europe economic outlook. second quarter 2014

Europe EconomicOutlook

May 2014

Europe Economic Outlook, May 2014

Section 1

The global economy remains robust

Section 2

Drivers for growth: better financial environment and higher confidence, policies are more

friendly, banking union proceeds as expected… but doubts on exports

Section 3

Projections: Recovery in 2014 with diminished risks

Section 4

Low inflation and sluggish credit growth. ECB policy and AQR’s will be key

Section 5

Correction of some imbalances, but others persist

Section 6

Country detail

Contents


World GDP Growth (% QoQ)

Based on BBVA-GAINSource: BBVA Research

Global cycle: growth remains robust at a quarterly 0.8% in the first half of the year

Overall, higher growth in developed economies partly offsets lower growth in emerging

economies

Overall, higher growth in developed economies partly offsets lower growth in emerging

economies

Growth is still robust and financial conditions have also eased in emerging economies, but incoming information reveal no acceleration in

the first half of 2014

Growth is still robust and financial conditions have also eased in emerging economies, but incoming information reveal no acceleration in

the first half of 2014

0,0

0,2

0,4

0,6

0,8

1,0

1,2

Last MC Current Last MC Current

Q2-13 Q3-13 Q4-13 Q1-14 Q2-14

Actual Estimates


US: GDP growth (% YoY)Source: BBVA Research, BEA

US: incoming information fits our baseline scenario

We maintain our baseline scenario for growth, the 1Q14 slowdown should be short-lived (bad

weather related)

We maintain our baseline scenario for growth, the 1Q14 slowdown should be short-lived (bad

weather related)

The balance of risks remain slightly biased to the upside

The balance of risks remain slightly biased to the upside

The FED will end tapering by the end of the year and will start increasing the Fed funds

rate in 2nd half 2015

2,8

1,9

2,5 2,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2012 2013 2014 2015

Baseline Apr-2014 Baseline Jan-2014


Monetary return to normal in the US is an event of global impact in financial markets

In May 2013 markets perceived that the end to Fed’s balance raise was near, which increased global volatility, especially in

emerging markets

Exchange rate volatility was higher in emerging economies with larger external

financial dependency

Exchange rate volatility in May-June 2013 and external financial needsSource: BBVA Research

Financial tensions vs. LehmanBBVA Research’s Financial Tension Index vs. Lehman=100%Source: BBVA Research

ARG

BRA

BUL

CHL

CHN

COL

HUN

IND

IDN

KOR

MYS

MEX

PER

PHLPOL

ROM

RUS

THATUR

VEN

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

-6.0 -4.0 -2.0 0.0 2,0 4.0 6.0

Foreign funding gap as % GDP (Current accout balance plus FDI)

Exchange rate

variation in

May 2013 FED's tapering event

0%

10%

20%

30%

40%

50%

60%

Greece, 2010

EMU periphery, 2011

EMU OMT, 2012

Fed tapering, May 2013

Greece, 2010

EMU periphery, 2011

EMU OMT, 2012


Greece, 2010

EMU periphery, 2011

EMU OMT, 2012


US EMU Emerging Markets


China: growth started weak in 2014

China: industrial production (YoY %)Source: Haver and BBVA Research

China’s indicators are losing momentum …China’s indicators are losing momentum …

China: debt in the non-financial private sectorTotal debt as % GDPSource: BBVA Research, BIS and OECD

… as the authorities are more focused on reducing vulnerabilities with less room for

manoeuvre in the short term

… as the authorities are more focused on reducing vulnerabilities with less room for

manoeuvre in the short term

2.0

6.0

10.0

14.0

18.0

22.0

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

90

110

130

150

170

190

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

All sectors (banking sector and non-intermediated)

Domestic banks


China: the baseline scenario has been updated due to poor incoming data and new assumptions on economic policy

The government will continue with reforms and will implement measures to reduce financial

risks

We expect a higher adjustment in investment than in consumption

In case of higher than expected deceleration in the economy (below 7%), there is room for public response (investment in infrastructure,

fiscal stimulus)

China: GDP growth (% YoY) Source: BBVA Research

7.7

7.7

7.27.0

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

2012 2013 2014 2015

Baseline Apr-2014 Baseline Jan-2014


Section 1


Section 2

Drivers for growth : better financial environment and higher confidence, policies are

more friendly, banking union proceeds as expected… but doubts on exports

Section 3


Section 4


Section 5


Section 6

Country detail

Contents


Drivers of (slow) growth in the eurozone

1) Incoming data are better, especially confidence1) Incoming data are better, especially confidence

2) The financial environment has improved, especially in the periphery2) The financial environment has improved, especially in the periphery

3) Fiscal policy is less restrictive3) Fiscal policy is less restrictive

4) Monetary policy is loose and ECB is ready to provide further support4) Monetary policy is loose and ECB is ready to provide further support

5) The banking union is advancing broadly as expected5) The banking union is advancing broadly as expected

6) The external environment is supportive, but with some doubts and a high euro exchange rate

6) The external environment is supportive, but with some doubts and a high euro exchange rate


Incoming data: GDP growth has returned

GDP growth moderately positive since 2Q2013, after a second recession

GDP growth moderately positive since 2Q2013, after a second recession

Germany clearly ahead of the restGermany clearly ahead of the rest

The periphery is now growing

GDP growth (% QoQ) Source: BBVA Research

(1.00)

(0.80)

(0.60)

(0.40)

(0.20)

-

0.20

0.40

0.60

0.80

1.00

EMU Germany France Italy Spain

4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 (f)


Incoming data are positive: First quarter above expectations

GDP growth projection for Q1 at 0.4% QoQ, above our previous projection (0.3%)

GDP growth projection for Q1 at 0.4% QoQ, above our previous projection (0.3%)

The second quarter has started also more positively than expected (0.2%)

The second quarter has started also more positively than expected (0.2%)

MICA-BBVA model of short term GDP (% QoQ)Source: Haver and BBVA Research

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

CI 20% CI 40% CI 60% MICA-BBVA Real GDP


Incoming data are positive: short-term indicators

Confidence data more positive since the start of the year

Confidence data more positive since the start of the year

Activity indicators less upbeat than confidenceActivity indicators less upbeat than confidence

Exports have been more hesitant recently

Eurozone

Latest

GDP DECPrivate consumption DECGeneral government expenditure DECGross fixed capital formation DECExports DECImports DEC

ESI APRIndustrial confidence APRConsumer confidence APRRetail trade confidence APR

Volume export order books APRVolume of order books APRConsumer unemployment expectations APR

PMI composite APRPMI manufacturing APRPMI services APR

IPI FEBManuf. new orders FEBDomestic FEBForeign FEB

Passenger car registration MARRetail Sales MARExports of goods FEB

China FEBUSA FEB

Imports of goods FEB

2014

Natio

nal

accounts

Soft data

Hard d

ata

2012 2013

Based on quarterly growth rates. For the latest

data, the average of available months in the

quarter is taken.

For confidence data, standarized values are used,

and the growth and fall are related to the mean.

No DATA

Stronger growth

Deeper fall

Growth

Fall


European peripheral risk and EM riskSource: Bloomberg and BBVA Research

150

200

250

300

350

400

450

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

average peripheral risk premium (pbs) 10Y yields Spain, Italy, Portugal, Ireland andGreece

EMBI Global

10Y bond yield: US and GER, % Source: Bloomberg and BBVA Research

-60

-40

-20

0

20

40

60

80

100

120

140

1

1,5

2

2,5

3

3,5

Spread US-Germany (rhs) Germany 10Y yield US 10Y yield

Further improvement in early 2014: Risk premia in the periphery continued to fall, and the bund’s rates

are lower due to the continued mention of QE by the ECB

The financial environment has improved


Change in public deficit targetsSource: Eurostat and BBVA Research

Fiscal policy is less restrictive than in previous years

The Ecofin relaxed fiscal targets in May 2013 to avoid excessively procyclical policy

The Ecofin relaxed fiscal targets in May 2013 to avoid excessively procyclical policy

The 3% target was delayed for six countries, including, Portugal, Spain, France and ItalyThe 3% target was delayed for six countries, including, Portugal, Spain, France and Italy

The fiscal stance is now less restrictive

4.5

2.5

1.9 1.81.5 1.3

3

2.2

1.3

4.5

2.8

1.9

5.5

4

2.5

2.9

2.6

1.8

3.9 3.8

3

6.5

5.5

4.2

0

1

2

3

4

5

6

7

2013

2014

2015

2013

2014

2015

2013

2014

2015

2013

2014

2015

Portugal Italy France Spain

End of 2012 Apr-2014


Fiscal policy is less restrictive than in previous years

Structural public deficit adjustment 2010-2015 (% GDP) Source: BBVA Research

The adjustment of the structural deficit has been smaller in 2013 than in previous yearsThe adjustment of the structural deficit has been smaller in 2013 than in previous years

The remaining structural deficit after 2015 is still positive and will require further adjustment

to comply with the fiscal compact

The remaining structural deficit after 2015 is still positive and will require further adjustment

to comply with the fiscal compact

0

2

4

6

8

10

12

14

16

Ireland France Spain Portugal Italy Greece

2012

2013

2015

2014

Post2015

2011


External environment positive, but with doubts on the impact from China and a high exchange rate

Dollar/euro exchange rateSource: BBVA Research

Impact of strong euro on GDP and exports (pp)Source: BBVA Research

-0.45

-0.40

-0.35

-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

GDP Exports

2014 2015

1.20

1.22

1.24

1.26

1.28

1.30

1.32

1.34

1.36

1.38

1.40

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

Jan-15

Mar-15

May-15

Jul-15

Sep-15

Nov-15

Jan-14 Apr-14

4% appreciation

0.4% appreciation


Section 1


Section 2

Drivers for growth : better financial environment and higher confidence, less restrictive

policies, banking union proceeds as expected… but doubts on exports

Section 3


Section 4


Section 5


Section 6

Country detail

Contents


EMU: annual contribution to GDP growth (pp)Source: Eurostat and BBVA Research

Projections: Gradual recovery during 2014, with domestic demand playing an increasing role

-10

-8

-6

-4

-2

0

2

4

6

2008 2009 2010 2011 2012 2013 2014 2015

Domestic Demand Exports Imports Net exports GDP

2012 2013 2014 (f) 2015 (f)

Economic activity

REAL GDP (yoy %) -0.6 -0.4 1.1 1.9

Private Cons. -1.4 -0.7 0.8 1.3

Public Cons. -0.6 0.1 0.3 0.7

Investment -3.8 -2.9 3.1 5.1

Domestic Demand (contribution to %) -2.1 -1.0 1.0 1.8

Exports 2.7 1.4 3.1 4.2

Imports -0.8 0.0 3.1 4.6

External Demand (contribution to %) 1.5 0.6 0.1 0.0

External sector

Current Account Balance (% GDP) 1.2 2.3 2.2 2.1

Public finance

General Government balance (% GDP) -3.7 -3.0 -2.6 -2.1

Prices

CPI , % avg 2.5 1.4 0.9 1.3

REAL GDP (yoy %) -0.6 -0.4 1.1 1.9


Country GDP projections (%)Source: Eurostat and BBVA Research

By country: Germany will continue to outgrow the rest

By country, Germany is more advanced in the recovery

By country, Germany is more advanced in the recovery

France and Italy revised upwards and will converge over 2015

France and Italy revised upwards and will converge over 2015

-0.6-0.4

1.1

1.9

0.9

0.5

1.82.0

0.0

0.3

0.9

1.5

-2.4

-1.8

0.7

1.4

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2012

2013

2014

2015

2012

2013

2014

2015

2012

2013

2014

2015

2012

2013

2014

2015

EMU Germany France Italy

New projection (Apr-14) Last projection (Feb-14)


Uncertainties and sources of risk

1) Fed tapering may have an impact on long rates1) Fed tapering may have an impact on long rates

2) Financial market fragmentation persists and credit remains subdued2) Financial market fragmentation persists and credit remains subdued

3) Risks from lower growth in emerging countries, including China3) Risks from lower growth in emerging countries, including China

4) Smooth AQR and stress tests results are needed for the recovery of credit4) Smooth AQR and stress tests results are needed for the recovery of credit

5) Several risks persist in the periphery. Adjustment needs to continue at the right pace

5) Several risks persist in the periphery. Adjustment needs to continue at the right pace

6) Risk of deflation or prolonged low inflation6) Risk of deflation or prolonged low inflation


Section 1


Section 2



Section 3


Section 4


Section 5


Section 6

Country detail

Contents


Strong recession, especially in domestic demand, has weighed on prices since 2009

Eurozone: Core inflation (% YoY)Source: Eurostat and BBVA Research

Inflation has declined coinciding with the past recession

Inflation has declined coinciding with the past recession

The reversing of recent tax hikes has also had an impact on disinflation

The reversing of recent tax hikes has also had an impact on disinflation

0,0

0,5

1,0

1,5

2,0

2,5

3,0

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

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

Recession Core HICP (% YoY) Core HICP at constant tax (% YoY)

1strecession

2ndrecession


Inflation is projected to remain at very low rates in the forecast horizon. Limited deflation risks

Eurozone: Inflation (% YoY)Source: Eurostat and BBVA Research

Inflation by countries (% YoY)Source: Eurostat and BBVA Research

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

20% 40% 60% 95%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Portugal Spain Italy Eurozone France Germany

2013 2014 2015


But very low inflation over a protracted period of time could end up pushing down inflation expectations

Eurozone: inflation (% YoY)Source: BBVA Research

Eurozone: inflation swaps expectations (%)Source: Bloomberg and BBVA Research

-3

-2

-1

0

1

2

3

4

5

6

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Sep-13

Mar-14

CI95 CI80

CI60 CI40

CI20 Optimal trim

Headline (official) Core (official)

0.0

0.5

1.0

1.5

2.0

2.5

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

2Y Inflation swap 5Y Inflation swap 10Y Inflation swap


-25

-20

-15

-10

-5

0

5

10

15

20

25

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Private consumption

LHH Stock (RHS)

New consumer loans over 5 yrs initial fix rate (RHS)

Eurozone: Stock of loans to householdsSource: Eurostat and BBVA Research

Eurozone: Growth of loans to households and private consumption (% YoY)Source: Eurostat and BBVA Research

New loans to households are recovering, mirroring consumption growth…

0

2

4

6

8

10

12

60

65

70

75

80

85

90

95

100

105

Jan-03

Jun-03

Nov-03

Apr-04

Sep-04

Feb-05

Jul-05

Dec-05

May-06

Oct-06

Mar-07

Aug-07

Jan-08

Jun-08

Nov-08

Apr-09

Sep-09

Feb-10

Jul-10

Dec-10

May-11

Oct-11

Mar-12

Aug-12

Jan-13

Jun-13

Nov-13

Loans to households (Stock, s.a., Dec10=100, LHS)

New consumers loans 1 to 5 yrs initial rate fix (Trend, Bil.EUR, RHS)

New consumer loans over 5 yrs initial rate fix (Trend, Bil.EUR, RHS)


… but the recovery of loans to firms is still very incipient

Eurozone: Loans to non-financial corporationsSource: Eurostat and BBVA Research

Eurozone: Loans to non-financial corporations and investment (% YoY)Source: Eurostat and BBVA Research

0

1

2

3

4

5

6

7

8

60

65

70

75

80

85

90

95

100

105

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

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

Loans to NFC (Stock, s.a., Dec10=100, LHS)

New business loans to NFC 1 to 5 yrs initial rate fix (Trend, Bil.EUR, RHS)

New business loans to NFC over 5 yrs initial rate fix (Trend, Bil.EUR, RHS)

-30

-20

-10

0

10

20

30

-15

-10

-5

0

5

10

15

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Sep-13

Feb-14

Investment

LNFC Stock (RHS)

New business loans to NFC over 5 yrs initial fix rate (RHS)


ECB signals a more dovish stance, though communication is not always consistent

Rate cut to 0.25% (refi) by surprise, given low inflation and doubts on the recoveryRate cut to 0.25% (refi) by surprise, given low inflation and doubts on the recovery

Talk of additional measures if neededTalk of additional measures if needed

ECB remains on hold despite inflation forecasts at 1.5% for 2016, which implies non-compliance with its inflation targetECB remains on hold despite inflation forecasts at 1.5% for 2016, which implies non-compliance with its inflation target

QE is on the table: “Unanimous” commitment to use unconventional instruments to cope with “risks of a too prolonged period of low inflation” (not necessarily of deflation)

QE is on the table: “Unanimous” commitment to use unconventional instruments to cope with “risks of a too prolonged period of low inflation” (not necessarily of deflation)

Draghi strongly signals more measures in June, after the new staff inflation projections are presented. The euro a “serious concern”Draghi strongly signals more measures in June, after the new staff inflation projections are presented. The euro a “serious concern”

We expect a further cut in refi interest rates, and a negative deposit rate. Additional measures on liquidity are not discarded for the coming monthsWe expect a further cut in refi interest rates, and a negative deposit rate. Additional measures on liquidity are not discarded for the coming months

QE is on the table, although it is not the central scenarioQE is on the table, although it is not the central scenario

Nov-13Nov-13

Jan/FebJan/Feb

MarchMarch

AprilApril

MayMay

JuneJune


Draghi has clarified what measures could be used

Unwarranted tightening of policy stance (money markets, bonds or euro)

Lower interest rate corridor,negative deposit rate,

further extension of full allotment, new liquidity injections

Further impairments in monetary policy transmission

Targeted long-term refinancing operation, ABS purchase

Worsening of the medium-term outlook of inflation

A more broad-based asset purchase programme (QE)


After the SRM, the comprehensive assessment will be the key event of the second half of 2014

Composed of 3 pillars

Supervisory Risk Assessment to review key risks, including liquidity, leverage and funding

Supervisory Risk Assessment to review key risks, including liquidity, leverage and funding

Asset Quality Review (AQR) to analyze the quality of banks’ assets, collateral valuation and provisions

Asset Quality Review (AQR) to analyze the quality of banks’ assets, collateral valuation and provisions

Stress Test to examine the resilience of banks’ balance sheet to stress scenariosStress Test to examine the resilience of banks’ balance sheet to stress scenarios

The exercise should be strict enough so as to dispel any doubts on the resilience of the balance-sheets.

Particular attention should be paid to the AQR, as most doubts surge on the current situation of the balance-sheets

The exercise should be strict enough so as to dispel any doubts on the resilience of the balance-sheets.

Particular attention should be paid to the AQR, as most doubts surge on the current situation of the balance-sheets


Section 1


Section 2



Section 3


Section 4


Section 5


Section 6

Country detail

Contents


Macroeconomic imbalances heatmap

Public Debt, 2013

Public Deficit,

2013

Unemployment

rate, 3-year

average

Current account,

3-year average

Net international

investment

position

Real effective

exchange rate, 3-

year percentage

change

Nominal unit

labour costs, 3-

year percentage

change

Private sector

debt, percentage

of GDP, 2012

Private sector

credit,

percentage of

GDP, 2012

Eurozone 93 -3 11 4 -13 1 4 165 0

GER 78 0 6 7 48 0 6 107 2

FRA 93 -4 10 -2 -21 -1 5 141 4

AUT 74 -2 4 2 3 2 7 147 3

BEL 102 -3 8 -2 44 1 9 146 5

NED 74 -3 6 10 53 2 6 219 0

FIN 57 -2 8 -1 16 2 8 158 9

ITA 133 -3 11 -1 -29 2 5 126 -1

SPA 94 -7 25 -1 -98 1 -5 194 -10

POR 129 -5 15 -3 -119 0 -1 224 -4

IRE 124 -7 14 4 -105 -2 -3 306 -2

GRC 175 -13 24 -4 -119 -4 -11 129 -7

CYP 112 -5 12 -4 -86 0 -6 299 10

SLV 72 -15 9 3 -38 1 -1 114 -3

SLK 55 -3 14 0 -65 3 1 73 3

DEN 44 -1 7 6 40 -1 4 239 6

SWE 40 -1 8 6 -5 3 5 212 3

U.K. 92 -6 8 -3 -1 4 6 179 3

Higher than 119 Lower than -9 Higher than 18 Lower than -6 Lower than -100 Greater than 8 Greater than 15 Greater than 263 Greater than 15

99/119 -9/-7 13/18 -6/-4 -100/-67 5/8 9/15 229/263 13/15

80/99 -7/-5 10/13 -4/-2 -67/-35 4/5 6/9 194/229 10/13

60/80 -5/-3 7/10 -2/0 -35/-3 3/4 3/6 160/194 8/10

Lower than 60 Higher than -3 Lower than 7 Greater than 0 Greater than -3 Lower than 3 Lower than 3 Lower than 160 Lower than 8


Public and private debt 2005-2015 (% GDP)Source: Eurostat and BBVA Research

Deleveraging still not present, with exceptions

Spain

Portugal

France

Greece

Italy

Germany

Netherlands

0

20

40

60

80

100

120

140

160

180

80 130 180 230

Public debt (% GDP)

Private debt (% GDP)

Macroeconomic

Imbalances

Thresholds

2005 x 2015 Private debt has stabilized and started to fall in Spain

Private debt has stabilized and started to fall in Spain

Periphery countries have experienced much larger debt increases during the crisis than the

core

Periphery countries have experienced much larger debt increases during the crisis than the

core


Periphery countries have reduced public deficits but public debts are still growing

Government debt and deficit 2005–2015Source: IMF

Spain

France

Italy

Greece

Portugal

20

40

60

80

100

120

140

160

180

200

-16 -11 -6 -1 4

General Government Debt (% of GDP)

General Government Deficit (% GDP)

Maastricht deficit

and debt limits

2005 x 2015

The adjustment of the deficit has been large, especially in countries under programme

The adjustment of the deficit has been large, especially in countries under programme

But debt levels have not started to fall yetBut debt levels have not started to fall yet

The return to growth and higher inflation are key to rapid deleveraging


-20

-15

-10

-5

0

5

10

15

Greece

Ireland

Spain

Portugal

EA 17

Denmark

Germ

any

Italy

France

Netherlands

United Kingdom

Austria

Finland

Belgium

Labour Productivity (Sign switched)

Wages

Unit Labour Cost

Unit Labour Cost Adjustment, 2009-2013 (%)Source: Haver and BBVA Research

Unit labour costs have adjusted rapidly in the periphery

In some countries such an adjustment is due to higher productivity, due to the fall of

employment


employment

Wage moderation has also played a role, especially in comparison to core countries Wage moderation has also played a role, especially in comparison to core countries


Unemployment since the beginning of the crisis (%)Source: Haver and BBVA Research

Periphery countries have reduced deficits but public debts are still growing


employment


employment

Wage moderation has also played a role, especially in comparison to core countries Wage moderation has also played a role, especially in comparison to core countries

0

5

10

15

20

25

30

EA18 GER FRA AUT BEL NLD FIN ITA SPA POR IRE GRC CYP SLV SLK DEN SWE UK

Latest Feb-08 Feb-13


Current account (% of GDP)Source: Eurostat and BBVA Research

Current accounts have adjusted much faster than expected

Current account (% of GDP)Source: Eurostat and BBVA Research

-20

-15

-10

-5

0

5

10

15

20

NLD GER IRE AUT ITA SPA GRC POR FIN FRA BEL

Exports Imports

Other items

Current account, four quarter moving sum:

Q4-2008 Q4-2013

Most EZ countries now in surplus (barring France)

Most EZ countries now in surplus (barring France)

Part of the adjustment due to recession (lower imports), but exports also played a big role

Part of the adjustment due to recession (lower imports), but exports also played a big role

-15%

-10%

-5%

0%

5%

10%

15%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Germany France Italy

Spain Portugal Netherlands


Section 1


Section 2



Section 3


Section 4


Section 5


Section 6

Country detail

Contents


Germany: Growing weight of domestic fundamentals

Confidence indicators reached their peak in Q1 Confidence indicators reached their peak in Q1

Robust growth with increasing role of domestic demand

Robust growth with increasing role of domestic demand

2012 2013 2014 (f) 2015 (f)

Economic activity

REAL GDP (yoy %) 0.9 0.5 1.8 2.0

Private Cons. 0.7 1.0 1.4 1.6

Public Cons. 1.0 0.7 1.3 0.9

Investment -1.3 -0.5 4.2 5.0

Domestic Demand (contribution to %) -0.2 0.5 1.8 1.9

Exports 3.8 1.0 3.6 3.9

Imports 1.8 1.0 4.2 4.5


External sector

Current Account Balance (% GDP) 7.0 7.5 6.7 7.0

Public finance

General Government balance (% GDP) 0.2 0.0 0.0 0.0

Prices

CPI , % avg 2.1 1.6 1.3 1.6

Latest

GDP DecPrivate consumption DecGeneral government expenditure DecGross fixed capital formation DecExports DecImports Dec

ESI AprIndustrial confidence AprConsumer confidence AprRetail trade confidence Apr

Volume export order books AprVolume of order books AprConsumer unemployment expectations Apr

Gfk consumer climate AprIfo business climate AprPMI composite AprPMI manufacturing AprPMI services Apr

IPI MarManuf. orders MarDomestic MarForeign Mar

Euro area MarNon-Euro area MarRetail Sales MarExports of goods Feb

Intra european union FebExtra european union Feb

Imports of goods Feb



quarter is taken.



No DATA

Stronger growth

Growth

Fall

Deeper fall

2012 2013 2014

Natio

nal

accounts

Soft d

ata

Hard d

ata


Germany: Healthy growth with medium-term concerns

Ifo confidence index, Composite PMI and Manufacturing foreign ordersBBVA Research

The growth pace is stronger and more balanced than in the other main economies

The growth pace is stronger and more balanced than in the other main economies

But the recent approval of a high minimum wage (€/h 8.50), effective from 2016, poses

medium term risks for employment

But the recent approval of a high minimum wage (€/h 8.50), effective from 2016, poses

medium term risks for employment

Liberalization of some services sectors would help to prop up consumption and domestic

growth-10

-5

0

5

10

15

20

25

30

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Ifo confidence index

PMI Composite

Manufacturing foreign orders YoY (RHS)

3 per. moving average (Manufacuring foreign orders YoY)


France: the recovery does not gain momentum

Business confidence indicators stalled in the last few months

Business confidence indicators stalled in the last few months

Slow recovery mainly driven by domestic demand

Slow recovery mainly driven by domestic demand

2012 2013 2014 (f) 2015 (f)

Economic activity

REAL GDP (yoy %) 0.0 0.3 0.9 1.5

Private Cons. -0.3 0.4 0.9 1.2

Public Cons. 1.4 1.8 0.6 0.5

Investment -1.2 -2.1 1.5 2.5

Domestic Demand (contribution to %) -0.9 0.4 0.9 1.3

Exports 2.5 0.7 1.9 3.2

Imports -0.9 1.0 1.8 2.6

External Demand (contribution to %) 1.0 -0.1 0.0 0.1

External sector

Current Account Balance (% GDP) -2.3 -1.6 -1.7 -1.6

Public finance


Prices

CPI , % avg 2.2 1.0 1.1 1.2

Latest




Business Climate Indicator (INSEE) AprBusiness sentiment indicator (BdF) AprPMI composite AprPMI manufacturing AprPMI services Apr

IPI MarManufacturing turnover (excl. Const.) FebDomestic FebForeign Feb

Capacity utilization rate (Industry) AprConsumer spending MarRetail Sales MarExports of goods Mar

Intra european union MarExtra european union Feb

Imports of goods Mar

2012 2013 2014

Natio

nal

accounts

Soft d

ata

Hard d

ata



quarter is taken.



No DATA

Stronger growth

Fall

Deeper fall


France: Reforms needed to regain competitiveness

Unit labour costs (2005=100) and Current account balance Source: BBVA Research

-2.5

-2

-1.5

-1

-0.5

0

95

100

105

110

115

120

2005

2006

2007

2008

2009

2010

2011

2012

2013

FRA Current Acc. Balance (%GDP) RHSEurozoneFranceGermanySpain

Loss of competitiveness is the main medium-term issue

Loss of competitiveness is the main medium-term issue

Hence, cuts in employment taxes to be financed by lower public spending are expected

Hence, cuts in employment taxes to be financed by lower public spending are expected


Italy: Exports support a slow recovery

Recent confidence indicators are clearly more upbeat

Recent confidence indicators are clearly more upbeat

Out of recession since 4Q13, on the path of an export-driven recovery

Out of recession since 4Q13, on the path of an export-driven recovery

2012 2013 2014 (f) 2015 (f)

Economic activity

REAL GDP (yoy %) -2.4 -1.8 0.7 1.4

Private Cons. -4.0 -2.6 0.1 1.2

Public Cons. -2.6 -0.8 -0.6 0.5

Investment -8.1 -4.6 1.2 2.4


Exports 2.0 0.0 3.3 3.6

Imports -7.1 -2.9 1.9 3.5


External sector

Current Account Balance (% GDP) -0.7 0.8 1.1 0.9

Public finance


Prices

CPI , % avg 3.3 1.3 0.7 1.2

Latest




Consumer confidence (ISTAT) AprBusiness confidence indicator (ISTAT) DecPMI composite AprPMI manufacturing AprPMI services Apr

IPI FebIndustrial new orders FebDomestic FebForeign Feb

Capacity utilization rate (Min. & Manuf.) MarPassenger car registrations AprRetail Sales FebExports of goods Feb

Intra european union FebExtra european union Mar




quarter is taken.



No DATA

Stronger growth

Fall

Deeper fall

2012 2013 2014

Natio

nal

accounts

Soft d

ata

Hard d

ata


Italy: Reforms needed to increase growth potential

GDP / Working Age Population (2000=100)Source: BBVA Research

90

95

100

105

110

115

120

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Italy Eurozone Spain

In fiscal policy, the main issue is the high volume of public debt (132,6%), while the deficit seems to be under control (-3%)

In fiscal policy, the main issue is the high volume of public debt (132,6%), while the deficit seems to be under control (-3%)

Very low potential growth reflects lack of reforms over a long period

Very low potential growth reflects lack of reforms over a long period

Many reform initiatives have been launched, but need to be defined


Spain: The recovery is gaining traction

Soft and hard indicators have been gaining traction over the first months of Q4

Soft and hard indicators have been gaining traction over the first months of Q4

Growth projections at 1.1% and 1.9% in 2014 and 2015, with an upward bias this year

Growth projections at 1.1% and 1.9% in 2014 and 2015, with an upward bias this year

2012 2013 2014 (f) 2015 (f)

Economic activity

REAL GDP (yoy %) -1.6 -1.2 1.1 1.9

Private Cons. -2.8 -2.1 1.4 1.3

Public Cons. -4.8 -2.3 -1.6 1.4

Investment -6.9 -5.2 1.0 4.5


Exports 2.1 4.9 6.0 5.1

Imports -5.7 0.4 5.4 5.4


External sector

Current Account Balance (% GDP) -1.2 0.8 1.3 1.5

Public finance


Prices

CPI , % avg 2.4 1.4 0.3 0.9

Latest




Private consumption (synth. indicator) MarPMI composite AprPMI manufacturing AprPMI services Apr

IPI MarIndustrial new orders FebCapacity utilization rate (Industry) AprMotor vehicle registrations AprRetail Sales MarExports of goods Feb

Intra european union FebExtra european union Feb


Stronger growth

Growth

Fall

Deeper fall

No DATA

2012 2013 2014

Natio

nal

accounts

Soft d

ata

Hard d

ata



quarter is taken.

For soft data, standarized values are used, and

the growth and fall are related to the mean.


EU 15: current account balance and implicit Social Security contribution rates Source: BBVA Research basef on based on Boscá, Doménech and Ferri (2013)

Fiscal devaluation: the optimum alternative

BEDK

DE

IE

EL

ES

FR

IT

LU

NL

AT

PT

FI

SE

UK

-0.17

-0.13

-0.09

-0.05

-0.01

0.03

0.07

0.11

0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9

Current account balance (% GDP, 2007)

Social security contributions/indirect tax , 2007

Recent cut in Social Security Contributions (SSC) will have a

positive impact on GDP and employment..

Recent cut in Social Security Contributions (SSC) will have a

positive impact on GDP and employment..

… but limited due to the temporary nature of the measure (among other factors)

… but limited due to the temporary nature of the measure (among other factors)

A fiscal devaluation (increase indirect taxes + reduction of SSC) may improve price-

competitiveness, employment and activity

Spain: Reforms needed to reduce unemployment and consolidate competitiveness gains

May 2014

Europe EconomicOutlook

europe economic outlook. second quarter 2014

Economy & Finance