Quarterly Reporton the Spanish Economy

Q3 2015

Círculo de EmpresariosMadrid, October 2015

2

GLOBAL

GDP PREDICTIONS 2015

3

Uneven path of growth

USA 3.1%

Mexico 3%

Brazil -1%

Spain 2.5%

UK 2.7%

France 1.2%

Italy 0.5%

South Africa

2%

India 7.5%

China 6.8%

Russia -3.8%

Japan 1%

ASEAN-5 5.2%

Australia 2.8%

Germany 1.6%

USA 2.5%

Mexico 2.5%

Brazil -1.5%

Spain 3.2%

UK 2.5%

France 1.3%

Southafrica** 2%

India 7.6%

China 6.7%

Japan 1%

Asia* 4.9%

Australia 2.3%

Germany1.5%

Canada 1.5%

Eurozone 1.5%

Latin America

0.3%

Pacific Asia 5.7%

Russia -3.8%

Source: BBVA Research, September 2015*Excludes China**OECD

Global growth

Source: Círculo de Empresarios based on La Caixa Research, 2015

4

2013 20162014 2015 20162015

Forecasts Moderation in global growth

China continuesdesacelerating

Further weakness inBrazil in 2015

-4

-2

0

2

4

6

8

10

Real GDP growth and forecasts%

Advanced Emerging China Brasil Global

Impact of China’s desaceleration

-0.47%

EMERGING GLOBAL ADVANCED

-0.31%-0.11%

Source: Círculo de Empresarios based on Bank of Spain, 20155

Impact on real GDP growth in case of a reduction in potencial growth and domestic demand of 1 percentage point in China(average 2016-2018)

China: evolution and geographicaldistribution of the external sector

China’s main customers% of exports ,2014

Source: Ciírculo de Empresarios based on Santandertrade, 2015

China’s foreign-exchangereserves fell by 285 billion $since 2014

USA: 17%

Hong-Kong, China: 15,5%

South Korea: 4,3%

Japan: 6,4%

Germany: 3,1%

China’s main suppliers% of imports, 2014

USA: 8,2%

Australia: 8,2%

South Korea: 9,7%

Japan: 8,3%

Germany: 5,4%6

External sector Reserves $

Sharp fall in imports weredriven by falling domesticdemand

3,8 trllion $3,55 trillion $

-5,5

-13,8

3.400

3.500

3.600

3.700

3.800

3.900

-20

-15

-10

-5

0

5

10

2013 2014 Q1 2015 Q2-2015 jul-15 aug-15

Currency reserves Exports

Imports Tendency

Current account and currency reserves evolution%, billions $

aug-15

Renmimbi depreciation (3%)

Jul-15 Aug-15

China: volatility in financial marketsShanghai Composite evolutionJun14-sep-15

Jun-14 Apr-14 Jun15 Sep-151.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

5.500

2012 Nov-14 Sep -20154

5

6

7 China’s interest rates evolution2012-actually

May-15 Aug-15

5 cuts sincenovember 2012

Timevariation

Interestrate

06 Jul 2012 6%

21 Nov 2014 5,6%

28 Feb 2015 5.35%

10 May 2015 5.10%

27 Jun 2014 4,85%

25 Aug 2015 4,6%

Source: Círculo de Empresarios based on Reuters and Bloomberg, 2015Interest rates variations

7 Source: Círculo de Empresarios based on Reuters and Bloomberg , 2015

Chinese stock market is areflection of the healthand monetary policy in China

China: indebtedness

Source: Círculo de Empresarios based on BIS, IMF and Natixis, 20158

China

Public debt evolutionin % of GDP

Debt evolution by sectorsin % of GDP

Japan and China: 7 years of debt-increasing

Source: Círculo de Empresarios based on BIS, 2015

Japan: indebtedness focuses onthe public sector (222% of GDP)

China: high private debt(193% of GDP)

Japan

46,2 %

247 %

150

200

250

300

20

30

40

50

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

China

Japan

66%105%

222%

393%

36%

157%

41%

235%

0

50

100

150

200

250

300

350

400

450

Families Companies Government Total

Japan China

Brazil: financial markets turbulences

Brazilian exchange rate(USD/BRL) , Jan14-Sep15

9 40.000

42.000

44.000

46.000

48.000

50.000

52.000

54.000

56.000

58.000

60.000

2,0

2,5

3,0

3,5

4,0

4,5

Jan-14 Jan-15 Sep-15Sep-14

May-15 Jul-15 Aug-15 Sep-15

Brazilian stock market(BOVESPA), May15-Sep15

poi

nts

Source: Círculo de Empresarios based on Bloomberg, 2015

BRL/USD

BOVESPA

Jan15-Sep15: -52%

Sep14-Sep15: -66%

Jan15-Sep15: -4%

Sep14-Sep15: -17%

Lower commodity prices

10

54% 48%

Aluminium Copper Zinc

46%

31%

Gold

23%

Oil

12%

China’s share of global consumption% of global consumption

-12%

-8%

-4%

0%

4%

8%

12%

Oil volatility

Jul-15 Ago-15 Sep-15

Change in commodity pricesYoY, YTD

Source: IMF, 2015* Copper,Aluminium , Gold, Iron, Tin, Nickel, Zinc, Lead

*

Source: World Economic Fourm, 2015

Partly due to China’sweakness

Cotton

-15%

-8,70%

-3,40%

-11%

-30%

-52%

-54%

-20%

-60% -50% -40% -30% -20% -10% 0%

Metals

Fuel

Petroleum

Non-Fuel

aug14 - aug15

jan15-aug15

Latin America: Growth and prices

11

Latin America GDP outlook for 2015 and 2016 %

Source:,Círculo de Empresarios based on IADB , 2015

Inflation expectations for Latin America, 2015 and 2016%

Will inceasein 2015

Will increasein 2016

Downward revision to LatinAmerican growth, excludingMexico and Chile

Prices in Latin Americaremains heterogeneous=

4

3

3,7 3,5

2,5 2,5 2,32,8

4,2 43,7

3,63,2 3,1 3

2,5

0,3

-1

0

1

2

3

4

5 2015

2016

2015 revised estimate

-1,7

0

2

4

6

8

10

2015 2016

USA: the economy gradually expands

Unemploymentcontinues to recedegradually

Consolidation in employment growth and a lower labor forceparticipation rate at thetime

Labor force and unemployment rate(%)

12 Source: Círculo de Empresarios based on Bureau of Labor Statistics, 2015

Employment change Not in labor forceNot in labor force and employment changeMiles

(left axis)

(right axis)

L. Force62,6%

August unemployment rate:5,1%

0

2

4

6

8

10

12

58

59

60

61

62

63

64

65

66

67

68Labor force participation rate

Unemployment rate

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

90.000

100.000

-1000

-800

-600

-400

-200

0

200

400

600

Employment change

Not in labor force

(left axis)

(right axis)

Contribution to percentage change in GDP growth (pp)

USA: GDP continued growth momentum

2Q-2015 GDP:17.913 trillion $

Source: Círculo de Empresarios based on Bureau of Economic Analysis, 2015

USA GDP Growth,YoY,

Favourable external sector

Much stronger accelerationin private consumption

13

1,9

1,1

3

3,8

-0,9

4,64,3

2,1

0,6

3,9

-2

-1

0

1

2

3

4

5

3,9%0,6%

-4 -2 0 2 4 6

Real GDP

Personal consumption

Private investment

External sector

Public consumption

1Q-2015

2Q-2015

Stock markets

Changes in stock marketsYTD

14

Higherprofitability

ITALY

Source: Círculo de Empresarios based on Bloomberg, 2015

-3%

2,2%

-9,20%

8%

-8%

-4%

-0,35%

-22%

-17%

-21%

-14%

-12%

-21%

-17%

-30% -20% -10% 0% 10%

DAX

CAC-40

IBEX-35

FTSE-MIB

S&P 500

EURO STOXX

Nikkei Since max.

jan15-sep15

Impacts resulting from stock markets

Effects associated with a fall in stock markets (20%) and a sharp hike in interest rates(100 basic points) in global stock markets(average 2016-2018)

-0.15%

ADVANCED GLOBAL EMERGING

-0.13%

-0.12%

15 Source: Círculo de Empresarios based on Bank of Spain, 2015

Exchange rates adjustmentsCurrency depreciations against U.S. dollarYTD

Further depreciation and volatility of the euro against theUS dollar

Expectations of an imminentincrease in monetary policyrates in the United States

Fuente: Bloomberg, 2015

16

The only currencywhich appreciates

against the US dollar:Swiss franc: +2%

Source: Círculo de Empresarios based on ECB, 2015

Euro – dollar evolutionJun14 -Sep15

Jun-14 Mar-15Jan-15 Sep-15

(right axis)(left axis)

-6%

-2,70%

-2,40%

-14%

-13%

-17%

-14%

-20% -15% -10% -5% 0%

Euro

Pound

Renminbi

Norwegian krone

Australian dollar

Canadian dollar

Russian ruble

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

-3%

-2%

-1%

0%

1%

2%

3%

Period to period changeEur/usd

Risks

17

Source: Círculo de Empresarios

Refugee crisis in Europe

18

Main entry routes to Europe, January-July 2015

Spain6,698

From:- Syria: 57%- Guinea: 10%- Côte d´Ivore: 5%

Italy91.302

From:- Eritrea: 26%- Nigeria: 12%- Sub-Saharan Africa: 11%

Greece132,240

From:- Syria: 59%- Afghanistan: 25%- Pakistan: 5%

Hungary102,342

From:-Afghanistan: 29%-Syria: 28%- Kosovo: 23%

Possible contribution to GDP growth

+0.2 pp (Source: Credit Suisse, 2015)

Source: OECD, 2015

19

SPAIN

Obstacles to growth

20

Deteriorating global growth prospects

Slow down in the emerging economies, notably China

Restraint of euro depreciation

Spain political scene

Increase in Spanish risk premium

12345

Development of growth

21 Possible weaker growth in 3Q 2015 = 0.8%

0.91 0.8

-0,5

0

0,5

1

1Q 2015 2Q 2015 3Q 2015*

GDP Q/Q change, 1Q - 3Q 2015Domestic and external demand contribution to GDP growth (pp)

* Estimated

-8

-6

-4

-2

0

2

4

6

1Q 2003 4Q 2004 3Q 2006 2Q 2008 1Q 2010 4T 2011 3Q 2013 2Q 2015

GDP (y/y change)Domestic and external demand contribution to annual growth (pp)

Domestic demand

External demand

GDP

Source: Círculo de Empresarios, based on INE and Bank of Spain, 2015

Composition of growth

22

Predictions 2015: GDP annual growth = 3.2%Regarding the 2Q 2015, the increase in gross fixed capital formation (GFCF) is the largestamong the components of domestic demand

• Private consumption = 3.4%

• Public consumption = 1.1%

• GFCF = 6%

• Exports = 5.1%

• Imports = 6.2%

Domestic demand

0.2 pp

3.4 pp

External demand

contribution to growth

contribution to growth

Source: Círculo de Empresarios, based on FUNCAS (September 2015)

Construction and housing

23

From the 1Q 2014, recovery in the investment in construction

98

99

100

101

102

103

104

105

106

107

2015Q22015Q12014Q42014Q32014Q22014Q12013Q42013Q3

Investment in construction: housing and othersIndex 100 = 2Q 2008

Total

Housing

Others

Source: Círculo de Empresarios based on INE, 2015

Prices

24

Energy prices drag down inflation

Spanishcompetitivenessgain

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

Annual development of Spanish general CPI and of Eurozone HCPI y/y %

Spain

Eurozone

Source: Círculo de Empresarios based on INE and ECB, 2015

25

Exports

January – July 2015 (y/y change)

4.5% (to 161,507.3 M€)Imports

5.5% (to 148,630.8 M€)

Trade balance 6.1% in DEFICIT (to 12,876.5 M€)

30.5% in energy deficit,because of lower energy prices

Geographic distribution (%)

SECTORS: TOP 3

Expo

rtsIm

ports

EU

Rest ofEurope 5.8%

64.6%

EU

Rest ofEurope

55.7%

5.3%

China8.3%

Source: Círculo de Empresarios based onMinistry of the Economy, September 2015

External sector

Exports % / total Imports % / total

Capital assets 19.7 Capital assets 19.8

Automobile 17.2 Chemistry 16.3

Food, beverage and tobacco

16.2 Energy 14.7

Source: Círculo de Empresarios based onMinistry of the Economy, September 2015

EUROPE61

ASIA18.7

AMERICA11

AFRICA8.9

Others0.3

EUROPE70.4

AMERICA11.4

ASIA9.6

AFRICA6.5

Others2.3

0%0,0%

0,1%

0,2%

0,3%

0,4%

0,5%

0,6%

Limited direct exposure to China and Greece

0,0%

0,2%

0,4%

0,6%

0,8%

1,0%

1,2%

1,4%

1,6%

1,8%

2007 2008 2009 2010 2011 2012 2013 2014 20150,0%

0,2%

0,4%

0,6%

0,8%

1,0%

1,2%

1,4%

1,6%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Exports from Spain to China,% of total exports

Exports from Spain to Greece,% of total exports

Source: BBVA Research, DatacomexSource: BBVA Research, Datacomex

Source: BBVA Research, BIS Source: BBVA Research, BIS

Financial assets in China% of each country GDP

Financial assets in Greece% of each country GDP

Low exposureLow exposure

26

0%0%

2%

4%

6%

8%

10%

12%

UK USA Japan Taiwan, China

France Germany Spain

Risk premium

27 Spanish risk premium slightly over the Italian one

0

100

200

300

400

500

600

Development of Spanish and Italian risk premiumwith respecto to 10 years German bond yield

Spain

Italy

Source: Círculo de Empresarios based on ECB and Bank of Spain, 2015

110115120125130135140145150155

02-s

ep.

04-s

ep.

06-s

ep.

08-s

ep.

10-s

ep.

12-s

ep.

14-s

ep.

16-s

ep.

18-s

ep.

20-s

ep.

22-s

ep.

24-s

ep.

26-s

ep.

28-s

ep.

30-s

ep.

Risk premium Spain-Italy SEP. 2015

SMEs loans

28

Funding conditions are impoving for Spanish SMEs

Financial costs in Spain continue above those in the Eurozone

2,5

3,0

3,5

4,0

4,5

5,0

5,5

6,0

6,5

7,0

Bank interest rates - new loans to SMEs *(%)

Eurozone Spain

* Loans of up to EUR 1MSource: La Caixa Research based on ECB, 2015

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

1.400.000m

ar.-

08

jul.-

08

nov.

-08

ma

r.-09

jul.-

09

nov.

-09

ma

r.-10

jul.-

10

nov.

-10

ma

r.-11

jul.-

11

nov.

-11

ma

r.-12

jul.-

12

nov.

-12

ma

r.-13

jul.-

13

nov.

-13

ma

r.-14

jul.-

14

nov.

-14

ma

r.-15

jul.-

15

Debt: PPAAs, non-financial corporations and households Millions of euros

Public Non-financial coroprations Households

Source: Círculo de Empresarios based on Bank of Spain, 2015

Development of debt

29

In absolute terms:• Increase in public debt• Deleveraging of private sector

TOTAL(July 2015)

246.4% of GDP

Public94.7

Non-financial

corporations84.9

Households66.8

Public accounts: Regional administrations fail to carry out deficit target for 2015

30

Galicia-0.21%

Between January and July 2015: Total deficit = 7,900 millions of euros =0.73% of GDP

Target 2015 = 0.7%

Regional administrations fiscal balance% GDP

Asturias-0.22%

Cantabria-0.46% Basque

Country-0.21%

La Rioja-0.01%

Navarre-1.39%

Aragon-0.95%

Catalonia-0.76%

Valencian Comunity-1.02%

Murcia-1.3%

Andalusia-1.02%

Balearic Islands0.39%

Canary Islands-0.59%

Extremadura-1.42%

Castile and Leon-0.71%

Madrid-0.75%

Castile-La Mancha-0.63%

Source: Círculo de Empresarios based on Ministry of Finance, 2015

Deficit above the target

Deficit below the target

Superavit

31

Labour market

In August, Social Security system revenues increased by1.35% y/y (to 65,800 millions of euros).

0

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

16.000.000

16.500.000

17.000.000

17.500.000

18.000.000

18.500.000

19.000.000

19.500.000

20.000.000

2007 2008 2009 2010 2011 2012 2013 2014 2015

Affi

liate

s

Evolution of affiliation to Social Security and registered unemploymentPersons

Affiliates Unemployed

Unemployed

Source: Círculo de Empresarios based on Ministryof Employment and Social Security, Sep. 2015

32

Spain´s position in international rankings

www.circulodeempresarios.org