Quarterly Report. Perspectives on Global and Spanish economy Q2-2019
0 likes282 views
The Q2 2019 economic report highlights a global economic slowdown influenced by trade tensions, particularly between the US and China, and uncertainties stemming from Brexit. Advanced economies are showing signs of nearing the end of their expansion phase, while emerging markets face macroeconomic imbalances, particularly in Turkey and Argentina. Predictions for global growth in 2019 resemble figures from 2017, but 2020 is anticipated to show improved prospects.
![Change of trend in the approval of financing
72
-15
-10
-5
0
5
10
15
Housing Consumption and others Non-financial corporations
Source: Círculo de Empresarios based on The Bank of Spain, 2019
Changes in the criteria for granting loans
% [(Entities tightening criteria considerably × 1)
+ (entities tightening criteria to some extent × 0.5)
– (entities relaxing criteria to some extent × 0.5)
– (entities relaxing criteria considerably × 1)]
2.3
8.4
4.3
1.6
2.32.4
8.6
4.5
1.5
2.3
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
9,0
Households-Housing Households-Consumption Household-Others Corporations->1 M€ Corporations-Until 1 M€
4Q 2018 1Q 2019
Financing conditions remain favourable, however, since Q4 2018, the criteria for granting loans have become
tougher and there has been a slight increase in the average rates of new operations
Tightening
criteria
Relaxing
criteria
Financing cost for new operations
% Quarterly average APR
The strong increase in consumer loans continues, 12.4% year-on-year in February 2019](https://image.slidesharecdn.com/quarterly-report-perspectives-on-global-and-spanish-economy-q2-2019-circulo-de-empresarios-190607111909/85/Quarterly-Report-Perspectives-on-Global-and-Spanish-economy-Q2-2019-72-320.jpg)
Quarterly Report. Perspectives on Global and Spanish economy Q2-2019
- 1. Perspectives on Global and Spanish Economy Q2-2019 June 2019 QUARTERLY REPORT
- 2. GLOBAL
- 3. Overview of the economic situation Q2-2019 3 Source: Círculo de Empresarios, 2019 The main international organisations (IMF, OECD, European Commission, etc.) continue to downgrade their growth expectations in light of the new geopolitical and economic scenario. Q1 2019 has been marked by the darkening economic outlook, the waning confidence of the private sector, and the mounting global uncertainty, which is at record levels of 2016, mainly due to the impact of trade tensions between the US and China, the fears associated with Brexit, the weakening of the multilateral trade, the lack of leadership, and the rise of populism. Globally, the slowdown in growth is confirmed, although better prospects are maintained for 2020. In advanced economies, there is a less robust & synchronised progress, symptoms of nearing the end of the expansion phase of the business cycle, and the US & euro area economies are decoupling. The US maintains a growth rate of over 2% per year & an unemployment rate at record lows, although the expansionary effect of its fiscal policy is beginning to subside. On the other hand, there is less dynamism in the EU, mainly due to the weakness of the German industry, the political & economic fragility of Italy, and the institutional crisis of the United Kingdom stemming from the indetermination of the final agreement of the Brexit. Macroeconomic imbalances persist in emerging countries, mainly in Turkey and Argentina, given their high debt levels, and the evolution of their growth & inflation rates. All this in a context contingent on the monetary policy of the main central banks, the evolution of oil price & other raw materials, the trade war, and lower profits margins.
- 4. Global growth shows signs of abatement Source: Círculo de Empresarios based on The World Bank & IMF, 2019 4 Evolution of world GDP (%) The global economic slowdown is predominantly explained by the rising uncertainty, trade tensions, the evolution of the downward outlook in Europe, and the moderation of growth in China Evolution in world GDP forecasts % change year-on-year 2,5 3 3,5 4 4,5 2016 2017 2018 Quarterly change Annual change Q4 18 3.3 3.6 3.8 3.3 3 3,2 3,4 3,6 3,8 4 4,2 2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 The forecast for global growth in 2019 is set at levels reached in 2017
- 5. Advanced economies: from a robust & synchronised growth to exhibiting signs of nearing the end of the expansion phase Source: Círculo de Empresarios based on the OECD & Reuters, 2019 5 2.3 1.9 1.2 1.4 EURO AREAUS Real GDP (%) 0 1 2 3 0.7 0.6 JAPAN UK 1.2 1 ADVANCED economies 1.8 1.7 1.7 0.8 3 1.9 0.9 0.3 1.8 2019 Minimum forecast2020 Maximum forecast 2.5 0.8 0.1 0.9 0.5 0.2 2.1 2.8 0.4
- 6. Emerging markets: favourable outlook for 2020 Source: Círculo de Empresarios based on the IMF & Reuters, 2019 6 BRAZILCHINA Real GDP (%) 0 3 5 7 ARGENTINA TURKEY EMERGING MARKETS 2019 Minimum forecast2020 Maximum forecast 6.2 6.0 1.4 2.3 -1.8 2.1 -3 -2.6 1.6 4.4 4.8 7 5.5 2.6 1.1 3.2 -0.1 -5 4.1 5.9 6.8 3.1 1.5 0.3 -2.5 1.4 2.3
- 7. Risks in 2019 Sharp rise in protectionist measures against China, the EU, & Mexico US Macroeconomic imbalances persist Argentina Turkey China Messy deleveraging Probability of a “hard Brexit” UK/ EU Uprisings in the wake of measures announced by Bolsonaro Brazil Australia Source: Círculo de Empresarios, 2019 Wilting growth of the main economies 7 Inverted yield curve increases the probability of recession in the medium term Geopolitical factors pose the greatest risks in 2019 High household debt-to-income ratio Financial institutions battling margin pressure Mexico Impact of US tariffs being imposed due to immigration issues New retaliations against US trade policy
- 8. Global trade loses momentum In January 2019, world trade fell by 0.97% year-on-year due to global uncertainty, protectionist measures, the slowdown in China, and a lower dynamism of German industry production, among other factors. Source: Círculo de Empresarios based on Reuters, Bloomberg, IMF, & CPB World Trade Monitor, 2019 Evolution of world trade (%) 8 Countries with the largest current account surplus in 2007-2018 $ billions 0 100 200 300 400 Germany Japan South Korea Netherlands Russia China % of GDP 0.4 7.4 3.5 7.0 9.8 4.7 Since 2015, the surplus of China's current account balance fell sharply by 83.9% to a record low in the last decade (from 4.75% of GDP in 2008 to 0.2% forecasted for 2019) -2 -1 0 1 2 3 4 5 6 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 YoY change Interquarterly change
- 9. 25 75 125 175 225 275 325 Financial crises in Asia & Russia 9/11 The Second Gulf War Financial Crisis Recession in the Eurozone; transition of power in China Refugee crisis Brexit Trump’s presidency Economic outlook hinges on the geopolitical context… Source: Círculo de Empresarios based on Thomson Reuters & Policy Uncertainty, 2019 9 Global Economic Policy Uncertainty Index Index value Trump announces tariffs on imports of Chinese products worth $50 billion A part of US tariffs announced take effect Uncertainty stemming from the possibility of a no-deal Brexit Global stability weakened by the US-China and US-Mexico trade tensions, among other factors. - Mounting trade tensions between the US and China - China retaliates against the US - New US—Iran geopolitical tensions - US tariffs imposed on Mexico over immigration issues Recession in the Euro area; transition of power in China
- 10. …where a new world order has been configured Source: Círculo de Empresarios based on Policy Uncertainty & The Economist, 2019 10 EU US Russia China Sphere of influence over other countries America First US EU China Russia Fall in multilateral co-operation and rise in economic protectionism, technological war, & casting doubt on international organisations A new paradigm for international relations MULTIPOLARUNIPOLAR
- 11. Trade war Source: Círculo de Empresarios based on the US Census Bureau & OECD, 2019 11 US — China 250 325 In effect Future tariff threats Imports of Chinese goods in 2018 539 China tariffs on US imports $ billions 110 120 In effect Imports of US goods in 2018 US tariffs on Chinese imports $ billions On the brink of future tariff threats The Trump Administration increases tariffs from 10% to 25% on imports worth $200 billion Possible future scenarios US protectionist measures could have a greater impact on the Asian economy in the next 3 years Meanwhile, China has announced that it will increase tariffs from 5% to 25% on US imports worth $60 billion. -0,8 -0,6 -0,4 -0,2 0 2018 2019 2020 2021 2022 Impact on China GDP (%) Impact on US GDP (%) -0,8 -0,6 -0,4 -0,2 0 2018 2019 2020 2021 2022 Impact of the measures announced by the US Impact if the US were to impose a 25% tariffs on the rest of the imports
- 12. The change in China's production model determines economic growth and world trade Source: Círculo de Empresarios based on the OECD & Thomson Reuters, 2019 12 Negative impact of a significant slowdown in China on global growth and trade (%) Contribution to the growth of world trade, by countries pp & annual % change Commodity exporters include Argentina, Australia, Brazil, Chile, Colombia, Indonesia, Norway, New Zealand, Russia, Saudi Arabia, South Africa and other oil-producing countries Note: impact on GDP growth against the backdrop of China's falling domestic demand (-2% per year), rising risk premium (+50 points), and falling global stock markets (-10%) *Additional effects as the monetary policy proves to be ineffective in boosting the GDP 1 -2 -1 0 US Euro area Germany Japan Commodity exporters¹ East Asia World Trade Uncertainty Equity prices Exogenous monetary policy Total 0 2 4 6 2014 2015 2016 2017 2018 2019 2020 China Rest of Asia Commodity exporters¹ Euro area US Rest of the world Internacional trade
- 13. Global PMIs point to a moderated growth in 2019 Source: Círculo de Empresarios based on Markit, 2019 13 Economic sentiment worsens especially in the Euro area, with the biggest variations in Italy and Germany. Manufacturing PMI 50=threshold (a value above 50 represents an expansion) Note: The JP Morgan Global Manufacturing PMI has been used to calculate the global data 67%ofworldGDP May-18 Jun-18 Jul-18 Aug-18 Sept-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 US 56.4 55.4 55.3 54.7 55.6 55.7 55.3 53.8 54.9 53 52.4 52.6 50.5 Germany 56.9 55.9 56.9 55.9 53.7 52.2 51.8 51.5 49.7 47.6 44.1 44.4 44.3 France 54.4 52.5 53.3 53.5 52.5 51.2 50.8 49.7 51.2 51.5 49.7 50 50.6 Italy 52.7 53.3 51.5 50.1 50 49.2 48.5 49.2 47.8 47.7 47.4 49.1 49.7 Spain 53.4 53.4 52.9 53 51.4 51.8 52.6 51.1 52.4 49.9 50.9 51.8 50.1 UK 54.2 54.1 53.8 52.8 53.8 51.1 53.6 54.2 52.8 52 55.1 53.1 49.4 Japan 52.8 53 52.3 52.5 52.5 52.9 52.2 52.6 50.3 48.9 49.2 50.2 49.8 China 51.1 51 50.8 50.6 50 50.1 50.2 49.7 48.3 49.9 50.8 50.2 50.2 India 51.2 53.1 52.3 51.7 52.2 53.1 54 53.2 53.9 54.3 52.6 51.8 52.7 Brazil 50.7 49.8 50.5 51.1 50.9 51.1 52.7 52.6 52.7 53.4 52.8 51.5 50.2 Global 53.1 53 52.8 52.6 52.2 52.1 52 51.5 50.7 50.6 50.6 50.4 49.8
- 14. +expansionary-expansionary Source: Círculo de Empresarios based on Bloomberg, 2019 14 Economic slowdown leads to a monetary policy turnaround in advanced economies ECB Official interest rate: 0% End of 2019: 0% In March, Draghi announced that the ECB could soften the impact of negative deposit rates (currently at -0.4%) by helping mitigate banks struggling with margin pressure → Fed Current Fed Funds rate: 2.25 – 2.5% At the beginning of 2019, Powell quelled the expectations of an interest rate hike for this year, and declared that the Fed does not rule out further reductions by the end of 2019. In addition, unveiled plans to end its balance sheet reduction ($4 billion) End of 2019: 2.25 – 2.5%→ BoJ Official interest rate: -0.1% End of 2019: -0.1% Kuroda says there is still ample room to expand stimulus further if deemed necessary and is considering easing the 2% inflation target → BoE Official interest rate: 0.75% End of 2019: 1%→ Although adjustments are expected by the end of this year, the monetary authority seems to be waiting for the doubts on the final agreement of Brexit to be resolved before taking any new decisions -1 0 1 2 3 Present Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 US Euro area Japan UK Canada 4 5 6 7 8 Present Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 China India Brazil Russia South Africa Interest rates forecasts (%) Central Banks of advanced economies Central Banks of BRICS
- 15. 15 Emerging markets: isolated turbulence in specific countries Source: Círculo de Empresarios based on Bloomberg & OECD, 2019 Foreign currency exchange rate against the dollar 2018 = 100 Mexico, Argentina and Turkey are the economies that suffer the largest increases in interest payments on debt Rising uncertainty and trade wars hinder the recovery of currencies of the main emerging countries to their contribution levels prior to the sharp depreciations suffered due to the change in the Fed’s monetary policy in 2018 Debt interest payments % of GDP 0 1 2 3 4 2014 2015 2016 2017 2018 Brazil Turkey Mexico China Russia South Africa Argentina 20 30 40 50 60 70 80 90 100 110 120 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Argentine Peso/dolar Turkish Lira/dolar Brazilian Real/dolar Southafrican Rand/dolar Russian Rublo/dolar Chinese Yuan /dolar
- 16. 0 5 10 15 20 25 30 35 40 1980 1990 2000 2010 2020 16 Asia: ever-increasing contribution to global growth Source: Círculo de Empresarios based on Bloomberg, Bank for International Settlements (BIS), & IMF, 2019 China Emerging Asia (excluding China) EU US MENA* Sub-Saharan Africa Evolution of GDP % of world GDP in $ *Middle East and North Africa The Asian continent’s share of the world GDP is about 31.7%, which is remarkable given the context of high levels of debt in the non-financial sector Total non-financial sector debt, Asia 2018 % of GDP 360 253 125 370237 187 181 India Malaysia Singapore Hong Kong China South Korea Japan 68Indonesia In 2018, China accounts for 15.8% of world GDP, while Japan's share drops to 5.9% Japan
- 17. Source: Círculo de Empresarios based on Thomson Reuters, 2019 China: slowdown woes become apparent 17 The Chinese government sets a lower GDP growth target to the range of between 6–6.5% in 2019, reporting a growth of 6.4% year-on-year in the Q1 2019. -10 -5 0 5 10 15 20 Consumption Investment Balance of trade GDP Evolution of GDP annual % change, & contributions to growth 0 10 20 30 40 50 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Primary sector Industry Services GDP (supply side) % of GDP The tertiarisation of the economy makes headway as participation in the services sector increases by 9.3 pp since 2008, while that of the industry subsides to the levels in 1970
- 18. Source: Círculo de Empresarios based on the OECD, National Bureau of Statistics, & Bloomberg, 2019 China: new fiscal stimulus 18 The Chinese government adopts an expansionary fiscal policy not only to counteract the impact of the trade war, but also to boost domestic demand as part of its production model change strategy -10 -5 0 5 10 15 20 Q12013 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q32018 Q42018 Tax revenue Public revenue Nominal GDP growth Evolution of public revenues % change year-on-year -3.1% -3.3% -3.5% Evolution of the public deficit % of GDP 2018 2019 2020 In 2019, the public deficit is forecasted to be 3.3% of GDP
- 19. Source: Círculo de Empresarios based on the State Administration of Foreign Exchange (SAFE), & Reuters, 2019 China: trade activity diminishes 19 In 2018, the current account surplus plunged by 88.3% from its peak in 2008, explained by the stagnation of China's contribution to global trade, together with the increase in imports due to the surge in the proportion of domestic demand in its economic growth. Current account balance, China $ billions 0 2 4 6 8 10 12 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 China exports and imports of goods % share of total global trade In turn, there is a change in the composition of the current account balance: the balance of goods surplus is narrowing and the services deficit is widening, mainly in tourism -2 0 2 4 6 8 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Current account Goods Services without tourism Tourism
- 20. 0 5 10 15 20 25 30 35 Q12007 Q32007 Q12008 Q32008 Q12009 Q32009 Q12010 Q32010 Q12011 Q32011 Q12012 Q32012 Q12013 Q32013 Q12014 Q32014 Q12015 Q32015 Q12016 Q32016 Q12017 Q32017 Q12018 Q32018 Households Government Non-financial corporations Total → Source: Círculo de Empresarios based on the Bank for International Settlements (BIS), & Thomson Reuters, 2019 China: symptoms of corporate debt reduction 20 From Q1 to Q3 2018*, the debt of non-financial sectors was reduced by 4.5% and stood at 252.7% of its GDP ($32.53 trillions), mainly due to the curbs on corporate debt borrowing Volume of non-financial sector debt $ trillions Average annual growth 2007-18 → → → 32.7% 21.1% 18.5% 20.5% *Latest data available 57.6 76.4 51.5 0 20 40 60 80 100 Euro area US China Household debt % of GDP In contrast, household debt continues to climb. Since 2007, it has skyrocketed by 728.75%, standing just 6.1 pp below the Euro area average in 2018
- 21. Source: Círculo de Empresarios based on Bloomberg, & Thomson Reuters, 2019 China: speculation in the real estate sector 21 22.4 14.2 13.5 12.7 3.7 China Taiwan Japan* US Hong Kong Since 1995, China’s rate of urbanisation has increased at an average annual rate of 3.1% House vacancy rate, 2017 % of the total Population evolution % and number of people Acquisition of housing in China % of the total 0 20 40 60 80 100 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q12018 First-time buyer Second-time buyer Third-time buyer *Japan’s figure is for 2013, rest for 2017 0 200000 400000 600000 800000 1000000 1200000 1400000 0 10 20 30 40 50 60 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 Rural population (right axis) Urban population (right axis) Rate of urbanisation (left axis) At the same time, there are currently 50 million empty houses in China (22.4% of the total) against the backdrop of rising speculation where people that are purchasing second and third housing is rapidly increasing
- 22. 22 Latin America: pattern of unrhythmic growth Source: Círculo de Empresarios based on the IMF, & CEPAL, 2019 A revised view on growth % -30 -20 -10 0 10 20 30 40 Intra-regional exports Extra-regional exports Exports in Latin America annual % change -3 -2 -1 0 1 2 3 2018 2019 2020 2018 2019 2020 2018 2019 2020 Brazil Mexico Argentina Peru -2 0 2 4 2018 2019 2020 2018 2019 2020 2018 2019 2020 ColombiaChile In 2019, the average growth of the region will be at 1.3%, marginally higher than in 2018 (1%) Peru, Chile and Colombia exhibit robust growth as opposed to Brazil and Argentina Previous forecast Present forecast
- 23. Evolution of GDP and unemployment % of GDP These downward revisions and darkening prospects take place in an environment in which the Brazilian economy has not regained the levels of production and unemployment prior to its 2015-16 crisis. Source: Círculo de Empresarios based on the OECD, & The Central Bank of Brazil, 2019 Evolution of the Economic Activity Index annual and monthly % change Brazil: expansion phase but growth is more modest The OECD forecasts that the Brazilian economy will grow by 1.4% in 2019, 0.7pp lower than its previous forecast, in the face of shrinking global trade and the sluggish pace of adopting the reforms announced by Bolsonaro’s government 23 -5 0 5 10 15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 GDP Unemployment 0.14 -0.36 0.62 -3.11 3.16 0.33 0.43 -0.14 -0.09 0.27 0.09 -0.31 -0.73 -4 -3 -2 -1 0 1 2 3 4 5 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Monthly variation Annual variation
- 24. 24 Mexico: trade improves with the US In Q1 2019, the immigration tensions with the US notwithstanding, Mexico's exports to the US increased by 5.4% (up to 29.5% of its GDP), replacing China as the main trading partner of the US. Source: Círculo de Empresarios based on Thomson Reuters, & the US Census Bureau, 2019 US goods trade with its main partners % of the total exports and imports 0 0,5 1 1,5 15 20 25 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Mexico exports to the US (left axis) US exports to Mexico (right axis) Evolution of goods exports % of GDP If the tariffs announced by the Trump Administration were to come into effect, it would slash Mexico's GDP growth down to 0.6% per year, as opposed to the 1.8% forecasted in 2019 Note: The Trump Administration announced that 5% tariffs will be imposed on all Mexican imports from 10 June 12.6 14.4 4 6 8 10 12 14 16 18 20 22 24 US trade with China US trade with Mexico US imports from China US imports from Mexico
- 25. 25 Turkey: growth supported by fiscal policy Source: Círculo de Empresarios based on the OECD, & Thomson Reuters, 2019 Evolution of GDP quarterly % change; and % 3,5 4 4,5 5 5,5 6 6,5 7 10 12 14 16 18 20 22 24 26 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 Inflation (left axis) USD/TRY (right axis) Evolution of inflation and the exchange rate % change year-on-year; and Turkish Lira to the US dollar In Q1 2019, Turkey’s GDP increased by 1.8% quarter-on-quarter, amidst a context of high inflation (19.6% annual) and unemployment rate (14.7%) in which the Turkish government maintains fiscal stimulus 14.7 8 11 14 -6 -3 0 3 6 Q12015 Q22016 Q32017 Q42018 Q12016 Q22017 Q32018 Q42019 Q12017 Q22018 Q32019 Q42020 Q12018 Q22019 Q32020 Q42021 Q12019 GDP (left axis) Unemployment rate (right axis)
- 26. Source: Círculo de Empresarios based on Thomson Reuters, & the OECD, 2019 The US: business cycle stabilises Forecasts for the annual growth of Real GDP % and contributions to GDP growth (pp) 2020 2.9 2.8 2.3 20192018 26 After 119 consecutive months of economic expansion, growth expectations are dampened in 2019 In Q1 2019, growth was up by 3.2% year-on-year, on the back of the growth in its external sector, while the contribution of household consumption and investment declined-3 0 3 6 2015 2016 2017 2018 2019 Consumption Investment Government Stockbuilding Net trade GDP Forecasts for Real GDP %
- 27. Source: Círculo de Empresarios based on J.P. Morgan, & NBER, 2019 27 The US: favourable tailwinds in the short-term Output Gap forecast by the St. Louis Fed* pp Economic Sentiment Index points and annual change After a decade, the US GDP regains its above-potential growth -7 -6 -5 -4 -3 -2 -1 0 1 2 3 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 The expectations of the economic agents remain positive, although in the short-term, this depends on the impact of any new trade tensions escalations *OG: 100*(Real Gross Domestic Product-Real Potential Gross Domestic Product)/Real Potential Gross Domestic Product -10 -8 -6 -4 -2 0 2 4 6 8 10 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Economic sentiment index GDP
- 28. Source: Círculo de Empresarios based on Thomson Reuters, 2019 28 The US: unemployment falls to lowest level since 1969 The US unemployment rate falls to record lows since 1969, with long-term unemployment rate falling sharply since 2012 92 94 96 98 100 1953 1957 1960 1969 1974 1980 1981 1990 2001 2007 Time taken to regain pre-recession unemployment rates Months 0 2 4 6 8 10 12 Unemployment rate more than 15 weeks Unemployment rate less than 15 weeks Unemployment rate Evolution of unemployment in the US % Nonetheless, the US economy has taken 76 months to recover back to the levels of unemployment prior to 2007, the longest period in comparison with previous economic crises.
- 29. 0 0,5 1 1,5 2 2,5 3 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 PCE Underlying inflation Inflation target FOMC forecasts Source: Círculo de Empresarios based on the BEA, Focus Economics, St. Louis Fed, & Thomson Reuters, 2019 29 The US: inflation moves away from the 2% target In Q1 2019, salaries increased by approximately 3.4% year-on-year US inflation indicators % change year-on-year * Personal consumption expenditure prices excluding the more volatile seasonal food and energy prices Salaries and labour costs Index value and % change year-on-year * This increase does not translate into inflation, which is currently 0.5pp below the Fed's 2% inflation target 0 0,5 1 1,5 2 2,5 3 3,5 4 95 97 99 101 103 105 107 109 111 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Unit labour costs Average wage per hour, MA (3 moths)
- 30. Source: Círculo de Empresarios based on the NY Fed, St. Louis Fed, Goldman Sachs, & Bloomberg, 2019 30 The US: recession probabilities rise *In the Economic Forecasting Survey of the Wall Street Journal (March 2019), the economists surveyed forecasted a probability of 24.51% Probability of a recession in the US* % (in the next 12 months) 10Y/3M US Treasury yield spread (%) -4 -2 0 2 4 6 Mar-62 Mar-65 Mar-68 Mar-71 Mar-74 Mar-77 Mar-80 Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 Mar-19Yield spread between 3-month and 10-year treasury bonds Recession Historically, an inverted yield curve has been the single best indicator that a recession is coming in the next 8 to 24 months The inversion of the US Treasury yield curve increases the expectations in the short-term of a new economic recession 0 5 10 15 20 25 30 35 40 45 50 Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 Jul-17 Oct-18 Jan-20 Probability May 2020: 29.62%
- 31. 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 0 1 2 3 4 5 US Fed balance sheet (left axis) 10-year government bond yield (right axis) 31 The Fed’s change of course on its policy Source: Círculo de Empresarios based on Bloomberg, & the Bank for International Settlements (BIS), 2019 Given the global slowdown, the Fed decided, in March, to hold interest rates steady in a range between 2.25–2.5%, and in June, will announce prospect of rate cuts by the end of the year Members of the FOMC, March 2019 meeting interest rate (%) Fed’s economic growth outlook Fed Balance sheet $ trillions; and % QE I QE II QE III “Taper talk” Taper Additionally, the Fed smoothes QE unwind of its balance sheet to 50% ($15 billion monthly) 2019 2020 2021 Long term GDP 2.1 1.9 1.8 1.9 December forecast 2.3 2 1.8 1.9 Unemployment rate 3.7 3.8 3.9 4.3 December forecast 3.5 3.6 3.8 4.4 PCE inflation 1.8 2 2 2 December forecast 1.9 2.1 2.1 2 Core PCE inflation 2 2 2 December forecast 2 2 2
- 32. Source: Círculo de Empresarios based on the CaixaBank Research, IMF, & OECD, 2019 32 The increased government spending approved in 2018 will boost the US GDP by about 0.9pp until the end of 2019, at the expense of delaying the fiscal adjustment of its high levels of public debt (105.8% of GDP). The US: divergent fiscal policy Public debt $ trillions Primary budget balance % of GDP OECD forecasts The US increases its primary deficit, while Japan, the United Kingdom, and the Euro area continue their fiscal consolidation processes Note: The US debt ceiling is the debt limit that the Government may borrow as approved by the US Congress. -12 -10 -8 -6 -4 -2 0 2 Japan US Euro area UK 12 14 16 18 20 22 24 Q22010 Q42010 Q22011 Q42011 Q22012 Q42012 Q22013 Q42013 Q22014 Q42014 Q22015 Q42015 Q22016 Q42016 Q22017 Q42017 Q22018 Q42018 Q22019 Q42019 Federal government debt Debt ceiling
- 33. Euro area: downward correction Source: Círculo de Empresarios based on Thomson Reuters, 2019 33 The main international organisations slashed the Euro area growth outlook in the face of deteriorating economic sentiment and the evolution of GDP in Germany and Italy Euro area economic growth (%) -1 0 1 2 10 11 12 13 14 15 16 17 18 19 -1 0 1 2 10 11 12 13 14 15 16 17 18 19 -1 0 1 2 10 11 12 13 14 15 16 17 18 19 -2 -1 0 1 2 10 11 12 13 14 15 16 17 18 19 Euro area France Germany Italy Spain Economic Sentiment Indicator Quarterly GDP -2 -1 0 1 2 10 11 12 13 14 15 16 17 18 19
- 34. The Euro area and the US economies are decoupling Source: Círculo de Empresarios based on the OECD, & Markit, 2019 34 1 1,5 2 2,5 3 3,5 2016 2017 2018 Euro area The US Evolution of advanced economies GDP annual % change Q4 18 Evolution of the PMI points The difference in GDP growth between the US and the Euro area widens, as a result of lower dynamism of the European manufacturing sector 47 50 53 56 59 Euro area composite PMI Euro area manufacturing PMI US composite PMI
- 35. European Commission: a more moderate growth Source: Círculo de Empresarios based on the European Commission, 2019 35 The European Commission downgrades its outlook for the Euro area and the EU-28 due to mounting uncertainty, the trade war, and the impact of the slowdown in China, among other factors In 2019, Germany is expected to reduce its contribution to the growth of the Euro area, given the fragile situation of its industrial sector Growth forecasts for 2019 Annual GDP growth (%) Annual CPI growth (%) 0 0,5 1 1,5 2 2,5 2016 2017 2018 2019 2020 Germany Spain France Italy Netherlands The rest Euro area Contributions to the growth of the Euro area percentage points European Commission Forecasts Autumn forecast 2018 Winter forecast 2019 1,9 1,91,4 1,2 0 1 2 EU 28 Euro area 2 1,81,6 1,4 EU 28 Euro area
- 36. 36 The ‘Japanisation’ of the Euro area Source: Círculo de Empresarios based on Bloomberg, & IMF, 2019 0 1 2 3 4 5 6 1985-1990 1991-2000 2001-2007 2008-2018 Germany Japan Spain The US Euro area Evolution of GDP Average annual growth (%) Since 2008, the low interest rates, the sluggish GDP growth, and the contained levels of inflation in the Euro area, together with a progressive fall in the working-age population, gradually converge to the situation in Japan in 1991 80 90 100 110 120 130 140 1980 1990 2000 2010 2020 2030 Japan Italy Spain France Germany Evolution of the working-age population 1980 = 100
- 37. Germany: economic stagnation Source: Círculo de Empresarios based on Bloomberg, & CESifo Group Munich, 2019 37 Growth is stagnated in the wake of worsening business expectations and industrial production. The German GDP will grow by 0.6% in 2019, at half the growth rate forecasted for the Euro area. Evolution of GDP and industrial production in Germany quarterly % change ifo Business Climate Index, Germany Index 2005 = 100 -0,6 -0,1 0,4 0,9 1,4 1,9 2,4 2015 2016 2017 2018 2019 2020 GDP Industrial production 1.7% 2.2% 2.2% 1.4% 0.6% 1.8% Annual GDP growth 70 80 90 100 110 120 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 General Current conditions Business expectations
- 38. -15 -10 -5 0 5 10 2012 2013 2014 2015 2016 2017 2018 2019 2020 Private consumption Investment Exports Italy: the climate of political uncertainty weighs on the evolution of the economy Source: Círculo de Empresarios based on the OECD, & Thomson Reuters, 2019 38 0 5 10 15 20 25 30 35 40 45 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Suspension of payments Exit the EU The probability of suspension of payments & the rise of Euroscepticism % Evolution of GDP (demand side) annual % change The new Government in Italy is formed as the Five Star Movement (M5S) and the Northern League reach a deal OECD forecasts In Q1 2019, Italian GDP recovered on the back of its external sector despite the fall in investment. The European Commission recommends opening an EDP* against Italy as its debt-to-GDP ratio reaches 132.2%, a situation that could cause future government crisis and deteriorate medium- and long-term sustainability *Excessive Deficit Procedure (EDP)
- 39. Greece: economic recovery and primary surplus Source: Círculo de Empresarios based on Bloomberg, & The Economist, 2019 39 GDP & employment annual % change; and number of people (thousands) Budget surplus % of GDP Job creation supports economic growth, boosting the recovery of household consumption and the rise in wages -500 -400 -300 -200 -100 0 100 200 300 -12 -10 -8 -6 -4 -2 0 2 4 6 8 GDP (left axis) Job creation in the last 12 months (right axis) Since 2015, the continuous primary surplus improves the access conditions of the Greek public debt to the international bond markets. Specifically, as its risk premium decreased by 92.1% from its record high in 2012 (3,999 bp) -15 -10 -5 0 5 10 15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Primary balance Primary balance cyclically adjusted
- 40. The ECB upholds the monetary stimulus 40Source: Círculo de Empresarios based on the European Commission, & Thomson Reuters, 2019 Given the slowdown in the Euro area, the ECB maintains steady interest rates and announces new targeted longer-term refinancing operations (TLTRO III) for banks The ECB's balance sheet doubles that of the Fed, representing 40% of the Euro area GDP Euro area inflation remains below 2% and forecasts for 2019 project it at 1.4% ECB Balance sheet € billions 0 1000 2000 3000 4000 5000 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 TLTRO I QE 1 QE 2 + TLTRO II Balance sheets of the main central banks % of GDP 0 50 100 2007 2013 2018 BoJ BCE Fed
- 41. 41 Source: Círculo de Empresarios based on The Bank of England, 2019 The UK: negative impact of Brexit 2019 *According to Ernst & Young, 80 of 222 financial firms operating in the United Kingdom are considering or have confirmed the relocation of assets or personnel outside the country 100 102 104 106 108 2016 2017 2018 US UK UK forecasts before Brexit EU-28 Real GDP growth 2016 = 100 From May 2016 to June 2019 -14% -2% -3.7% POUND DEPRECIATION GDP REDUCTION LOSS OF INVESTMENT £1tn LEAVING ASSETS*
- 42. 50 55 60 65 70 75 80 85 90 2018 2019 Oil (I): new upward pressures Source: Círculo de Empresarios based on the US Energy Information Administration (EIA), 2019 42 Since January 2019, the price of a barrel of Brent has soared by 37.5%, although it remains slightly below the levels recorded in the same period of 2018 Upward pressures 2 1 Trump: end of exemptions on Iranian oil imports as of May 1 2 US–China trade war persists1 OPEC to continue with its policy of production cuts Evolution of Brent Spot Price $ per barrel Downward pressures However, the evolution of oil prices in the short- and medium-term hinge on these causes as follows... Global economic growth slumps +37.5% +20.2% Venezuela’s oil production declines3
- 43. 33 34 35 36 37 38 39 40 42 44 46 48 50 52 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Non-OPEC (left axis) OPEC (right axis) Oil (II): US production Source: Círculo de Empresarios based on Thomson Reuters, & the US Energy Information Administration (EIA), 2019 43 Since 2018, the US exceeds the daily barrels of crude oil production of Saudi Arabia, the main exporter of the OPEC Evolution of crude oil production MB/D 5 6 7 8 9 10 11 12 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 US Russia Saudi Arabia Crude oil production, by countries MB/D 32.8 15.6 10.2 41.4 Saudi Arabia Iraq UAE Rest of producers Main OPEC oil producing countries % of the total
- 44. 0 10 20 30 40 50 60 Stock markets (I): back to the levels before the 2018 year-end collapse 44Source: Círculo de Empresarios based on Reuters, 2019 World Stock Index (MSCI WORLD) January 2018=100 VIX Volatility index 80 85 90 95 100 105 110 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19
- 45. Stock markets (II): the future evolution of the main stock exchanges in the world is contingent on mounting uncertainties 45Source: Círculo de Empresarios based on Bloomberg, 2019 From record highs in May 2019: Nasdaq -9.1% Dow Jones -6.4% S&P 500 -6.6% Stoxx 600 -6.2% Topix Japan -7.4% Main stock market indices in the world January 2018=100 In May, the trade tensions and the sluggish profit margins dragged down the main stock indices 70 80 90 100 110 120 130 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 S&P 500 Topix Stoxx 600 Nasdaq Dow Jones
- 46. 2300 2400 2500 2600 2700 2800 2900 3000 16 18 20 22 24 26 28 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 PER (left axis) S&P 500 (right axis) Stock markets (III): the US stock market reacts positively to the announcements of the Fed 46Source: Círculo de Empresarios based on Thomson Reuters, 2019 However, following the new announcement by the Fed*, the improvement in investor expectations allows the S&P 500 to climb to the 2,826 points in the first days of June In May, the S&P 500 tumbled by 6.6% to 2,752 points, its biggest drop in the same month since 2010, on account of the new tariffs imposed on imports from Mexico and China, and the announcement by the Trump Administration of a future antitrust law Evolution of S&P 500 Ratio (%); and points +25.3% *In June, the Fed announced possible rate cuts by the end of the year 2019
- 47. 47Source: Círculo de Empresarios based on Thomson Reuters, 2019 Stock markets (IV): worst stock performance in Europe The share prices of the European banking sector have slumped in light of the banks struggling with margin pressure in an environment of low interest rates* and high structural costs Annual evolution of stock markets January 2018=100 By sectors, annual evolution of stock markets, 2019* year-on-year change * 6 May 2019 *Currently, the deposit rates of the ECB are negative, around -0.4% 60 70 80 90 100 110 120 Stoxx 600 Stoxx banks S&P500 S&P 500 Stoxx600 TOTAL 2.3 -4.5 Industry 4.5 -7.9 Banks 2.6 -4.9 Utilities 24.8 10.5 Healthcare 5.4 4.9 Comsumer cyclicals -0,4 -12.1 Commodities -4.2 -13.6 Technology 1.2 1.7 Energy -24.6 -7.6 Consumer non-cyclicals 9.5 8.2 Telecom. -8.6 -4.1
- 48. -0,1 0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 2 2,2 2,4 2,6 2,8 3 3,2 3,4 US (left axis) Germany (right axis) Japan (right axis) 2.8 2.1 1.5 1.1 0.6 0.6 -0.2 -0.3 -0.6 -0.6-1,0 0,0 1,0 2,0 3,0 48Source: Círculo de Empresarios based on Thomson Reuters, 2019 Fixed income: inverted US Treasury yield curve The end of the business cycle keeps the 10-year bond yield at a minimum, especially in Germany and Japan 10-year Treasury yield, US, Germany, & Japan % 2-year Treasury yield, main countries % The persistence of negative rates in the short-end of the European curves stands out
- 49. 49
- 50. 50 Executive Summary In 2018, the Spanish economy expanded by 2.6% annually and for 2019 the Bank of Spain foresees a deceleration to 2.2%, due to the uncertainty, fragmentation, and slowdown that define the national and international environment. This trend slows the creation of employment and slows the reduction of public indebtedness Internally, the political and institutional instability that maintains the reformist paralysis continues. Economically, Spain leads growth among the major European economies, displaying greater resistance to the slowdown and the deterioration of world trade. Domestic demand is supported by the increase in productive investment, while household consumption dwindles. Public spending, with extended General State Budgets (PGE), remains high especially after its expansion via the Royal Decree Law. The new fiscal measures and spending generate uncertainty and raise the tax burden on families and businesses, negatively impacting their ability to save, consume and invest. Finally, after six quarters in negative, the external sector recovers its positive contribution to growth, explained by a proportionally much greater fall in imports than that in exports The Spanish economy manifests risks in the medium-term, given the progressive deterioration of global expectations, the persistence of high levels of unemployment, public deficit & debt, which reduce the margin of fiscal policy in the event of a new recession
- 51. Risks 51 • National context: future formation of the Government o Will the paralysis of the reform impulse be further prolonged? o Indetermination about the future orientation of economic policies and the budget consolidation process o Rising territorial political tensions • Limited leeway to manoeuvre the European monetary policy and the Spanish fiscal policy in the wake of a possible recession • Impact of rising protectionism on global growth and trade, especially in the Euro area in light of the dim prospects of Italy & Germany, which negatively affect the Spanish external sector • Uncertainty about the new political scene in the UK as the Government of Theresa May leaves and also about the final impact of Brexit • High levels of public deficit & debt, made worse by the expansion of public spending via Royal Decree-Law (RDL) and the lack of a General State Budget (PGE), which delay the necessary fiscal consolidation • Persistence of unemployment, especially youth and long-term, and duality in the labour market • Population ageing and its impact on the sustainability of the welfare state • Decline in productivity and competitiveness
- 52. 52 2019*2018 Slowdown of GDP growth to a lesser extent than in the main European economies Spain’s economy on a gradual path of growth deceleration 2.6% 2.2% 2020* 1.9% * Forecast Source: Círculo de Empresarios based on The Bank of Spain, IMF, BBVA Research, & FUNCAS, 2019 Bank of Spain Forecasts % change year-on-year These forecasts coincide with those of the OECD, the Government, FUNCAS, and BBVA Research The European Commission and the IMF have lowered their forecasts for 2019 by 0.1pp to 2.1%. They also maintain the forecast for a slowdown in 2020, with a GDP growth of 1.9%, while the average of the Euro area increases by 0.2pp
- 53. In a context of low productivity 53 The productivity per hour worked continues to display a countercyclical behaviour. Since 2013, job creation has not lead to any new improvements in productivity. In 2018, productivity per hour worked was 1.9% below the EU average and 18.7% below the Euro area average Evolution of productivity per hour worked & employment 1995-2018 Productivity in US dollars based on 2017 PPP, Euro area = 100 Number of employed 1995 = 100 Source: Círculo de Empresarios based on BBVA Foundation—Ivie & INE, 2019 100 110 120 130 140 150 160 170 75 80 85 90 95 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spain´productivity EU productivity Euro area productivity Spain´s employment +14.5% -1.9% -5% -9.6% -18.7%
- 54. The external sector recovers its positive contribution to growth 54 After six months of negative contribution to GDP growth, the external sector recovers its positive contribution to growth In Q1 2019, GDP increased by 0.7% quarterly and by 2.4% year-on-year, on the back of domestic demand, sustained by the fiscal expansion and the increase in investment GDP and contribution of domestic & external demand % change YoY & pp Source: Círculo de Empresarios based on The Bank of Spain, OECD, & INE, 2019 3 3.6 3.9 4.1 3.6 3.3 3.1 2.7 2.9 3.1 2.9 3.1 2.9 2.6 2.5 2.3 2.4 -1,0 0,0 1,0 2,0 3,0 4,0 5,0 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 4Q2018 1Q2019 Spain´s domestic demand Spain´s external demand Spain´s GDP Euro area GDP * Bank of Spain and OECD forecasts
- 55. Domestic demand maintains its dynamism 55 • Investment indicates positive growth rates for the fifth consecutive year • Household consumption subsides to 1.4% year-on-year, at the same time, the household savings rate is at lower levels than in 2007 (4.9% in 2018) • The final consumption of the public administrations (2% in Q1 2019) is soaring at an unforeseen pace since 2009 Source: Círculo de Empresarios based on The Bank of Spain, & INE, 2019 4 5 6 7 8 9 10 11 12 13 14 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 Q1 2019201820172016201520142013201220112010200920082007 Private consumption (left axis) Public consumption (left axis) Investment (right axis) Savings rate (right axis) % YoY change % GDI Evolution of the main components of domestic demand and savings % change year-on-year; and % Gross Disposable Household Income In Q1 2019
- 56. PMIs in decline 56Source: Círculo de Empresarios based on Markit, 2019 * * Forecast Spain PMIs A reading above 50 indicates an expansion of the manufacturing/services sector compared to the previous month; below 50 represents a contraction; while 50 indicates no change Moderately wilting PMIs confirm the deceleration of the Spanish economy in 2019 Although the manufacturing PMI remains in an expansion zone, in May, it dipped down to 50.1 points, which is 1.7 points below the April figure The services PMI (52.5) has also faired worse, as it is 4.3 points below its previous maximum reached in March 50.1 52.5 40 45 50 55 60 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Manufacturing PMI Services PMI Economic expansion Economic contraction
- 57. A tertiary economy that has made no strides in the share of its industry sector 57 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 1Q2012 3Q2012 1Q2013 3Q2012 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 Industry Vehicles Metallurgy Evolution of GDP by production approach 2007=100 and % of GDP Industry electricity consumption % change year-on-year Source: Círculo de Empresarios based on INE & Red Electrica, 2019 Electricity consumption of the industrial sector plummets to levels of seven years ago, especially in the automotive sector and metallurgy In Q1 2019, the GVA of the Spanish industry marginally increased by 0.4% year-on-year, 2.2pp less than in Q1 2018, after dipping down by a 1.3% in Q4 2018, mainly due to global trade tensions, the slowdown in global growth, the increase in the cost of electricity, and the reversal of labour reform measures 15 16 17 40 50 60 70 80 90 100 110 120 130 140 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 2018Q3 2019Q1 Industry/GDP (right axis) GDP (left axis) Primary sector (left axis) Industry (left axis) Construction (left axis) Services (left axis)
- 58. 58 Asymmetric regional distribution of industrial activity Source: Círculo de Empresarios based on INE, 2019 Industry by Autonomous Community % regional GDP and % change year-on-year The Autonomous Communities with greater weight (exceeding 25%) of the industry on their GDP are Navarra, La Rioja and the Basque Country Differences of up to 20pp between the Autonomous Communities in the contribution of the industry to its regional GDP3 2.2 1.6 2.5 3.4 2.3 2.3 2.8 2.5 2.7 1.5 2.1 2.6 2 2.4 3.7 2.4 2.2 1.5 1.6 0 1 1 2 2 3 3 4 4 0 5 10 15 20 25 30 Navarra Basque Country LaRioja Aragon Cantabria Asturias Catalonia Castille-La Mancha Castilleand Leon Galicia Murcia ValencianC. Spain´s average Extremadura Andalusia MadridC. CanaryI. BalearicI. Ceuta Melilla % Industry/regional GDP (left axis) % Manufactures/regional GDP (left axis) % GDP YoY change (right axis)
- 59. 59 Recovery of the real estate sector since 2014 Source: Círculo de Empresarios based on The Bank of Spain, 2019 885,000 sales Annual average 2004-2007 Home sales Investment in housing % of GDP Since 2014, investment in housing continues to maintain levels close to 5% of GDP in line with other EU countries 0 2 4 6 8 10 12 14 16 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spain Ireland EU 848390 955186 463719 491287 300568 581793 300000 400000 500000 600000 700000 800000 900000 1000000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 In 2018, there were around 580,000 home sales, increasing approximately at a 10% annual rate, but a 39% less than its record high in 2006
- 60. 60 Moderate job creation and unemployment adjustment The Social Security recovers the levels of the number of affiliates it had prior to the crisis, although the 30% registered unemployment rate is still higher than the levels in 2008 -6.5 -7.8 -7.7 -11.1 -6 -5.3 1.6 3.6 2.6 3.9 3.1 2.8 -12 -10 -8 -6 -4 -2 0 2 4 0 5000000 10000000 15000000 20000000 25000000 2008 2014 2015 2016 2017 2018 2019 Unemployment (left axis) Affiliates (left axis) Persons % 17 19.5 6.3 3.4 2 3 4 5 6 16 17 18 19 20 21 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 2018Q3 2019Q1 Employment Unemployment Evolution of S.S. affiliation and registered unemployment People (May) and % change year-on-year May/May Source: Círculo de Empresarios based on the Ministry of Labour, & INE (EPA), 2019 Evolution of employed & unemployed — LFS Q1 2019 Number of people (millions)
- 61. 61 Public employment increases more than private 57 58 59 60 61 -10 -8 -6 -4 -2 0 2 4 6 8 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 2018Q3 2019Q1 Public employment (left axis) Private employment (left axis) Activity rate (right axis) Source: Círculo de Empresarios based on the INE (Labour Force Survey), 2019 Evolution of employed % economic activity rate (EAR) % change year-on-year; and % working age population • The number of employed declined by 93,400 people compared with the previous quarter, maintaining the year- on-year increase of 3.2% • The unemployment rate rose to 14.7% of the economically active population as the number of unemployed increased by 50,000 people, in a context of a reduction in the economic activity rate (currently 2.2pp lower than the maximum reached in Q3 2012) In Q1 2019 Since Q4 2017, there has been a change in the pattern of job creation, with the public employment growing 1.2 pp more than private, at an average annual rate of 3.8%
- 62. High unemployment rates persist in Spain 62 Spain continues to be the 2nd country of the EU-28 in total and youth unemployment after Greece. However, Spain is reducing its unemployment rate at a much higher rate than the average for the Euro area and the EU Source: Círculo de Empresarios based on Eurostat, 2019 Unemployment rate UE 28 April 2019, % of the active population Unemployment rate — total & youth April 2019, % of the active population 18.5 14.7 10.238.8 32.7 31.4 Total < 25 years 18.5 14.7 10.2 8.7 7.6 6.7 6.4 4.6 3.7 3.3 3.2 -32.7 -43.9 -17.1 -14.7 -36.7 -58.1 -41.3 -65.4 -51.3 -56 -38.5 Unemployment Apr. 2019 ▼2018/2013 (%)
- 63. Rising labour costs in a low productivity environment 63 After a 0.9% rise in unit labour costs1 in 2018, the European Commission forecasts a further increase of 1.9% in 2019, slightly below the EU-28 average (2.1%), in a context where the productivity per employee will increase only 0.1% per year -4 -2 0 2 4 6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* EU 28 Spain 0.4 1.7 0.1 0.1 1.7 0.2 1.2 0.9 0.5 2000-04 2005-09 2010-14 2015 2016 2017 2018 2019* Spain EU 28 Source: Círculo de Empresarios based on Eurostat, 2019 Unit labour costs % change year-on-year Productivity % Real GDP/employed 1 Unit labour costs include both wage costs and other concepts, among which Social Security contributions take the lions share. In Q4 2018, the monthly labour cost per worker reached €2,692.52, 0.9% more than in the same period of the previous year (INE) *European Economic Forecast, Spring 2019
- 64. 64 The impact of digitisation on employment (1) Risk of automation between 50% and 70% (2) Risk of automation greater than 70% Source: Círculo de Empresarios based on the OECD, 2019 Employment affected by digitisation % of jobs in risk of automation Jobs less susceptible to automation • Demand a high level of education & social interaction, creativity, problem solving and caring for others • In the services sector Jobs with higher risk of automation • Do not require qualification or any ad hoc training • Interact with machines • In the primary & industrial sector 0 10 20 30 40 50 60 70 Norway N.Zealand Finland Sweden USA UK Denmark Netherlands Canada Belgium Ireland Estonia Korea Israel OECD Austria CezhRep. France Poland Italy Spain Slovenia Chile Germany Japan Greece Turkey Lithuania Slovakia Risk of significant change (1) High risk of automation (2) The OECD forecasts that 52% of the jobs will be affected by digitisation in the next 10 to 15 years
- 65. 65 The Spanish economy maintains competitiveness via prices with the Euro area The core inflation remains around 1% Source: Círculo de Empresarios based on INE & Eurostat, 2019 Price evolution % change year-on-year According to Pimco, inflation will be below 2% until 2050, mainly due to the ageing of the population The CPI was 1.5% in April, and the flash estimate for the CPI in May forecasts a significant deceleration of 0.7% to 0.8%, predominantly explained by the fall in electricity prices 1.5 0.8 0.9 1.7 1.2 0 1 2 3 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Spain´s CPI Spain´s core CPI Euro area CPI *General index without unprocessed foods and energy products
- 66. Rising public spending slows fiscal consolidation 66 Evolution of public revenue & expenditure % of GDP Source: Círculo de Empresarios based on Eurostat, 2019 Evolution of public expenditure % change year-on-year 39 45.8 48.1 41 41.341 34.8 38.9 37.7 38.9 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Expenditure Revenues In 2018, the fiscal policy was more expansionary than the Euro area average, with a 4.5% increase in public spending (2.8% EA19), in most part explained by the rise in pensions and salaries of civil servants. The increase in public spending reduces the capacity for fiscal consolidation in a context in which revenues increased by 6.2%, to 38.9% of GDP In its Spring Forecast, the European Commission recommends that Spain ensure that the nominal growth rate of net primary public spending does not exceed 0.9% in 2020, implying an annual structural adjustment of 0.65% of GDP, approximately €15 billion -1 0 1 2 3 4 5 2014 2015 2016 2017 2018 Euro area Germany Spain France Italy
- 67. 67 The structural deficit hinders debt reduction efforts Source: Círculo de Empresarios based on AMECO, & The Bank of Spain, 2019 Balance of Public Administrations % of GDP The structural balance stood at 2.7% of GDP in 2018 due to the lack of reforms In 2018, the public deficit amounted to 2.5% of GDP (€29,982 million including aid to banks), 0.28pp above the objective of the stability path. The European Commission announced that Spain exits the Excessive Deficit Procedure after a decade The negative balance of the Public Administrations reduced by 16.5% YoY (0.6% of GDP), not due to the consolidation efforts but as a result of growth and inflation (cyclical adjustment) The European Commission forecasts a public deficit of 2.3% of GDP in 2019, 0.3pp higher than the Government's forecast, which will require an adjustment of around €22 billion to achieve the goal agreed with the European Commission in 2020 (-0.5% of GDP) -2.7 -2.5 0 -2.2 -1.3 -0.5 -11 -9 -7 -5 -3 -1 1 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Structural General Primary Target (Budget 2018)
- 68. 68 In 2018, the Central Administration ran a deficit of €16,376 million (-1.4% of GDP) and the Social Security Administrations of €17,088 million (-1.4% of GDP) No progress made in reducing the deficit of the Central Administration and Social Security The Autonomous Communities reduced their negative balance by 33.6% to € 2,810 million (-0.2% of GDP) and the Local Corporations maintain a surplus of €6,292 million (0.5% of GDP) Balance of public administration by level % of GDP Source: Círculo de Empresarios based on The Bank of Spain, 2019 * Government forecast retrieved from the communication sent to the European Commission on 09/04/2019 Balance 2018 Objective 2018 Difference (pp) Public Admins -2.5 -2.2 -0.3 Central Admin -1.4 -0.7 -0.7 Auton. Comms. -0.2 -0.4 +0.2 Local Corps. 0.5 0 +0.5 S.S. Admins -1.4 -1.1 -0.3 Non-compliance with budget pathway % of GDP 1.3 -2.9 -9.1 -4.8 -3.6 -7.9 -4.8 -3.7 -2.8 -2.6 -1.9 -1.4 -1 1.3 0.7 0.7 -0.2 -0.1 -1 -1.1 -1 -1.2 -1.6 -1.4 -1.4 -1.4 -12 -9 -6 -3 0 3 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* Central Government Autonomous Regions Local Authorities Social Security
- 69. 69 The situation with Social Security accounts worsens Source: Círculo de Empresarios based on the Ministry of Labour, 2019 In 2018, the Social Security deficit (€17,088 million) accounts for almost 60% of the Total Public Administrations (€29,889 million) and the Government expects that in 2019 it will reach €17,558 million* (almost 70% of the total) Public accounts of the Social Security % of GDP Difference in Social Security revenue & expenditure until March 2019 with respect to the same period of 2018 % * Government forecast retrieved from the communication sent to the European Commission on 09/04/2019 9.7 10.7 8.1 7.1 7 Non-financial revenues Non-financial expenditures Contributions to Social Security Pensions Retirement pension 1.3 1.6 -1.4 3.4 Public accounts balance Debt From superavit to deficit ▲ 112.5% 2007 20072018 2018 Since 2007, debt has advanced 112% to represent 3.4% of GDP (around €41 billion)
- 70. 70 Public debt remains very high Public Administrations debt % of GDP Source: Círculo de Empresarios based on The Bank of Spain, 2019 35.6 100.4 97.1 98.5 -40 -20 0 20 40 60 80 100 120 140 2007 2014 2018 March 2019 Central Administration Autonomous Regions Local Authorities Social Security Consolidation Public debt The European Commission forecasts that public debt will be reduced to 96.3% of GDP in 2019 and 95.7% in 2020, mainly due to the nominal GDP growth Thus, in 2020, Spain will be the 6th country in the EU-28 with the highest level of gross public debt, second only to Greece (168.9%), Italy (135.2%), Portugal (116.2%), Belgium (100.7%), and France (98.9%) In March 2019, the debt of public administrations reached €1,199.8 million, 3.3% more year-on-year, 0.9pp above the growth of the Spanish economy (2.4% in Q4 2018), representing 98.5% of GDP (38.5 pp higher than the 60% established in the Stability and Growth Pact)
- 71. 71 Diminishing rate of private sector debt reduction Source: Círculo de Empresarios based on The Bank of Spain, 2019 Evolution of the private non-financial sector debt % of GDP Reduction of private non-financial debt Average % change year-on-year 328 280.7 137 128.6 85 58.9 133 93.2 218 152.1 30 60 90 120 150 180 210 240 270 300 330 Jun-08 Dec-09 Jun-11 Dec-12 Jun-14 Dec-15 Jun-17 Dec-18 Total debt Public Administrations Households Non-financial corporations Non-financial private sector 65.9 pp -3.2 -3.1 -3.3 -1 -1.5 -0.3 Private sector Non-financial corporations Households 2011-2017 2018 In 2018, households barely reduced their level of indebtedness in volume, while non-financial corporations did so at 1.5% per year. In contrast, the non-financial debt of the Public Administrations increased by 4.4% annual
- 72. Change of trend in the approval of financing 72 -15 -10 -5 0 5 10 15 Housing Consumption and others Non-financial corporations Source: Círculo de Empresarios based on The Bank of Spain, 2019 Changes in the criteria for granting loans % [(Entities tightening criteria considerably × 1) + (entities tightening criteria to some extent × 0.5) – (entities relaxing criteria to some extent × 0.5) – (entities relaxing criteria considerably × 1)] 2.3 8.4 4.3 1.6 2.32.4 8.6 4.5 1.5 2.3 0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 Households-Housing Households-Consumption Household-Others Corporations->1 M€ Corporations-Until 1 M€ 4Q 2018 1Q 2019 Financing conditions remain favourable, however, since Q4 2018, the criteria for granting loans have become tougher and there has been a slight increase in the average rates of new operations Tightening criteria Relaxing criteria Financing cost for new operations % Quarterly average APR The strong increase in consumer loans continues, 12.4% year-on-year in February 2019
- 73. 73 Balance of trade, January-March 2019 Change with respect to the same period of the previous year Exports stagnate in Q1 2019 Imports Capital goods Chemical goods Energy goods Exports 0% €71 bn Imports ▲ 3.2% €80,5 bn BALANCE ▲ Deficit 36.5% -€9.5 bn Energy déficit ▲ 7.7% Sectorial distribution, January-March 2019 % of total Exports Capital goods Food, beverages and tobacco Automobile 19.8 17.1 16.1 20.8 16.1 14.1 Evolution of trade in goods % of GDP 14.8 17.3 20.1 21.7 23 23.2 23.1 22.9 23.7 23.6 23.1 19.1 22.2 24.6 24.8 24.6 25.6 25.4 24.5 25.9 26.4 26 -4.3 -4.9 -4.5 -3.1 -1.6 -2.4 -2.3 -1.6 -2.3 -2.8 -2.9 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* Exports Imports Deficit Source: Círculo de Empresarios based on the Ministry of Industry, Trade & Tourism, 2019 * Last 12 months, from March 2018 to March 2019 GDP based on the growth forecast for 2019 by The Bank of Spain = 2.2% In Q1 2019, there was a new widening in the trade deficit, conditional to the evolution of the energy balance
- 74. The European context hinders exports 74 Breakdown of exports of goods by country, 2017 % of total exports; and exports as a % of GDP Source: Círculo de Empresarios based on the Ministry of Industry, Trade & Tourism, and OECD forecasts, 2019 Geographical distribution, January – March 2019 % of total 0 20 40 60 80 100 0 10 20 30 40 50 Netherlands France Belgium Spain Italy Germany UK China Germany Italy UK Total exports % GDP % total exports % GDP Exports Imports Europe 72.4 59.6 EU 66.8 53.3 Germany 11.3 12.7 France 15 10.7 Italy 8 6.2 UK 7.3 3.6 America 10.5 10.4 Asia 8.8 21 China 2.1 8.9 Africa 6.5 8.7 Others 1.8 0.3 The lower dynamism of Spanish exports is predominantly explained by the slowdown of Germany, the situation in Italy, the Brexit, and the uncertainty generated by the trade tensions
- 75. 75 Reduction in external debt continues Source: Círculo de Empresarios based on the forecasts by The Bank of Spain, 2019 In 2018, the net international investment position (NIIP) of the Spanish economy was reduced from -98% of GDP to -77.2% of GDP, 20.9 pp less than its peak in 2014. Spain is a debtor nation as it has a negative NIIP value External debt Net international investment position (NIIP) % of GDP NIIP by debt instruments % of GDP 20.9 pp 88.5 91.9 89.9 95.3 98 89.4 85.4 83.5 77.1 77 82 87 92 97 2010 2011 2012 2013 2014 2015 2016 2017 2018 7.4 17.8 83.9 52.3 6.7 6.9 2014 2018 Bank of Spain Financial debt Foreign Direct Investment
- 76. Rise in Foreign Direct Investment (FDI) in 2018 2nd 1st 3rd 76Source: Círculo de Empresarios based on forecasts by the Ministry of Industry, Trade & Tourism, 2019 In 2018, the gross flows of FDI received in Spain soared by 71% year-on-year to €46.8 billion (3.9% of GDP) Germany Luxembourg* Netherlands Spain FDI flows abroad plummeted by 41% to €22.4 billion (1.8% of GDP) and were mainly directed to the EU and Latin America (85% of total Spanish FDI), and a mere 1.9% to Asia and Africa * Luxembourg acts as a pass through vehicle for the capital in transit. Only 9% of the investment received in Spain through Luxembourg is controlled by investors residing in Luxembourg. A closer look reveals the initial sources. 41% comes from US investors, 12% comes from the UK, 8% from Qatar, and another 7% comes from Canada. 74% of the FDI Origin Destination Madrid 85.3% of the total ▲125.3% annual Catalonia 6.4% of the total ▼11.7% annual FDI flows received in Spain € millions ▲ 71% Basque Country 2.1% of the total ▼64% annual 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
- 77. Company formation is maintained nationwide 77Source: Círculo de Empresarios based on the Business demography statistics by the INE, 2019 Company formation Accumulated January-March Quantity and % change year-on-year Distribution of company formation by Autonomous Community Accumulated January-March % change year-on-year and % of national total 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 -45 -35 -25 -15 -5 5 15 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 New companies (right axis) % YoY change (left axis) 3.3 3.4 1.8 1 -2.2 22.6 19.2 16.5 11.9 4.2 Madrid Catalonia Andalusia Valencian C. Galicia % YoY change % /total Company formation increased by 1.5% year-on-year until March. 58.6% of new companies were formed in Madrid, Catalonia, and Andalusia.
- 78. Risk Premium on a downward trend 78Source: Círculo de Empresarios based on Reuters & Bloomberg, 2019 50 100 150 200 250 300 350 Spain Italy Portugal Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14 Apr-15 Nov-15 Jun-16 Jan-17 Aug-17 Mar-18 Oct-18 May-19 Moody´s S&P FitchAaa AAA AA+ AA AA- Aa1 Aa2 Aa3 A+ A A- A1 A2 A3 BBB+ BBB BBB- Baa1 Baa2 Baa3 Rating Risk premiums from Spain, Portugal and Italy compared with the 10-year German bond bp Evolution of Spain’s rating 2010-2018 The risk premium is below 100 bp, and is moving away from the Italian risk premium, but is converging with that of Portugal
- 79. 79Source: Círculo de Empresarios based on Reuters, 2019 Financial markets 80 85 90 95 100 105 110 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 S&P 500 Eurostoxx 50 IBEX 35 * Includes: continuous market, trading floors of the four stock exchanges, MAB (The Alternative Spanish Equity Market), & Latibex Evolution stock market January 2018=100 The IBEX 35 is down 4.4% since the beginning of April, in line with the S&P and Eurostoxx
- 80. www.circulodeempresarios.org ‘The quarterly report’, is a publication of the Círculo de Empresarios produced by its Department of the Economy, contains information and opinion from reliable sources. However the Círculo de Empresarios does not guarantee its accuracy and does not take responsibility for any errors or omissions. This document is merely informative. As a result, the Círculo de Empresarios is not responsible for any uses that may be made of the publication. The opinions and estimates of the Department can be modified without prior warning.