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THE RECOVERY OF THE SPANISH ECONOMY Luis M. Linde Governor of the Banco de España Lunch colloquium of the Asociación para el Progreso de la Dirección (APD Zona Levante – Valencia) 25 June 2014 THE SPANISH ECONOMY HAS ENTERED A PHASE OF RECOVERY In mid-2013 the Spanish economy exited the double-dip recession which marked the crisis and activity is now on a path of gradual recovery. GDP: RECENT COURSE AND PROJECTION 5 % 4 3 2 1 0 -1 -2 -3 -4 -5 2007 2008 2009 2010 2011 2012 QUARTER-ON-QUARTER RATE OF CHANGE 2013 2014 2015 2016 YEAR-ON-YEAR RATE OF CHANGE 2 AND HAS CROSSED THE CRITICAL JOB-CREATION THRESHOLD The long period of job destruction gave way to modest job creation at the end of 2013, which has continued in 2014 and will foreseeably become more firmly entrenched in 2015-2016. EMPLOYMENT: RECENT COURSE AND PROJECTION 6 % 4 2 0 -2 -4 -6 -8 2007 2008 2009 2010 2011 2012 QUARTER-ON-QUARTER RATE OF CHANGE 2013 2014 2015 2016 YEAR-ON-YEAR RATE OF CHANGE 3 WHAT FACTORS EXPLAIN THE ABOUT-FACE IN THE SPANISH ECONOMY? The recovery of the Spanish economy was favoured by a number of positive stimuli received from abroad. But it would not have been possible without the progress made in the process of internal adjustment. 4 EXTERNAL STIMULI: THE PICK-UP IN GLOBAL ACTIVITY FAVOURED EXPORTS AND IMPROVED CONFIDENCE In the second half of the year, growth picked up in the advanced economies and, more particularly, in the euro area, which exited the recession. GROWTH OF EURO AREA GDP GROWTH OF WORLD GDP 10 % 4 % 3 8 2 6 1 4 0 -1 2 -2 0 -3 -2 -4 -5 -4 2007 2008 2009 2010 2011 2012 2013 2013 2014 2015 H1 H2 ADVANCED ECONOMIES EMERGING ECONOMIES 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 QUARTER-ON-QUARTER ANNUAL BMPE PROJECTIONS 5 ACTIONS OF EUROPEAN GOVERNMENTS WHICH ALSO CONTRIBUTED TO CREATING A MORE CONFIDENT CLIMATE European governments adopted important measures nationally and in relation to the governance and functioning of the euro area. At national level: • Progress was made in fiscal consolidation processes (the budget deficit of the euro area decreased to 3% of GDP in 2013 from a peak of 6.4% in 2009). • Reforms were undertaken in the economies subject to greatest pressure. • The financial assistance programmes for Ireland and Portugal ended. • The programmes for Cyprus and Greece proceeded favourably. At the level of European institutions: • The new procedures that arose from the governance reform were firmly established (European Semester, Macroeconomic Imbalance Procedure) • The budget deficit targets were revised to attune them more closely to the cyclical conditions of each economy. • The design of the SSM was completed and it will be fully operational at the end of this year. • Significant progress has been made in the design of the SRM. 6 THE STRONGLY EXPANSIONARY MONETARY POLICY OF THE ECB AIDED THE RECOVERY IN EUROPE AND THE EASING OF STRAINS The ECB maintained its strongly expansionary monetary policy stance through the use of conventional and non-conventional monetary policy measures. Main measures adopted IHICP AND ECB POLICY INTEREST RATES 2.75 • Reduction of official rates on three occasions. Negative rates on the deposit facility. • Introduction of forward guidance. • New longer-term refinancing operations designed specifically to encourage lending. • Prolongation of fixed-rate tenders with full allotment until at least end-2016. • Transparency: extension of projection horizon and publication of accounts of meetings (the latter under consideration). % 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 -0.25 Jan -12 Jul-12 Jan -13 Jul-13 Jan-14 MAIN REFINANCING OPERATIONS MARGINAL LENDING FACILITY DEPOSIT FACILITY YEAR-ON-YEAR RATE OF INFLATION 7 THE EASING OF STRAINS ON FINANCIAL MARKETS HAS BEEN EVIDENT After summer, sovereign and bank risk premia moved onto a clear downward path. SOVEREIGN SPREADS VIS-À-VIS GERMANY (10 YEAR) 1600 BANK RISK PREMIA (FIVE-YEAR CDS) pb pb 700 1400 600 1200 500 1000 400 800 300 600 200 400 100 200 0 2010 2011 FRANCE 2012 ITALY SPAIN 2013 2014 PORTUGAL IRELAND 0 2010 2011 GERMANY 2012 FRANCE 2013 ITALY 2014 SPAIN 8 PROGRESS IN INTERNAL ADJUSTMENT: FISCAL CONSOLIDATION The budget deficit stood at 6.6% of GDP in 2013 (excluding aid for the financial sector), with a fresh improvement in the primary structural balance. BUDGET BALANCE OF GENERAL GOVERNMENT (NA) AND CHANGES 4 % of GDP 2 0 -2 -4 -6 -8 -10 -12 2007 2008 2009 2010 Change in primary structural balance of general government 2011 General govt. balance 2012 2013 General govt. balance excl. aid to financial institutions 9 PROGRESS IN ADJUSTMENT OF COMPETITIVENESS (THROUGH INTERNAL DEVALUATION) The moderation of costs and prices was maintained, allowing Spain to make headway in recovering the lost competitiveness vis-à-vis its main trading partners and in restoring a favourable inflation differential. RELATIVE LABOUR COSTS: Spain vis-à-vis the euro area 120 HICP: OVERALL INDEX y-o-y 1998=100 5 DIFFERENTIAL EURO AREA % SPAIN ULC, whole economy 115 Compensation per employee 4 Productivity 3 110 2 105 1 100 0 -1 95 -2 2006 90 2007 2008 2009 2010 2011 2012 2013 2014 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 10 PROGRESS IN EXTERNAL ADJUSTMENT The end of 2013 saw the first positive external balance of the euro era, due mainly to the non-energy trade surplus and the positive performance of tourism. 10 % GDP 5 0 -5 -10 -15 2006 2007 2008 2009 2010 2011 2012 2013 ENERGY BALANCE (a) NON-ENERGY BALANCE (a) TOURISM BALANCE BALANCE OF INCOME AND TRANSFERS NET LENDING (+) OR BORROWING (-) OF THE NATION – OTHER 11 DECISIVE PROGRESS IN RESTRUCTURING AND RECAPITALISATION OF THE BANKING SYSTEM The Spanish economy has made a considerable public and private effort to recapitalise its banking system RECAPITALISATION OF SPANISH BANKS 120 € bn 13.6 39.5 100 80 61.4 60 40 20 0 PUBLIC INJECTIONS PRIVATE ISSUES HYBRID INSTURMENT AND SUBORDINATED DEBT MANAGEMENT 12 DELEVERAGING ACCOMPANIED BY SHIFTS IN THE COMPOSITION OF CREDIT The credit crunch at aggregate level is compatible with shifts in the composition of credit towards sounder firms 13 THE LEGACY LEFT BY THE CRISIS WILL BE DIFFICULT TO OVERCOME Private-sector debt Fall in and scant growth of GDP Unemployment Imbalance in public finances (deficit and debt) 14 THE PRIVATE-SECTOR DELEVERAGING PROCESS HAS CONTINUED Spanish firms and households have continued to reduce their debt levels, although they remain high DEBT RATIO OF NON-FINANCIAL PRIVATE SECTOR 240 % GDP 210 180 150 120 90 2000 2001 2002 2003 2004 2005 SPAIN 2006 EURO AREA 2007 2008 UNITED KINGDOM 2009 2010 2011 2012 2013 UNITED STATES 15 THE LEGACY OF THE CRISIS WILL CONDITION THE STRENGTH OF THE RECOVERY, ITS GROWTH POTENTIAL AND…. The loss of economic activity with respect to the pre-crisis period is still very high and several years will be needed to return to the GDP level of 2008 GDP AT CONSTANT PRICES: BEHAVIOUR SO FAR AND OUTLOOK 104 2008 Q2 = 100 100 96 92 88 84 80 76 72 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 16 …THE ABILITY TO ABSORB UNEMPLOYMENT, FOCUSING ON YOUNG PEOPLE AND UNSKILLED LABOUR The unemployment level will fall slowly and an increase in its structural component must be avoided UNEMPLOYMENT RATE: RECENT COURSE AND OUTLOOK 30 % of labour force 25 20 15 10 5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 17 THE SUSTAINABILITY OF PUBLIC FINANCES IS AN ESSENTIAL INGREDIENT FOR THE DELEVERAGING OF THE ECONOMY The public debt ratio continued to increase in 2013 to 93.9% of GDP. According to the SGP, strict compliance with fiscal targets will allow this trend to be reversed from 2015. GENERAL GOVERNMENT DEBT (EDP) IN SPAIN % GDP 120 100 80 60 40 20 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 18 THANK YOU FOR YOUR ATTENTION