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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