spain economic outlook - european university institute · 2017-08-22 · spain economic outlook,...

Spain Economic Outlook

Rafael Doménech EUI-nomics 2015 Debating the Economic Conditions in the Euro Area and Beyond Firenze, 24th of April, 2015

Spain Economic Outlook, April 2015

The outlook one year ago: the risks were to the upside for the first time

Spain: GDP growth forecasts in2014 (% YoY) Source: BBVA Research based on Consensus Forecast Inc.

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10

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60

(< -0,25) (-0,25;0) (0;0,25) (0,25;0,5)(0,5;0,75) (0,75;1) (1;1,25) (1,25;1,5) (>1,5)

Rel

ativ

e fr

equen

cy

GDP Growth forecast

March-2014 (mean: 0,9%)December-2013 (mean: 0,6%)March-2013 (mean:0,3%)

BBVA ResearchFEB-2014

GDP growth in 2014: 1.4%

Economic policy decisions have eliminated the risk scenarios

The differential performance of the Spanish economy confirms this improvement in the

trend

If this trend is confirmed, GDP growth could be even stronger than our forecasts: slightly

above 1% in 2014 and close to 2% in 2015


Main messages this year

Incoming data roughly as expected, domestic demand strong and no signs of slowdown. If

trends hold, positive bias towards 2Q15

Policies having stronger impacts, data revisions have shown better fundamentals than previously

thought, risks are not materializing

GDP growth could be close to 3% in 2015 and 2,7% in 2016, but with

uncertainties about potential growth

Further tailwinds: mild recovery in EMU growth, oil prices, exchange rates depreciation and

expansionary monetary policy

Neutral balance of risks: downside (political uncertainty and external factors), upside (stronger

impact of policies or weaker uncertainty)

1

2

3

4

5


GDP forecast by country (%) Sources: Eurostat and BBVA Research

EMU: more solid growth expected for 2015

Germany: strong growth will continue to be driven by domestic demand

France: the pace of recovery depends on continued structural reforms and

reinforcing competitiveness

Italy: finally out of recession in 2015, though the recovery is slow and mainly exports

driven

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EMU Germany France Italy

New projection (Apr-15) Last projection (Jan-15)


Spain: consumer confidence and Social Security affiliation Source: BBVA Research based on ME&SS and European Comission

Signs of GDP acceleration

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SS Afiliation (q/q SA)

Confidence (right)

Consumers confidence at 2001 levels

Employment growth (1.1% q/q in 1Q2015) as high as in pre-crisis period

Sectors that have been dragging the recovery (e.g., construction) are now growing


Signs of GDP acceleration

Confidence and employment indicators point to a further acceleration of growth in 1Q15:

0.8-0.9% q/q

If trends hold, GDP growth in 2Q15 expected to be again close to 1% q/q

Which are the factors behind this acceleration?

Spain: GDP growth observed and forecasts using MICA-BBVA model (%QoQ) Source: BBVA Research

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CI at 60% CI at 40%CI at 20% GDP (%QoQ)MC-JAN15


Factors behind GDP acceleration

1.  Expansionary monetary policy: TLTRO and QE are reducing cost of financing, boosting profits and confidence more than expected

2.  External factors: euro depreciation, EZ recovery, banking union and lower oil price

3.  Improvement of new credit flows to SMEs (+7.1% y/y) and households (+17,7% y/y)

4.  Fiscal policy slightly expansionary: slow structural adjustment, lower direct taxes (tax reform), lower debt service (lower r), commercial arrears program

5.  Labour market policies: (1) flat rate -> (2) 500 € exemption of social s. contributions for open-ended contracts, part-time employment, +incentives to job search

6.  Better consumption fundamentals: increases in wealth and disposable income

7.  Private sector deleveraging: the differential with EMU has been halved

8.  Perception in financial markets of lower political risks: Podemos has hit a wall, pro independence parties have lost some support and C’s increases political stability


GDP consensus forecasts continue converging towards BBVAs. The upward trend in consensus growth expectations came back

Spanish GDP consensus forecasts

Spain: 2015 GDP growth forecast (YoY) Source: BBVA Research based on Consensus Forecast Inc.

Note: Last forecast figure in brackets

Spain: 2016 GDP growth forecast (YoY) Source: BBVA Research based on Consensus Forecast Inc.

Note: Last forecast figure in brackets

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14

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BBVA Research (MC-APR15: 3,0%)Consensus (2,4%)National Forecasters (2,6%)Foreign Forecasters (2,3%)

1,5

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3,0

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15

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-15

BBVA Research (MC-APR15: 2,7%)Consensus (2,3%)National Forecasters (2,5%)Foreign Forecasters (2,1%)

2,7% 3%?


Macroeconomic forecasts

We still think exports will keep on accelerating, on the back of tailwinds, offsetting import

growth

Investment in M&E still going strong and along with consumption will explain most of the

increase in domestic demand

Increasing probability of seeing unemployment rates below 20% at the end of 2016


Risks going forward

Bias on GDP scenario going forward Driver What’s behind?

Ris

ks

Political uncertainty

•  Can coalition governments be formed? •  How will local elections affect Catalonian and

national elections?

Slightly better than 3/6 months ago

Stronger than expected impact of policies

•  ECB actions in particular, could be having stronger impacts than previously thought Positive

Fiscal slippage •  Increasing likelihood of not meeting 2015 target could mean a contractionary fiscal policy in 2016

Neutral (no big changes expected)

Export slowdown?

•  Worrying stagnation (structural?) over last 6m

Neutral (too early to tell)

Reform fatigue sets in

•  Debtor relief reform •  New subsidy to “permanent” contracts

Neutral


Implementation of country specific recommendations

Synthetic indicator of progress on implementation of 2012 and 2013 CSRs Source: ECFIN Economic Brieff, 37 (2014) http://goo.gl/KMuN10


Spain: unemployment rate and NAIRU (%) Source: BBVA Research based on INE and European Commission. Annual data.

Effects of structural reforms on structural unemployment

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dic-80 dic-84 dic-88 dic-92 dic-96 dic-00 dic-04 dic-08 dic-12 dic-16

Unemployment rate (%)

NAIRU (%)

NAIRU CE (%) European Commission

BBVA (Production function approach)


2005

2006 2007

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2010 2011 2012

2013 2014

2015

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Budg

et s

urpl

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Cyclical unemployment (%)

Spain: unemployment rate and budget balance of general government, 2005-2017 Source: BBVA Research based on INE and Updated Stability Program (2014)

Note: Structural unemployment assumed to remain constant at 18% from 2014 onwards in the dots representing the Updated Stability Program. A reduction of the structural unemployment rate increases the slope of the fiscal adjustment path, as in the arrow with a dashed line.

Effects of structural reforms on the fiscal adjustment

Structural reforms increase the cyclically-adjusted budget balance


Competitiveness gains buffer

Inflation differential with EMU continues

Trend inflation in Europe might remain below ECB target,

both in Europe and Spain

Trend inflation in Spain is close but above zero

A deflation process

continue to be outside

the baseline scenario

Negative growth rates

in Spain continue to have a non

negligible probability

Spain and EMU: trend inflation (% YoY, Trimmed mean method) Source: BBVA Research based on INE and Eurostat

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Feb-15

Spain EZ


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5$

10$

5$

10$

15$

20$

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Effects of structural reforms on structural unemployment

Spain: current account balance and unemployment rate Source: BBVA Research

In the past, job creation implied an increase of external debt

The challenge now is to reduce unemployment without increasing the current account deficit

Better performance of ULC so far: 2003-7: 3.5% (ESP) vs 1,5% (EMU) y/y

2014-16: 0.2% (ESP) vs 0.6% (EMU) y/y


2004 2006 2008 2010 2012 2014 2016

16.0

16.5

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17.5

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Conclusions

Employment (LFS, millions) Source: BBVA Research and INE

Consistent with GDP growth close to 3%, by 2016 employment could be back to the levels

observed in 2004

Could this recovery be sustainable in following years in order to reach the employment levels

previous to the crisis?

The sustainability of this recovery will depend on the ambition and the scope of the structural

reforms still needed

Spain Economic Outlook

Rafael Doménech EUI-nomics 2015 Debating the Economic Conditions in the Euro Area and Beyond Firenze, 24th of April, 2015

spain economic outlook - european university institute · 2017-08-22 · spain economic outlook,...

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