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Debating the Economic Conditions of the Spanish Economy
Rafael Doménech EUI-nomics 2015 Debating the Economic Conditions in the Euro Area and Beyond Firenze, 24th of April, 2015 (Updated the 7th of May, 2015)
Debating the Economic Conditions of the Spanish Economy
The outlook in April 2014: 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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(< -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
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GDP Growth forecast
March-2014 (mean: 0,9%)December-2013 (mean: 0,6%)March-2013 (mean:0,3%)
BBVA ResearchFEB-2014
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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
Debating the Economic Conditions of the Spanish Economy
Main messages in April 2015
Incoming data roughly as expected, strong domestic demand 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 around 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)
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Debating the Economic Conditions of the Spanish Economy
GDP forecast by country (%) Sources: Eurostat and BBVA Research
EMU: more solid growth expected for 2015
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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)
Debating the Economic Conditions of the Spanish Economy
Spain: consumer confidence and Social Security affiliation Source: BBVA Research based on ME&SS and European Comission
Signs of GDP acceleration in the Spanish economy
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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
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Debating the Economic Conditions of the Spanish Economy
Signs of GDP acceleration in the Spanish economy
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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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Debating the Economic Conditions of the Spanish Economy
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
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Debating the Economic Conditions of the Spanish Economy
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 Page 8
Spain: 2016 GDP growth forecast (YoY) Source: BBVA Research based on Consensus Forecast Inc.
Note: Last forecast figure in brackets
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BBVA Research (MC-APR15: 2,7%)Consensus (2,3%)National Forecasters (2,5%)Foreign Forecasters (2,1%)
2,7% 3%
Debating the Economic Conditions of the Spanish Economy
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
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Debating the Economic Conditions of the Spanish Economy
Risks going forward
Bias on GDP scenario going forward Driver What’s behind?
Ris
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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
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Debating the Economic Conditions of the Spanish Economy
Implementation of country specific recommendations
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Synthetic indicator of progress on implementation of 2012 and 2013 CSRs Source: ECFIN Economic Brieff, 37 (2014) http://goo.gl/KMuN10
Debating the Economic Conditions of the Spanish Economy
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)
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Debating the Economic Conditions of the Spanish Economy
2005
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2013 2014
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Bud
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Cyclical unemployment (%)
Spain: unemployment rate and budget balance of general government, 2005-2018 Source: BBVA Research based on INE and Updated Stability Program (2015)
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
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Debating the Economic Conditions of the Spanish Economy
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
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Spain and EMU: trend inflation (% YoY, Trimmed mean method) Source: BBVA Research based on INE and Eurostat
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Spain EZ
Debating the Economic Conditions of the Spanish Economy
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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
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Debating the Economic Conditions of the Spanish Economy
2004 2006 2008 2010 2012 2014 2016
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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
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Debating the Economic Conditions of the Spanish Economy
Rafael Doménech EUI-nomics 2015 Debating the Economic Conditions in the Euro Area and Beyond Firenze, 24th of April, 2015 (Updated the 7th of May, 2015)