0

Consumer prices 2.0 2.9 1.6 1.4 1.5 1.5

Unemployment rate (level) 20.1 20.6 20.0 19.2 18.6 17.7

Current account balance (% of GDP) -4.5 -3.7 -3.1 -2.8 -2.6 -2.1

Government budget (% of GDP) -9.2 -6.5 -4.7 -3.3 -2.8 -2.5

Government debt (% of GDP) 62.0 67.5 70.8 71.8 72.1 72.1

ECB main renancing rate (%) 1.0 1.3 2.3 3.1 3.5 3.9

Euro effective exchange rate (1995 = 100) 120.8 119.4 117.0 116.0 114.9 114.1

Exchange rate ($ per ) 1.33 1.36 1.28 1.25 1.24 1.23

Muted growth at the end of 2010

In the nal three months of 2010, Spanish GDP increased by just

0.2%, only a marginal improvement from the stagnation seen in

Q3 2010. The dynamic of the economy changed little through

2010, with domestic demand dragging down growth and net trade

providing only a small contribution. In 2010 as a whole, Spanish

GDP shrank by 0.1%, as the pull from foreign trade, which was

instrumental in lifting growth in other Eurozone countries, proved

too weak to counter the plunge in domestic demand.

The rst indications for 2011 do not point to a major turnaround.

The Purchasing Managers Index (PMI) for March suggested that

output only increased on account of foreign orders, while spare

capacity remained large. Meanwhile, the services PMI pointed to

only a tiny increase in activity. Both sectors reported a contraction

in labor force. As a result, the unemployment rate has continued to

increase this year, to 20.4% in January (on the International Labor

Organization measure).

and GDP to increase by just 0.6% in 2011

Spanish GDP is forecast to grow by just 0.6%, markedly lower than

the Eurozone average. In 2012, growth is unlikely to exceed 1.1%.

Subdued domestic demand and a positive contribution from net

trade should continue.

Household income is expected remain under pressure from

stubbornly high unemployment, which is not likely to decline

signicantly from its current levels, and from the adverse effects of

the cuts in public sector wages and government transfers that are

part of the scal consolidation process. Growth in private sector

wages are going to be limited by unemployment and the cap

agreed in 2010. In addition, savings are expected to remain high at

around 13% of disposable income, as uncertainty about

employment should encourage precautionary savings. In addition,

deleveraging of the Spanish household sector has barely started.

Household debt has fallen only marginally from the pre-crisis peak

and remains at 90% of GDP, around 20 percentage points (ppt)

above the Eurozone average. As a consequence, privateconsumption is expected to increase by just 0.4% this year.

Investment to continue its slide as the construction

sector remains weak

Investment is expected continue its fall and, in 2011, being 2.8%

lower than the year before. The recovery in exports seen in 2010

has restored protability in the manufacturing sector somewhat;

together with relatively better prospects for demand, this should

help limit the slide in non-residential investment.

By contrast, residential investment is expected decrease by more

than 12% this year. And we do not expect it to start rising before

2013. Saddled with strained balance sheets, the construction

industry faces quite bleak prospects.

The fall in house prices is likely to continue, as price-to-rent ratios

suggest that housing is still overvalued. Tax incentives for house

purchases in place until the end of 2010 and low interest rates are

Source: Oxford Economics


5/8

3Ernst & Young Eurozone Forecast Spring 2011 Spain

likely to have prevented a steeper fall in prices so far. As these

factors no longer support the housing markets, very large declines

in prices seem likely. Moreover, despite the pickup in sales seen in

Q3 2010 (due to the anticipation of the end of tax incentives), the

backlog of unsold homes remains large. According to Bank of

Spains estimates, there are between 700,000 and over a million

unsold homes, corresponding to over three years worth of sales.

Moreover, credit conditions remain tight. According to the latest

Bank of Spains Bank Lending Survey for Q1 2011, the signicant

tightening seen in the rst part of 2010 has not been relaxed, and

the majority of banks continue to report an increase in interest

margins. Tighter and more costly credit is expected to act as an

additional drag on domestic demand and, in turn, threaten the

relative stability of the banking sector.

Investment is forecast to increase by only 1.5% in 2012 and may

accelerate to 3.4% the following year.

Only net exports to provide a positive contribution

to growth

Given bleak prospects for domestic demand, only exports could

provide some pull to the economy, but Spanish exporters have to

grapple with structural competitiveness problems. Between 1999

and 2010, Spains real exchange rate has appreciated by 22%, as

opposed to the 2% appreciation of the Eurozone average and the

over 10% depreciation experienced in Germany. Wage moderation

is expected to bring about some small competitiveness gains going

forward, but undoing the losses accumulated in the past decade

requires substantial improvements in productivity resulting from

structural reforms, which take time to implement and bear fruitonly slowly.

All in all, in the medium term, the Spanish economy is expected see

growth rates much lower than those enjoyed in the boom years,

and we forecast GDP growth below 2% per year until 2015.

Infationexpectedtocomebackdown

Subdued domestic demand should put a lid on ination in the

medium term. The rise in ination since the end of 2010, which

has seen consumer prices increase by 3% year on year in January

(harmonized measure), has been mostly accounted for by the spike

in energy prices and last Julys increase in VAT. Ination should

remain above 3% during H1, but it is expected to come back down

later this year in line with the forecast moderation in energy prices

and as the impact of the VAT increase drops out of the

calculations, averaging 2.9% for the year as a whole. In the medium

term, ination is projected to remain below the Eurozone average,

at around 1.5%, as Spain tries to regain competitiveness.

Health of the banking sector key uncertainty

Our baseline forecast assumes a gradual but effective resolution ofthe problems affecting the banking sector. Some important policy

measures have been taken and, on the whole, the situation has

improved since the nal months of 2010, but the possibility of a

marked deterioration, leading possibly to a state bailout, cannot be

ruled out. The health of the banking sector constitutes a key risk to

our forecast.

The most important policy initiatives taken are aimed at

overhauling the regional savings banking sector (cajas), in order to

tackle its low capitalization and large dependence on wholesale

funding. At the beginning of 2010, the Government implemented a

series of reforms aimed at strengthening the sector, by mergingthe cajas and improving their governance. The number of banks

has dropped from 45 to 17, and average total assets per institution

have more than doubled, which should improve efciency.

-25

-20

-15

-10

-5

0

5

10

1980 1984 1988 1992 1996 2000 2004 2008 2012

% year

Industrial

production

GDP Forecast

5

10

15

20

25

1980 1984 1988 1992 1996 2000 2004 2008 2012

%

Forecast

Figure 1

GDP and industrial production

Figure 2

Unemployment rate

Source: Oxford Economics Source: Oxford Economics


6/8

4 Ernst & Young Eurozone Forecast Spring 2011 Spain

Fiscal consolidation on track, but growth is still missing

Moreover, in February 2011, new measures were put in place to

strengthen capitalization. Banks will have to raise the capital needed

on the market, sell assets or tap temporarily into a government-

sponsored fund that would amount to a partial nationalization.

According to central bank estimates, the capital shortfall to be lled

by public money will not exceed a manageable 20 billion, but

other analyses put the amount of resources needed as high as

100 billion, given the uncertainty surrounding the quality of assets

linked to the construction sector. Such a sum would far exceed the

amount of resources set aside by the Government to restructure

the banking sector and would jeopardize scal restructuring.

Meanwhile, Spanish banks have succeeded in regaining access to

the interbank market and have greatly reduced their dependence

on the European Central Bank (ECB). In January 2011, loans from

the ECB have dropped to 53 billion, less than half the amount

borrowed at the peak last June. However, the weak economic

situation is continuing to erode the quality of banks assets. InDecember 2010, the ratio of NPLs to total credit climbed to a

15-year high of 5.8%. Bad loans may continue to increase as they

normally lag economic activity.

An additional source of risk stems from the large exposure of the

Spanish banking sector to Portugal. According to analysts

estimates, Spanish banks own roughly a third of Portugals foreign

debt (which is 60% of total debt). Any loss triggered by a

Portuguese debt restructuring would inevitably have a sharp

adverse impact on Spanish banks balance sheets.

Fiscal consolidation appears on track

Better news is coming from public nances. Preliminary data for

2010 shows that the ambitious scal consolidation plan is

proceeding according to schedule. The budget decit for 2010 has

been contained to an estimated 9.2% of GDP. If scal discipline

continues to be enforced, budget decit will shrink to 6.5% of GDP

in 2011, not too far from the Governments 6% target.

However, most of the improvement has come so far from the

better-than-expected performance of the central government.

According to the Ministry of Finance, more than half of the regions

(including the biggest one, Catalunya) have missed their decit

reduction targets and will be obliged to step up the scal

retrenchment measures in 2011.

Yet, the improvement in scal balances has so far failed to impress

bond markets, which remain nervous, as the Government has to

roll over nearly 25% of total debt this year. At over 200bp by the

beginning of March, spreads over German Bunds have fallen byless than 50bp from the peak observed in the nal months of last

year. While they remain low in comparison to those on Portuguese

and Irish bonds, the burden of interest payments on government

nances remains substantial. These latent tensions in the Spanish

government bond markets imply that any slippage in scal

consolidation, for instance from regional governments, could have

a signicant impact on the cost of borrowing and the sustainability

of public nances.

-8

-6

-4

-2

0

2

4

6

8

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

% year

Forecast

GDP

Net exports

Domestic

demand

0

10

20

30

40

50

60

70

80

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

-12

-10

-8

-6

-4

-2

0

2

4

% of GDP

Forecast

Government debt(right-hand side)

Government budget balance(left-hand side)

% of GDP

Figure 3

Contributions to GDP growth

Figure 4

Government balance and debt

Source: Oxford Economics Source: Oxford Economics


7/8

Please visit www.ey.com/eef to:

View video footage of macroeconomists and Ernst & Young

professionals discussing the future of the Eurozone and

its impact on businesses

Use our dynamic Eurochart to compare country data over

the next ve years

Download and print the Ernst & Young Eurozone Forecast

and forecasts for the 17 member states

Or follow our ongoing commentary on Twitter at

http://twitter.com/EYnews

Follow the Eurozonesprogress online


8/8

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and

advisory services. Worldwide, our 141,000 people are united by

our shared values and an unwavering commitment to quality. We

make a difference by helping our people, our clients and our wider

communities achieve their potential.

Ernst & Young refers to the global organization of member firms of

Ernst & Young Global Limited, each of which is a separate legal entity.

Ernst & Young Global Limited, a UK company limited by guarantee,

does not provide services to clients. For more information about our

organization, please visit www.ey.com

2011 EYGM Limited.

All Rights Reserved.

EYG No. AU0713

In line with Ernst & Youngs commitment to minimize its

impact on the environment, this document has been printed

on paper with a high recycled content.

This publication contains information in summary form and is therefore intended for

general guidance only. It is not intended to be a substitute for detailed research or the

exercise of professional judgment. Neither EYGM Limited nor any other member of the

global Ernst & Young organization can accept any responsibility

for loss occasioned to any person acting or refraining from action as a result of any

material in this publication. On any specific matter, reference should be made to the

appropriate advisor.

The views of third parties set out in this publication are not necessarily the views of the

global Ernst & Young organization or its member firms. Moreover, they should be seen in

the context of the time they were made.

About Oxford Economics

Oxford Economics was founded in 1981 to provide independent

forecasting and analysis tailored to the needs of economists and

planners in government and business. It is now one of the worlds

leading providers of economic analysis, advice and models,

with over 300 clients including international organizations,government departments and central banks around the world, and a

large number of multinational blue-chip companies across the whole

industrial spectrum.

Oxford Economics commands a high degree of professional and

technical expertise, both in its own staff of over 70 professionals

based in Oxford, London, Belfast, Paris, the UAE, Singapore, New York

and Philadelphia, and through its close links with Oxford University

and a range of partner institutions in Europe and the US. Oxford

Economics services include forecasting for 190 countries, 85 sectors,

and over 2,500 cities sub-regions in Europe and Asia; economic impact

assessments; policy analysis; and work on the economics of energy

and sustainability.

The forecasts presented in this report are based on information obtained from public sources

that we consider to be reliable but we assume no liability for their completeness or accuracy.

The analysis presented in this report is for information purposes only and Oxford Economics

does not warrant that its forecasts, projections, advice and/or recommendations will be

accurate or achievable. Oxford Economics will not be liable for the contents of any of the

foregoing or for the reliance by readers on any of the foregoing.

eurozone forecast winter 2010 spain

Documents