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The European and Spanish Economic Outlook, June 2016
June 9
Economic Outlook
2016
• Spain
The European and Spanish
Economic Outlook: A Less
Cloudy Global Scenario?
Rafael Doménech
BBVA Financial Institutions Conference
The European and Spanish Economic Outlook, June 2016
The global economic scenario has improved in the past
three months, but growth is still weak, and vulnerable to
several risks
In Spain, data on activity lend an upward bias to our growth
forecast for 2016, while increased uncertainty gives a
downward bias for 2017
Uncertainties make it more necessary to push for an
ambitious programme of reforms in Europe and Spain
2
The European and Spanish Economic Outlook, June 2016
Global
The European and Spanish Economic Outlook, June 2016
The world
Weak growth, fragile and more vulnerable to risks
USA
Spain
Euro zone
China
2016
2017
2016
2017
2016
2017
2.5
2.4
2.7
2.7
1.6
1.9
Latin America
2016 2017
-
-1.0
2016
2017
6.4
5.8
World
2016
2017
3.2
3.4
1.7
Source: BBVA Research
World figures consistent with world GDP published by the IMF
Down
Steady
Up
4
The European and Spanish Economic Outlook, June 2016
Markets have been improving since January
-0.3%
Fewer doubts about China
(in the short term)
+37%
Increase
in oil prices
+15%
Rising markets
(world stock markets, MSCI)
(Brent)
-125 bps
Better financing conditions in
EM
(Reduction in EMBI risk premium)
Reduced uncertainty as regards
global growth
Source: BBVA Research. Trends observed since 10/02/2016
5
The European and Spanish Economic Outlook, June 2016
Stabilizing oil prices at low levels
Movements in the price of oil
(Brent, US$ per barrel)
Cheap oil is good news but not for all.
Less uncertainty about global growth
140
120
100
Oil prices stabilize at very low levels,
while are expected to increase
gradually
80
60
40
Support buyers’ disposable income,
but weigh on that of oil producers
20
Actual
Source: BBVA Research and Bloomberg
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0
Forecasts
6
The European and Spanish Economic Outlook, June 2016
Global growth: weak and subject to several risks
Global economic growth
Forecasts based on BBVA-GAIN (%, annualised rate)
6
5
Average
2000-07
4
Average
2011-15
3
2
2Q09
2Q10
2Q11
2Q12
2Q13
2Q14
2Q15
2Q16
Growth, forecast
for 1Q16
and y2Q16
Crecimiento,
previsiones
1T16
2T16
Source: BBVA Research
7
The European and Spanish Economic Outlook, June 2016
Global trade is sending warning signals
Growth in world trade
Exports of goods, % YoY - BBVA indicator
9
Average
2000-071
8
7
6
Average
2012-15
5
4
3
2
1
0
Q3sep-11
2011
Q2jun-12
2012
1: IMF data
Source: BBVA Research and IMF
Q1mar-13
2013
Q4dic-13
2013
Q3sep-14
2014
Q2jun-15
2015
Q1mar-16
2016
8
The European and Spanish Economic Outlook, June 2016
What are the risks on the global scenario?
China
Probability
Europe
Crisis
Brexit
Geopolitical
Peripheral
countries
Emerging
markets
US Federal
Reserve’s
raising interest
rates
Source: BBVA Research
Impact
9
The European and Spanish Economic Outlook, June 2016
Forecasts
China: slow adjustment to continue
China: GDP growth
In the short term, monetary and fiscal
policies will modulate the
adjustment to China’s growth, which
will continue
(YoY %)
9
8
7,7
7,3
6,9
7
6,4
5,8
6
5
4
Semi-public enterprises: sustained
by debt and with overcapacity. Without
reforms, they will act as a brake on
growth in the medium term
3
2013
2014
Source: CEIC and BBVA Research forecasts
2015
2016 (f)
2017 (f)
10
The European and Spanish Economic Outlook, June 2016
Forecasts
USA: growth increasing over the course of 2016
USA: GDP growth
After a gentle start, the economy will
accelerate over the course of the year,
driven by employment
(YoY %)
3,5
3,0
2,5
2,4
2,4
2014
2015
2,5
2,4
2,0
1,5
1,5
1,0
0,5
The Federal Reserve will take into
account the strength of the domestic
economy and the negative effect on
the global environment when deciding
on the timing and extent of its
interest rate hikes
0,0
2013
Source: BEA and BBVA Research forecasts
2016 (f)
2017(f)
11
The European and Spanish Economic Outlook, June 2016
Forecasts
Eurozone: revised downwards, but recovery continues
Euro zone: GDP growth
The external environment weighs
down exports and growth
(YoY %)
2,5
1,9
2,0
1,5
1,5
Certain support factors are fading:
the positive effects of low oil prices and
the euro’s depreciation
1,6
0,9
1,0
0,5
Meanwhile, policies continue to
support growth: specially monetary
policy and, marginally, fiscal policy
0,0
-0,5
-0,2
-1,0
2013
2014
2015
Source: Eurostat and BBVA Research forecasts
2016 (f)
2017 (f)
12
The European and Spanish Economic Outlook, June 2016
Drivers
Eurozone: revised downwards, but recovery continues
ECB expanded QE
and cut interest
rates further
Slightly expansive
fiscal policy
Economic
policies
Some structural
reforms bear fruit
on the periphery
Strength of
domestic factors
Confidence, despite
events in early 2016
Lower
foreign
demand
Supporting
Resilience
Fading
Softer
tailwinds
Political
uncertainty
Rebalancing in EM
and lower imports
from advanced
economies
Oil prices
stabilization and
more appreciated
euro in the shortterm
Brexit, Greece,
terrorism, delays in
the reform process,
…
13
The European and Spanish Economic Outlook, June 2016
Political uncertainty
Greece: agreement reached, but still cornerstones ahead
• Measures approved : tax reform, pension reform and ready to hike indirect taxes, enough
to get 5.4bn cuts by 2018 and achieve fiscal target of 3.5% of GDP
Achieved
• Contingency measures demanded by the IMF (plan B in case those measures are not
enough): agreement of automatic horizontal cuts
• Disbursement second tranche of the ESM programme (EUR10.3bn)
• Agreement on benchmark for gross financing needs and on a gradual package of
debt measures at the end of the programme in mid-2018
What’s
left?
• Greece’s ownership, reforms deployment and assessment
• Political issues: IMF has to decide if it participates
• ECB likely to buy Greek bonds in September
14
The European and Spanish Economic Outlook, June 2016
Political uncertainty
Brexit: short and long-term risks
Referendum
• Timing: June 23rd (3 days before Spanish elections)
• Polls: 45%-43% for Bremain
• Brexit is not about economics: it is mainly about politics and emotions
Long-term
costs
• For UK: lower GDP (-1%/-9%, depending on new status), employment, impact on FDI and
the City, Scotland, etc.
• For EU: Risks of further centripetal moves (social and politics), but mostly for non-EU
countries (Eastern Europe, Nordics). Britain’s pro-market role.
Short-term
impact
• Depreciation (GBP): Most cited figures is additional -15% (vs USD)
• Reaction of BoE: So far, strong anti-Brexit positioning by Mr Carney, defying calls for
independence; contingency plans; debate over rates post-Brexit: raise rates to avoid
inflationary pressures or cut taxes to avoid recession
• Contagion to rest of Europe, global: unknown
15
The European and Spanish Economic Outlook, June 2016
Forecasts
Euro zone: monetary policy is nearing its limit
Euro zone: official rate and deposit rate
The ECB approves a new package
of measures: interest rate cuts,
extension of QE and new liquidity
supply (at zero cost)
(%)
5
4
3
These measures will mitigate bank
financing doubts, but their impact on
the real economy and credit is
uncertain
2
1
0
Deposit rate
rate
Deposit
Source: BBVA Research
mar-16
mar-15
mar-14
mar-13
mar-12
mar-11
mar-10
mar-09
mar-08
mar-07
mar-06
mar-05
-1
The ECB is starting to take account of
the side-effects of negative rates
Official rate rate
Refinancing
16
The European and Spanish Economic Outlook, June 2016
Europe’s future lower economic and political role
Regional contribution to world growth in the next ten years (%)
Western Europe
6.2%
Eastern Europe
5.4%
2015
1980
2045
Middle East
3.9%
Africa
6.3%
Japan: 0.9%
China: 29.1%
Other Asia
31.9%
Oceania
0.8%
North America
9.9%
Latin America
5.6%
World Center of Gravity
Global growth will be concentrated in the Asia-Pacific region, which
will account for 78.2% of the increase in GDP between 2015 and 2025.
Source: BBVA Research, IMF and Quah D., 2011, “The Global Economy’s Shifting Centre of Gravity”.
17
The European and Spanish Economic Outlook, June 2016
Europe’s future lower economic and political role
World GDP weights
Lower employment and productivity
growth than in emerging countries
imply a smaller share of Europe in
world GDP
(%)
25
20
From 2000 to 2020 Europe’s share in
world GDP will halve
15
10
The influence in world politics will
depend on the EU leadership in
political and economic agreements
(e.g., TTIP, climate change, etc.)
5
0
Eurozone
US
2000
Japan
2010
2020
China
18
The European and Spanish Economic Outlook, June 2016
Spain
The European and Spanish Economic Outlook, June 2016
GDP growth
The recovery continues
3.2%
2.7%
2.7%
2015
2016
2017
Source: BBVA Research and INE (National Statistics Institute)
20
The European and Spanish Economic Outlook, June 2016
Economic policy and growth
Uncertainty remains high…
Spain: Economic Policy Uncertainty
(idiosyncratic component in standard deviations)
2,0
1,5
1,0
0,5
0,0
-0,5
-1,0
May-16
Feb-16
Nov-15
Aug-15
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
Feb-12
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
-1,5
General elections
Source: BBVA Research based on EPU of Baker et al. (2015)
21
The European and Spanish Economic Outlook, June 2016
Economic policy and growth
… but the recovery continues
Spain: GDP growth
(% QoQ, MICA-BBVA model)
1,5
1,0
1,0
0,5
0,5
0,0
0,0
-0,5
-0,5
-1,0
-1,0
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
Sep-15
Dec-15
Mar-16
Jun-16 (f)
1,5
CI at 60%
CI at 40%
(f): forecast
Source: BBVA Research based on INE
CI at 20%
Available data point to GDP growth
slowing down gently (to 0.7% in
2Q16)
All in all, the probability of growth
exceeding 2.7% in 2016 remains high
Domestic demand (particularly
private consumption and
investment) support the recovery
GDP (%QoQ)
22
The European and Spanish Economic Outlook, June 2016
Tailwinds
Growth will continue to be supported by
Record low oil
prices
Expansive
monetary policy
Moderated
acceleration in the
euro zone
Neutral
fiscal
policy
23
The European and Spanish Economic Outlook, June 2016
Domestic risks
Economic policy uncertainty
Spain: GDP growth scenarios
In an environment without uncertainty,
the economy could have grown by 0.3
pp more in 2016 and 0.5 pp more in
2017
(%)
3,3
3,1
2,9
2,7
The longer this situation persists, the
greater the impact will be
2,5
2,3
2,1
1,9
1,7
1,5
2015
2016 (p)
Counter-factual scenario
Base scenario
(without uncertainty)
(with uncertainty)
(p): projected.
Source: BBVA Research based on INE
2017 (p)
24
The European and Spanish Economic Outlook, June 2016
Domestic risks
Non-compliance with fiscal commitments
Breakdown of public administrations’ fiscal
adjustment. (pp of GDP)
In the absence of stimulus measures,
the government would have reached
the deficit target in 2015
6
5
1,9
1,1
4
3
1,3
0,1
1,1
5,8
In the short term, the fiscal impetus
contributed about half a percentage
point to growth
0,1
5,0
2
3,9
2,9
1
0
Deficit Pasive Fiscal Deficit Pasive Fiscal Deficit Pasive Fiscal Deficit
2014 fiscal effort 2015 fiscal effort 2016 fiscal effort 2017
policy
policy
policy
2015 (A)
2016 (f)
(a): advance; (f): forecast. Not including assistance to banks
Source: BBVA Research based on MINHAP and INE
2017 (f)
In the long run, the costs may be
significant: the overshoot is likely to
increase the risk premium by about 25
bps relative to a scenario in which the
commitments had been met
25
The European and Spanish Economic Outlook, June 2016
Economic Outlook
• Spain
Conclusions
The European and Spanish Economic Outlook, June 2016
The global economic scenario has improved in the past
three months, but growth is still weak, and vulnerable to
several risks
In Spain, data on activity lend an upward bias to our growth
forecast for 2016, while increased uncertainty gives a
downward bias for 2017
Uncertainties make it more necessary to push for an
ambitious programme of reforms in Europe and Spain
27
The European and Spanish Economic Outlook, June 2016
June 9
Economic Outlook
2016
• Spain
The European and Spanish
Economic Outlook: A Less
Cloudy Global Scenario?
Rafael Doménech
BBVA Financial Institutions Conference