Madrid sicilia

Europe Outlook Second Quarter 2015 Jorge Sicilia, Chief Economist BBVA

Europe Outlook, Second Quarter 2015

Drivers of growth

Slow implementation of reforms: moral hazard issues

Oil price shock is positive as it is mostly supply-driven Relaxation in fiscal policy, now broadly neutral

Slowdown in Russia Monetary policy: large and open-ended QE programme Uncertainty about Junker’s plan Better-than-expected incoming data

China: downside bias

Greek crisis weighing on confidence

Page 2

Europe Outlook, Second Quarter 2015

The ECB announced a larger-than-expected QE… Open ended: Monthly purchases €60bn to expand the ECB balance sheet by about €1.1 trillion (CBPP and ABSPP)

ECB’s expected balance sheet: breakdown by components (EUR bn) Source: Bloomberg and BBVA Research

3500

96

114

Sovereign bonds

3000

60

704

836

24

0 30

176 100

160

CBPP3 & ABSPP CBPP1&2

440

2500

220

MRO and 3M LTRO TLTRO

352

432

512

512

1000 Dec-14

Tender operations

3Y LTRO

212 237

Purchase programs

jun-15

Dec-15

jun-16

Purchases of private assets: CBPP and ABSPP, currently running at about €13 billion a month (250 EUR bn).

SMP 250

2000

1500

European institutions

Dec-16

Purchases of European institutions’ bonds: 12% (114 bn EUR).

Risk-sharing.

Other balance sheet items

Purchases of government bonds: around EUR 836 bn EUR. Risk-sharing 8% (EUR 67 bn) Page 3

Europe Outlook, Second Quarter 2015

The ECB announced a larger-than-expected QE that will strengthen the recovery QE channels Porfolio rebalancing channel.

Weaker euro Signaling channel (QE + FWG).

Still limited impact on relevant interest rates

Impact? Likely lower than US and UK (Bank-based financial system / Later implementation) Impact from purchase of 1% of GDP

US GDP: 0.1/ 0.6pp UK GDP: 0.1/ 0.2pp

Baseline

Dif. GDP level 4Q (pp)

1.2

1.6

(0.4QoQ)

(0.5QoQ)

0.6

Low growth

Reduced uncertainty about financial markets and the economy

2015 2016

1.6

2.2

(0.4QoQ)

(0.6QoQ)

1.2

Source: ECB , Weale et all. March 2015, and BBVA Research

Page 4

Europe Outlook, Second Quarter 2015

A larger than expected weaker euro Exchange rate (EURUSD) Source: BBVA Research

1,5 1,4

10%

1,3 Nov-14

1,2 1,1

Jan-15

0.5/0.6%

in eurozone USD/EUR GDPfirst year

EUR against USD

May-15

1,0 0,9

Oct-17

Jun-17

Feb-17

Oct-16

Jun-16

Feb-16

Oct-15

Jun-15

Feb-15

Oct-14

Jun-14

Feb-14

Oct-13

Jun-13

Feb-13

Oct-12

Jun-12

0,8

Page 5

Europe Outlook, Second Quarter 2015

The fall in oil prices is positive for growth, and joins to improved confidence Lower oil prices will boost GDP growth in 2015 and 2016‌

Oil price (Brent, USD/b) Source: BBVA Research

130 120 110

0.2-0.5%

Oct-14

More than 30% in 2015-16

100 90 80

May-15

‌ supporting household spending, also underpinned by employment

70 60

Sep-18

Mar-18

Sep-17

Mar-17

Sep-16

Mar-16

Sep-15

Mar-15

Sep-14

Mar-14

Sep-13

Mar-13

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

50

Page 6

Europe Outlook, Second Quarter 2015

Fiscal policy more favourable than in previous years Structural deficit adjustment 2010-2015 (% GDP) Source: BBVA Research and IMF

11

Broadly neutral fiscal policy in 2015

9

7

European Commission more careful not to force pro-cyclical adjustments

5

3

Uncertainty about Juncker’s Plan: Impact of up to 0.5% per year in 2015-17 if successful

1

-1

Eurozone Germany

France

Struct.Def. at the end of 2015

Italy 2015

Spain 2014

Portugal 2013

2012

Ireland 2011 Page 7

Structural adjustment

Europe Outlook, Second Quarter 2015

Forecast: growth will be higher than 1.5% in 2015 EMU: annual GDP growth contributions (pp) Sources: Eurostat and BBVA Research

6

2013

2014

2015 (f)

2016 (f)

-0.4

0.9

1.6

2.2

Private consumption

-0.6

1.0

1.7

1.6

Public consumption

0.2

0.7

0.5

0.9

Investment

-2.4

1.0

1.5

4.4

-0.9

0.8

1.3

2.0

Exports

2.1

3.7

5.2

5.9

Imports

1.2

3.8

4.9

6.1

0.4

0.1

0.3

0.2

Current account balance(% GDP)

2.2

Public deficit (% GDP)

-2.9

2.3 -2.5

2.8 -2.1

2.8 -1.6

CPI, % average

1.4

0.4

0.1

1.3

Activity REAL GDP (% YoY)

4 2 0

Domestic demand (contr. %)

-2

Net exports (contr. %)

-4 -6 -8 -10 2008

2009

2010

Domestic Demand

2011 Exports

2012

2013

Imports

2014

2015

Net exports

2016 GDP

Page 8

Europe Outlook, Second Quarter 2015

Across countries, Germany will continue to lead France and Italy GDP forecast by country (%) Sources: Eurostat and BBVA Research

2,5 2,0

•

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

1,5 2,2

1,0

1,6

1,6

0,5

1,9

2,2 1,8 1,3

1,1

0,9

0,7 0,4 0,4

0,2

0,0 -0,4

-0,4

-0,5 -1,7

-1,0 -1,5

EMU

Germany

New projection (Apr-15)

France

2016

2015

2014

2013

2016

2015

2014

2013

2016

2015

2014

2013

2016

2015

2014

2013

-2,0

Italy

Last projection (Jan-15) Page 9

Europe Outlook, Second Quarter 2015

Inflation very low in 2015, below the ECB target in the forecast horizon Eurozone: demand and inflation Source: Eurostat and BBVA Research

2.5

4.0

2.0

3.0

Very low inflation due to slow recovery of domestic demand

1.5 2.0 1.0 0.5

1.0

0.0

0.0

-0.5

-1.0

Negative inflation due to energy prices that will continue to shape inflation in 2015… …but the through should be behind us

-1.0 -2.0 -1.5 -3.0

-2.5

-4.0

Lower risk of deflation

1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17

-2.0

Domestic demand (cycle, pp, LHS) Core (% YoY, RHS) Headline (% YoY, RHS) Page 10

Europe Outlook, Second Quarter 2015

Europe faces important challenges and risks Greece: uncertainty weighs on investment

Russian crisis worsening (with significant financial spillovers)

Slow implementation of reforms

Several elections in 2015-16, risk of unstable governments

Risk of stagnation and deflation

Page 11

Europe Outlook, Second Quarter 2015

Low potential growth in the EZ vs the US US and EZ projected potential GDP growth (pp) Sources: Eurostat and BBVA Research

US

2,8

Lower potential well below that in the US

2,3

1,8

EMU

Slower population dynamics and productivity growth are the main reasons of the gap

1,3

0,8

0,3

-0,2 2014-2022 Capital growth Population 15-65 growth Productivity growth

2014-2022 Higher participation rate Fall of structural unemployment

Page 12

Europe Outlook, Second Quarter 2015

Where do we stand after the crisis?

GDP Note: Q1-2008=100 Sources: Eurostat, Haver and BBVA Research

110,0

109,6

107,5 105,0 103,9 102,5

101,4

100,0 98,1

97,5

96,3 95,0

94,2

92,5

93,1

90,0

90,5

Eurozone

Germany

France

Italy

Spain

USA

Portugal

Ireland

Dec-14

Sep-14

Jun-14

Mar-14

Dec-13

Sep-13

Jun-13

Mar-13

Dec-12

Sep-12

Jun-12

Mar-12

Dec-11

Sep-11

Jun-11

Mar-11

Dec-10

Jun-10

Sep-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

Jun-08

Mar-08

87,5

Page 13

Europe Outlook Second Quarter 2015 Jorge Sicilia, Chief Economist BBVA

Europe Outlook, Second Quarter 2015

Germany: growth gains momentum

Activity REAL GDP (% YoY) Private consumption Public consumption Investment Domestic demand (contr. %) Exports Imports Net exports (contr. %) External sector Current account balance (% GDP) Public finances General Govt. Balance (% GDP) Prices CPI, % avg.

2013

2014

0.2 0.9 0.7 -0.4 0.7 1.7 3.2 -0.5

1.6 1.2 1.1 3.4 1.2 3.8 3.3 0.4

1.9 1.9 1.2 2.2 1.7 4.6 4.9 0.2

2.2 1.8 0.9 4.0 1.9 5.6 6.0 0.2

6.7

7.5

7.6

7.9

0.1

0.6

0.5

0.3

1.6

0.8

2015 (f) 2016 (f)

0.3

1.4

Private consumption begins to grow at rates consistent with the favorable labor market conditions Uncertainty caused by geopolitical conflicts could lead companies to continue delaying their investment plans to 2016

Net exports will play a minor role in contributing to growth

Page 15

Europe Outlook, Second Quarter 2015

Germany: strong domestic fundamentals Deviation from the EA18 average Source: BBVA Research and Eurostat

GDP per working age population

+18.2pp

-2.5pp

+9.9pp

Public consumption / GDP ratio Employment rate

Positive divergence with the average of the area is gradually broadening

Increasing public investment would help correct the current account surplus

Unemployment rate reached a historic low in March (4.7%)

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Europe Outlook, Second Quarter 2015

France: recovery will move up in 2015

Activity REAL GDP (% YoY) Private consumption Public consumption Investment Domestic demand (contr. %) Exports Imports Net exports (contr. %) External sector Current account balance (% GDP) Public finances General Govt. Balance (% GDP) Prices CPI, % avg.

2013

2014

0.4 0.3 2.0 -0.8 0.3 2.4 1.9 0.1

0.4 0.6 1.9 -1.6 0.7 2.7 3.8 -0.3

1.1 1.5 1.0 0.0 1.0 4.4 3.8 0.1

1.8 1.4 1.0 3.5 1.7 5.5 5.1 0.1

-1.4

-2.3

-2.2

-2.2

-4.1

-4.0

-3.6

-3.0

1.0

0.6

2015 (f) 2016 (f)

0.1

1.1

The recovery in 2015 and 2016 will be based on domestic factors, especially consumption

The delay in the deficit adjustment should also help

The loss of competitiveness is the main issue in the medium term

Page 17

Europe Outlook, Second Quarter 2015

France: fiscal targets loosening to help economy recover Deviation from the EA18 average Source: BBVA Research and Eurostat

+12.4pp

GDP per working age population

Income is stable above the average

+1.6pp

Evolution of ULC %2008-14

Wage growth have hampered competitiveness during the crisis

Current account balance % GDP

France hasn’t corrected the current account deficit in last years, as other countries did

-4.6pp

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Europe Outlook, Second Quarter 2015

Italy: out of recession in 2015

Activity REAL GDP (% YoY) Private consumption Public consumption Investment Domestic demand (contr. %) Exports Imports Net exports (contr. %) External sector Current account balance (% GDP) Public finances General Govt. Balance (% GDP) Prices CPI, % avg.

2013

2014

2015 (f) 2016 (f)

-1.7 -2.8 -0.3 -5.8 -2.5 0.7 -2.2 0.8

-0.4 0.3 -0.9 -3.2 -0.6 2.4 1.6 0.3

0.7 0.6 -0.5 -0.2 0.1 4.5 2.7 0.6

1.3 0.8 0.0 3.0 0.9 4.9 4.0 0.4

1.0

1.8

2.0

2.6

-2.8

-3.0

-2.6

-2.0

1.3

0.2

0.0

0.9

We continue to expect a slow recovery in 2015 (0.7%), driven by exports

Investment will still be affected by uncertainty linked to the slow pace of reforms

The growth potential is very low but could recover, should fiscal and labour market reforms underway be completed

Page 19

Europe Outlook, Second Quarter 2015

Italy: reforms needed to increase the growth potential Deviation from the EA18 average Source: BBVA Research and Eurostat

-9.5pp

+40.2pp

-8.2pp

GDP per working age population

Income has worsened notably in the last two decades and counting

Debt / GDP ratio

Slow privatization programme is delaying the debt reduction (132.1% of GDP in 2014)

Employment rate

Measures taken lately to encourage youth and female employment

Page 20

Europe Outlook, Second Quarter 2015

Spain: growth revision to the upside in 2015

Activity REAL GDP (% YoY) Private consumption Public consumption Investment Domestic demand (contr. %) Exports Imports Net exports (contr. %) External sector Current account balance (% GDP) Public finances General Govt. Balance (% GDP) Prices CPI, % avg.

2013

2014

2015 (f) 2016 (f)

-1.2 -2.3 -2.9 -3.8 -2.7 4.3 -0.5 1.4

1.4 2.4 0.1 3.4 2.2 4.2 7.6 -0.8

3.0 3.1 0.8 5.7 3.0 6.1 6.5 0.0

2.7 2.4 0.6 6.4 2.7 7.5 7.8 0.1

1.4

0.1

0.9

1.0

-6.3

-5.7

-4.4

-3.0

1.4

-0.2

-0.2

1.4

Both in 2015 and in 2016, activity will grow steeply, supported by internal and external factors The recovery in the fundamentals and the change in tone of fiscal policy will contribute to the sustained recovery in domestic demand

The contribution of net external demand to growth will be virtually nil

Page 21

Europe Outlook, Second Quarter 2015

Spain: the labour market is improving, but challenges remain Deviation from the EA18 average Source: BBVA Research and Eurostat

-22.4pp

+10.8pp

-7.9pp

GDP per working age population

Income is still well below the average of the eurozone

Labour productivity %2008-14

Most of the gains in labour productivity were due to job destruction

Employment rate

But between 2015 and 2016 1,000,000 jobs will be created

Page 22