perspectives on global and spanish economy 4q-18...advanced economies: forecasts for economic growth...
TRANSCRIPT
Perspectives on
Global and Spanish Economy
4Q-18
October 2018
QUARTERLY REPORT
GLOBAL
Executive summary
3
The year 2018 unfolded with synchronised and rising global growth. However, since April, the risks of a slightdeceleration have escalated, partly due to the uncertainty stemming from the possible consequences of a
monetary policy normalisation.
A lower than expected growth in the Eurozone, and the increase in macro-financial imbalances in some
emerging markets such as Turkey or Argentina with high levels of dollar debt and inflation that is further
aggravated by the recent dollar appreciation.
The mounting risks explain the downward revisions in the growth of the Eurozone, China or emerging markets(approx. 60% of world GDP).
The recent trade slowdown and Trump's protectionist policy have harmed the levels of economic confidence,
with China caught in the crosshairs. In addition to these risks, the consequences of US sanctions on Iran (oil
price increase), the budgetary policy of the coalition government in Italy, the stagnant Brexit negotiations and
the worryingly high global debt.
Advanced economies: forecasts for economic growth
Source: Círculo de Empresarios based on IMF, October 2018 4
1,8
2.92.5
21.9
EURO AREAUS
Real GDP (%)
From a homogeneous growth at the beginning of the year to a synchronised deceleration
0
1
2
3
1.10.9
JAPAN UK
1.4 1.5
ADVANCED
economies
2.42.1
2018 Downward revision vs July
-0.2
-0.2 -0.1
+0.1
2019
Upward revision vs July
Emerging economies: forecasts for economic growth
Source: Círculo de Empresarios based on IMF, October 2018
5
1,8
BRAZILCHINA
Real GDP (%)
0
3
5
7
ARGENTINA TURKEY EMERGING
economies
The crises in Argentina and Turkey erode business confidence in emerging economies
2018 Downward revision vs July2019
Upward revision vs July
6.66.2
1.42.4
-2.6-1.6
-3
3.5
0.4
4.7 4.7-0.2
-0.4-0.1
-4.6-4.8
-0.9
-3.6
-0.2 -0.4
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18
US 55.5 55,3 55,6 56,5 56.4 55,4 55,3 54,7 55.6Germany 61.1 60,6 58,2 58,1 56.9 55,9 56,9 55,9 53.7France 58.4 55,9 53,7 53,8 54.4 52,5 53,3 53,5 52.5Italy 59 56,8 55,1 53,5 52.7 53,3 51,5 50,1 50UK 55.1 54,9 54,8 53,9 54.2 54,1 53,8 52,8 53.8Japan 54.8 54,1 53,1 53,8 52.8 53 52,3 52,5 52.5China 51.5 51,6 51 51,1 51.1 51 50,8 50,6 50India 52.4 52,1 51 51,6 51.2 53,1 52,3 51,7 52.2Brazil 50 52,7 50,4 50 49.5 47 50,4 50,4 50.9Global 54.4 54,1 53,3 53,5 53.1 53 52,8 52,6 52.2
PMIs softening
Source: Círculo de Empresarios based on Markit, 20186
Other than the US, the economic sentiment of business owners is relaxed during 2018
Manufacturing PMI50=threshold (a value above 50 represents an expansion)
Note: The JP Morgan Global Manufacturing PMI has been used for the global data
58
% o
f w
orl
d G
DP
ene-18 feb-18 mar-18 abr-18 may-18 jun-18 jul-18 ago-18 sep-18
EEUU 55,5 55,3 55,6 56,5 56,4 55,4 55,3 54,7 55,6
Alemania 61,1 60,6 58,2 58,1 56,9 55,9 56,9 55,9 53,7
Francia 58,4 55,9 53,7 53,8 54,4 52,5 53,3 53,5 52,5
Italia 59 56,8 55,1 53,5 52,7 53,3 51,5 50,1 50
R.U 55,1 54,9 54,8 53,9 54,2 54,1 53,8 52,8 53,8
Japón 54,8 54,1 53,1 53,8 52,8 53 52,3 52,5 52,5
China 51,5 51,6 51 51,1 51,1 51 50,8 50,6 50
India 52,4 52,1 51 51,6 51,2 53,1 52,3 51,7 52,2
Brasil 50 52,7 50,4 50 49,5 47 50,4 50,4 50,9
Global 54,4 54,1 53,3 53,5 53,1 53 52,8 52,6 52,2
Risks increase worldwideA lower synchronisation of economic growth is to be underlined as is the impact of Trump's protectionist policy
Impact of trade war
Monetary Policy Normalisation
US
Financial imbalances derived from an excess of external debt in $ and inflation
Argentina
Turkey China
Economic slowdown
Change production model
Impact of trade war
Lack of Brexit agreement
UK/
EU
Future political scenario
Brazil
Impact of US sanctions
Russia
Return to recessionSouth
Africa
Source: Círculo de Empresarios, 2018
Impact of trade war
7
Reflecting on an increase in the level of uncertainty and
less global trade
Source: Círculo de Empresarios based on Policy Uncertainty and WTO, 2018
Global Economic Policy Uncertainty (GEPU) Index1997=100
Average
1997-2018
4.7
3.9
2017
Global growth of goods trade
%
3.7
2018
(forecast)
2019
(forecast)
Trump ElectionsTrade war
Financial crisis
Euro area debt
crisis
8
0
50
100
150
200
250
300
Jan-
97
No
v-97
Sep
-98
Jul-9
9
May
-00
Mar
-01
Jan-
02
No
v-02
Sep
-03
Jul-0
4
May
-05
Mar
-06
Jan-
07
No
v-07
Sep
-08
Jul-0
9
May
-10
Mar
-11
Jan-
12
No
v-12
Sep
-13
Jul-1
4
May
-15
Mar
-16
Jan-
17
No
v-1
7
Sep
-18
Source: Círculo de Empresarios based on Bloomberg, BBVA, IMF, and ECB, 20189
Global trade suffersIncreased protectionism is detrimental to business confidence and investment, slowing the pace of
global trade growth
If the trade war persists, it is estimated that the negative
impact on the global economy will be...
250
267
50
60
2.6
46
3.2
Trade war sequenceImports hit by tariffs in billions of $
ThreatEffective
Effective
CHINA
EU
0.8 pp of GDP*
(IMF)
(ECB)
Approx. 1pp of GDP**
* Impact by 2020
** Impact in the first year
US
Source: Círculo de Empresarios based on Bank for International Settlements (BIS), 201810
The level of global debt is another major source of
concern
26.7%
Top 5 countries with the highest debt*% of total global debt
Evolution of global debt (non-financial sector)$ trillions and % of world GDP
Debt as a % of GDP (right axis)
* Debt of non-financial sector
19.1%
10.4%
4.7%
4.4%
65.3% of non-financial global debt
150
160
170
180
190
200
210
220
230
240
250
20
40
60
80
100
120
140
160
180
200Debt ($ trillion) (left axis)
World GDP, current dollars $ (left axis)
11
Economic deterioration in some emerging economiesThe dollar appreciation, the rise in US interest rates, the trade war, and the inflow of capital in the US
have a negative impact on emerging economies with greater external imbalances
Source: Círculo de Empresarios based on Bloomberg and Bank for International Settlements (BIS), 2018
External debt of Emerging Markets, 2017% of GDP
Net capital flows to Emerging Markets$ bn
53.4%
49.6%
38.1%
36.5%
34.0%
32.5%
19.7%
14.2%
Turkey
South Africa
Mexico
Argentina
Russia
Brazil
India
China
-20
-10
0
10
20
30
40
Jan-
17
Feb
-17
Mar
-17
Ap
r-17
May
-17
Jun-
17
Jul-1
7
Au
g-17
Sep
-17
Oct
-17
No
v-17
Dec
-17
Jan-
18
Feb
-18
Mar
-18
Ap
r-18
May
-18
Jun-
18
Jul-1
8
Au
g-18
Equity Bond
Argentina and Turkey, epicentre of the crisis...High capital outflow in Argentina and Turkey due to their idiosyncratic vulnerabilities*
Source: Círculo de Empresarios based on Moody’s, Bankia and IMF, 2018
Doubts about the independence of the Central Bank of Turkey and the diplomatic crisis with the US aggravate its macroeconomic imbalances
The high external financing needs and the worst droughtin the last 50 years have hurt the confidence level in Argentina’s economy
Turkey vulnerability index 1
1: (Short-term external debt + long-term maturity + one-year deposits by non-residents) / International reserves
0
50
100
150
200
250
300
350
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
* External debt in dollars, high inflation, political instability ...
Growth & current account of ArgentinaAnnual change and % of GDP
12
-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
Real GDP
Current account
... that has infected Brazil, aggravating uncertainty
about the future political scenario*
Source: Círculo de Empresarios based on Bankia Estudios, 2018
The persistence of Brazil's macroeconomic imbalances has a negative impact on its solvency
DOWNWARD
REVISION OF
GDP GROWTH
HIGH FISCAL
DEFICIT AND
DEBT
UNSUSTAINABLE
PENSION
SYSTEM
1.2% for 20187% and 75% of GDP,
respectively in 2018 Represents 13% of GDP
* In the first round, the conservative leader Bolsonaro obtained 46% of the votes, followed by Haddad (29%).13
...which has led to its currency depreciation
Source: Círculo de Empresarios based on Bloomberg and IMF, 2018
Although, they show recent signs of stabilisation in the wake of interest rate hikes by their Central Banks due to the high inflation
Exchange rate against the dollarJanuary 2018 - 10 Sept 2018
Percentage of emerging economies with double-digit inflation
%
0
10
20
30
40
50
60
70
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Note: Includes all Emerging Markets & Developing Economies (EMDEs)
14
-60% -50% -40% -30% -20% -10% 0% 10%
Argentine peso
Turkish lira
South African rand
Russian ruble
Brazilian real
Chinese yuan
Mexican peso
3000
3200
3400
3600
3800
4000
4200
4400
4600
5,8
6,0
6,2
6,4
6,6
6,8
7,0
7,2
Oct
-16
No
v-16
Dec
-16
Jan-
17
Feb
-17
Mar
-17
Ap
r-17
May
-17
Jun-
17
Jul-
17
Au
g-17
Sep
-17
Oct
-17
No
v-17
Dec
-17
Jan-
18
Feb
-18
Mar
-18
Ap
r-18
May
-18
Jun-
18
Jul-
18
Au
g-18
Sep
-18
Source: Círculo de Empresarios based on Bloomberg, 2018
China: the yuan and the stock markets dwindleThe dollar appreciation, the divergence of monetary policy with the US, the trade war* and the symptoms of slowdown in Chinese GDP explain its developments
Exchange rate USD / CNY1 dollar =6.9 yuan Chinese Stock Exchange, CSI 300
The CSI 300 index consists of the 300 most liquid Chinese companies
+ 9% -24%
* The IMF estimates that the trade war will have an impact of 1.6% of
GDP in 201915
Source: Círculo de Empresarios based on Bureau of Economic Analysis and IMF, 2018
US: above-potential growth (I)Private consumption is the main driver of growth
Annualised quarterly real GDP (Q2)
%
Q2 2018
1.9 3 4.2
Q2 2017Q2 2016
16
• Employment at levels in 2006 &unemployment-to-number of vacancies ratio at all time lows
•
•
•
•
Source: Círculo de Empresarios based on J.P. Morgan and NBER, 201817
US: leads the growth of advanced countries (II)
End date of expansion phase
In 2019, it will reach its longest expansive economic cycle in history
Length of economic expansion in the USMonths
Start date of expansion phase
Reasons for the US economic boom
Investment strength &
business profits
Growth of GDP &
economic sentiment
Employment at levels in 2006 &
unemployment-to-number of
vacancies ratio at all time lows
2133
1912
44
1022 27
21
50
80
3745
39
24
106
36
58
12
92
120
73
111
Sep
tem
ber
190
2
Ma
y 1
907
Jan
uar
y 19
10
Jan
uar
y 19
13
Au
gust
19
18
Jan
uar
y 19
20
Ma
y 1
923
Oct
ob
er
19
26
Au
gust
19
29
Ma
y 1
937
Feb
rua
ry 1
94
5
No
vem
be
r 1
94
8
July
19
53
Au
gust
19
57
Ap
ril
196
0
De
cem
ber
19
69
No
vem
be
r 1
97
3
Jan
uar
y 19
80
July
19
81
July
19
90
Ma
rch
20
01
De
cem
ber
20
07
Jun
e 2
009
40
50
60
70
80
90
100
110
9.9
3.7
3.6
2.9
1
2
3
4
2
3
4
5
6
7
8
9
10
11
May
-07
Oct
-07
Mar
-08
Au
g-08
Jan-
09
Jun-
09
No
v-09
Ap
r-10
Sep
-10
Feb
-11
Jul-1
1
Dec
-11
May
-12
Oct
-12
Mar
-13
Au
g-13
Jan-
14
Jun-
14
No
v-14
Ap
r-1
5
Sep
-15
Feb
-16
Jul-1
6
Dec
-16
May
-17
Oct
-17
Mar
-18
Au
g-18
Unemployment rate (left axis) Salary growth (right axis)
Source: Círculo de Empresarios based on J.P. Morgan, Bloomberg, University of Michigan, 201818
US: full employment reinforces the dynamism of private
consumption and business sentiment (III)
Evolution of unemployment and nominal wages% of active population, & YoY change
Last 50-year average
Unemployment rate: 6.2%
Wages & Salaries growth +4,2%
Consumer Sentiment Index 3-month moving average
Historical average
The US unemployment rate falls to lowest level since 1969
Growth of real GDP: +2,9%th
0,00
1,00
2,00
3,00
4,00
5,00
6,00
7,00
Sep
-98
No
v-99
Jan-
01
Mar
-02
May
-03
Jul-0
4
Sep
-05
No
v-06
Jan-
08
Mar
-09
May
-10
Jul-1
1
Sep
-12
No
v-13
Jan-
15
Mar
-16
May
-17
Jul-1
8
Sep
-19
No
v-2
0
Source: Círculo de Empresarios based on Bureau of Economic Analysis (BEA), Focus Economics, & St. Louis Fed, 2018
19
US: inflation remains above 2% (IV)The inflation gauge closely followed by the Fed (core PCE*) stands at 2%, causing a new rate increase in the FED up to the 2-2.25% interval in September
US inflation indicatorsYoY change
Objective
* Personal consumption expenditure prices excluding the more volatile seasonal food and energy prices
Since December 2015, eight consecutive increases, approaching its neutral level (3%)
US Federal funds rate%
1,0
1,2
1,4
1,6
1,8
2,0
2,2
2,4
2,6
Mar
-17
Ap
r-17
May
-17
Jun
-17
Jul-
17
Au
g-1
7
Sep
-17
Oct
-17
No
v-1
7
De
c-1
7
Jan
-18
Feb
-18
Mar
-18
Ap
r-18
May
-18
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
Core PCE Core CPI Swap 5y5y
0%
1%
2%
3%
4%
5%
US 2-year bond yield S&P 500 dividend yield
Source: Círculo de Empresarios based on Bloomberg and Capital Group, 201820
US: monetary policy tightening pressures up sovereign rates (V)
For the first time in a decade, the IRR of the 2-year bond exceeds the dividend yield of the S&P 500*
* The market rally has led to a fall in earnings yield (inverse of the PER) that puts its spread with the 10-year bond at a lowest since 2010
2.8%
1.9%
-300
-200
-100
0
100
200
300
400
Sep
-76
Oct
-78
No
v-8
0
Dec
-82
Jan
-85
Feb
-87
Mar
-89
Ap
r-91
May
-93
Jun-
95
Jul-9
7
Au
g-99
Sep
-01
Oct
-03
No
v-0
5
Dec
-07
Jan
-10
Feb
-12
Mar
-14
Ap
r-16
May
-18
Source: Círculo de Empresarios based on NY FED and St. Louis Fed, Goldman Sachs and Bloomberg, 2018
21
US: the flattening of the yield curve is unsettling, although
the risk of recession is low (VI)
10Y/2Y US Treasury spread%
Historically, an inverted yield curve has been the single best indicator that a recession is coming in the next 12 to 24 months
30 bp
This narrower spread of the yield curve is partly explained by a lower inflation volatility or greater demand for long-
term assets by pension funds
US sovereign bond yield curve%
2.1 2.2
2.62.8 2.9 2.9
3.23.36
0.95 1.051.3
1.5 1.61.9
2.3
2.9
0
1
2
3
4
1M 3M 1Y 2Y 3Y 5Y 10Y 30y
Sep-18 Sep-17
EU: downside risks
Source: Círculo de Empresarios based on Bloomberg, 2018 22
The anti-establishment government in Italy and the trade tensions with the US explain in part
the deterioration of the credit spreads of Italian bond
2Y Italian bond spread vs main euro area countriesBasis points
44.5
241 233
26 6
200
1 January 2018 9 October 2018
Risk premium vs benchmark Germany*Basis points
* 10Y bond spread
1 January 2018 19 October 2018
334
141114
164 169151
Eurozone: economic sentiment worsens
23Source: Círculo de Empresarios based on European Commission, 2018
The waning business confidence for the 9th consecutive month warns about the slowdown in
the economy of the Eurozone
3Q17
2.8%
4Q17
2.7%
1Q18
2.4%
2Q18
2.1%
Annualised quarterly Real GDP growth (%) EU Economic Sentiment Indicator (ESI)An index value greater than 100 indicates an above-average
economic sentiment
60
70
80
90
100
110
120
May
-85
Jan-
87
Sep
-88
May
-90
Jan-
92
Sep
-93
May
-95
Jan-
97
Sep
-98
May
-00
Jan-
02
Sep
-03
May
-05
Jan
-07
Sep
-08
May
-10
Jan
-12
Sep
-13
May
-15
Jan-
17
Sep
-18
Italy: abandoned fiscal discipline
Source: Círculo de Empresarios based on Bloomberg and The Economist, 2018 24
The new government triples its deficit target for 2019
This decision puts at risk the necessary debtreduction that Italy must endure*
* Public debt is around 131% of GDP (target is 60% of GDP)
Resulting in bond prices falling which in turn shrinks the balance of its banks**
** Italian banks hold €370bn in Italian bonds (21.6% of GDP)
Public debtBillions and % of GDP
10Y Italian bond yield%
2,256 2,218 2,093
1,145
452 414 3230
500
1000
1500
2000
2500
Italy France Germany Spain Belgium Netherlands Greece
(131.5%) (97%)(64.1%)
(98.4%)
(103.2%) (56.7%) (181.9%)
1
2
3
4
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18
The ECB announces the end of net purchases of assets
25Source: Círculo de Empresarios, 2018
In December, the net purchases of assets will cease. Maturing principal from the stock ofasset purchases will continue to be reinvested for the foreseeable future subject tomedium-term inflation outlook
ECB inflation forecasts Eurozone
2018 2019 2020
1.7% 1.7% 1.7%
Purchase Volume of ECB programme (APP)*
*APP: Asset Purchase Programme
Germany: economic growth revised down
Source: Círculo de Empresarios based on IMF and CESifo Group, 2018
Note: the index value of 100 indicates the threshold between
“good” and “poor” conditions.
Ifo Business Climate Index, Germany
The trade tension with the US provokes a downward revision of its growth forecasts, although the expectations of business owners rise
Real GDP forecast
for 2018 (April)
Forecast (July)
Forecast (October)
2.5%
2.2%
1.9%
26
70
75
80
85
90
95
100
105
110
Jan
-07
Au
g-0
7
Mar
-08
Oct
-08
May
-09
De
c-0
9
Jul-
10
Feb
-11
Sep
-11
Ap
r-12
No
v-1
2
Jun
-13
Jan
-14
Au
g-1
4
Mar
-15
Oct
-15
May
-16
De
c-1
6
Jul-
17
Feb
-18
Sep
-18
27Source: Círculo de Empresarios based on Eurostat, 2018
United Kingdom: Brexit is not the solution (I)Since the referendum, had the result been in favour of remaining a member of EU, then the UK could
have grown an additional 2.5%
The UK is one of the economies heavily dependent on
its capital (London)
GDP per capita of regions of the UK€ PPP
Real GDP growthYoY change
UK above the EU UK below the EU
Brexit negotiations
Since Brexit, the Eurozone has grown 2.1% on
average (1.6% UK)
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
Q1
201
3
Q2
201
3
Q3
201
3
Q4
201
3
Q1
201
4
Q2
201
4
Q3
201
4
Q4
201
4
Q1
201
5
Q2
201
5
Q3
201
5
Q4
201
5
Q1
201
6
Q2
201
6
Q3
201
6
Q4
201
6
Q1
201
7
Q2
201
7
Q3
201
7
Q4
201
7
Q1
201
8
Q2
201
8
EU 28 EU 27 (Ex UK)
15000
20000
25000
30000
35000
40000
45000
50000
55000
60000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
EU United Kingdom LondonWales Scotland Northern Ireland
28Source: Círculo de Empresarios based on Eurostat, 2018
United Kingdom: Brexit is not the solution (II)The productivity and balance of trade of UK are a concern
Labour productivity is 25% less than that of France and Germany, and at levels similar to Italy
The current account balance of the UK has presented a continuous deficit (-3.9% of GDP in 2017, about £79bn) compared to the surplus of Germany, Spain and Italy
Evolution of GDP per hour worked2010=100
Evolution of current account % of GDP
94
96
98
100
102
104
106
108
110
2010 2011 2012 2013 2014 2015 2016 2017
France Germany Italy
Spain United Kingdom-15
-10
-5
0
5
10
Germany Spain France
Italy United Kingdom
29Source: Círculo de Empresarios based on HMRC, Overseas Trade Statistics, 2018
United Kingdom: Brexit is not the solution (III)The EU is the main trading partner of the UK, representing 47,9% of total exports...
Top 10 destinations for UK exports of goodsNote: EU countries are shaded
Balance of goods deficit% of GDP
Balance of services surplus% of GDP
-6.7%
+5.5%
Million £ % total
1 US 45,738 13.4
2 Germany 36,156 10.6
3 France 23,576 6.9
4 Netherlands 21,379 6.3
5 Ireland 19,508 5.7
6 China 16,593 4.9
7 Switzerland 15,374 4.5
8 Belgium 13,776 4.0
9 Spain 10,449 3.1
10 Italy 10,239 3.0
1
1,1
1,2
1,3
1,4
1,5
1,6
Jan
-16
Mar
-16
May
-16
Jul-1
6
Sep
-16
No
v-16
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep
-17
No
v-17
Jan-
18
Mar
-18
May
-18
Jul-1
8
Sep
-18
GBP/EUR GBP/USD
30Source: Círculo de Empresarios based on Bloomberg and ONS, 2018
The negative impact on the exchange rate and inflation is evident
Pound/Dollar, Euro1 pound: $1.31 ; €1.14
Evolution of inflationYoY change
United Kingdom: Brexit is not the solution (IV)
Brexit process Brexit process
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
Jan
-15
Mar
-15
May
-15
Jul-
15Se
p-1
5N
ov-
15
Jan
-16
Mar
-16
May
-16
Jul-
16Se
p-1
6N
ov-
16
Jan
-17
Mar
-17
May
-17
Jul-
17Se
p-1
7N
ov-
17
Jan
-18
Mar
-18
May
-18
Jul-
18Se
p-1
8
Euro area UK
31Source: Círculo de Empresarios based on IMF and Iceland Chamber of Commerce, 2018
In current dollars, Iceland is the 6th economy with the highest GDP per capita *
Iceland: successful recovery
* 16th in terms of purchasing power parity (PPP). $1 = 119 ISK
Iceland data 2018 (or latest data available)
Exports of goods & services: 47% of GDP
Likewise, it ranks highly in the main world rankings
Population:348,000
Nominal GDP: $29bn(2% of Spain’s GDP)
Unemployment rate: 2.9%(7.6% in 2010)
Gender Equality (WEF) 1Global Peace Index (Vision of Humanity) 1
/144
Democracy Index (The Economist) 1 /167
Social Progress Index (SPI) 2 /127
Media Freeom (Freedom House) 9 /199
Economic Freedom (HF) 11 /180
Global Innovation Index(Insead) 13 /137
Doing Business(World Bank) 23 /190
Competitiveness(IMD) 24 /63
Public debt: 41%(95% in 2011)
GDP per capita: $54,752($39,731 in 2009)
/163
55
60
65
70
75
80
85
90
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18
Oil prices continue to soar (I)
Source: Círculo de Empresarios based on Bloomberg, 201832
The price of a barrel of crude reached its highest level since November 2014, primarily due to factors related to supply (Brent: $80 and West Texas Intermediate: $70)
Brent and WTI Spot Price$ per barrel
Iran sanctions effect
Reasons for rising oil prices
2 Venezuela’s collapse
1 Sanctions on Iran
and US tensions
3 OPEC decisions*
4 Inventory reduction
* The goal of OPEC is to cut production by 1.2 million barrels per day (mbd)
Tensions between Saudi Arabia**
(largest exporter of oil) and US
** Saudi Arabia pumps one-in-ten oil barrels produced worldwide
Brent
WTI
Oil prices continue to soar (II)
Source: Círculo de Empresarios based on Bloomberg Economics and Goldman Sachs, 2018 33
Negative effect on consumption, especially
in EuropeIndia, China, Chile, Turkey,
Egypt & Ukraine
Saudi Arabia*, Nigeria & Colombia
The impact of a $100 per barrel of oil
On the global economy... Countries that will reap the most benefits
of this as it helps reduce their deficit and
increase investment...
Countries that will lose
out the most due to a
surge in energy costs...
* In 2016, Saudi Arabia’s net oil production accounted for 21% of GDP
High uncertainty looms over the medium-term price of crude oil due to the reduction of additional production capacity in Saudi Arabia, the sanctions against Iran and Venezuela’s
oil production plummets to the levels of 1940s
5
10
15
20
25
30
35
85
90
95
100
105
110
MSCI EUROPE
S&P 500
-7.2% in six consecutive
negative sessions
34Source: Círculo de Empresarios based on Bloomberg, JP Morgan and St Louis Fed, 2018
After the positive returns in 2017, euro area stock markets show an erratic tone due to an environment
marked by fears of Trump protectionism, high us stock valuations and signs of US economy overheating
US and European Equity MarketsJan 2018=100
Market implied volatility (VIX)Index
US stocks have outperformed EU
counterparts
Financial markets: Stock Markets (I)
0
500
1000
1500
2000
2500
3000
3500
Financial markets: US Stock Markets (II)
35Source: Círculo de Empresarios based on J.P. Morgan, 2018
In 29 of the last 38 years the S&P500 has recorded positive annual returns *
* Past performance is no guarantee of future results
Annual performance (annual returns & intra-year declines)
%
Evolution S&P 500 (until 30 Sept 2018)(MSCI World ex USA Index)
Economic growth and healthy corporate earnings boost US stock markets to set new all-time high records
-60
-50
-40
-30
-20
-10
0
10
20
30
40
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Annual returns
Intra-year decline
Financial markets: high valuations (III)
36Source: Círculo de Empresarios based on Yale, J.P. Morgan, and Factset, 2018
1 Cape Shiller: relation between the price of stock market and the average of 10 years of earnings adjusted for inflation
Average CAPE 2000-2018: 26
CAPE Shiller (cyclically adjusted price-to-earnings ratio)1
Valuation
measure
CAPE 1
P/E forward 2
Latest
31,06
Div.Yield 4
17
P/E trailing 3 22.5
1.9%
P/B 5 3.2
P/CF 6 12.5
25 yearavg.
26,7
16.1
19.4*
2%
2.9
10.7
2 Forward P/E : Price over net earnings over next 12 months 3 Trailing P/E: Price over the net earnings over the previous 12 months
4 Dividend Yield: the expected annual payout divided by the price 5 P/B: Price over total book value 6 P/CF: Price over cash flow
* Average of the last 20 years
0
5
10
15
20
25
30
35
40
45
50
Jan
-00
Mar
-01
May
-02
Jul-
03
Sep
-04
No
v-0
5
Jan
-07
Mar
-08
May
-09
Jul-
10
Sep
-11
No
v-1
2
Jan
-14
Mar
-15
May
-16
Jul-
17
Sep
-18
Financial markets: high dependence on the US (IV)
37Source: Círculo de Empresarios based on Merrill Lynch, 2018
Despite the greater weight of emerging economies, the US continues to lead in the different
European and Asian stock markets
Income generation, by country in each stock exchange% of total earnings
Ranking 1 Ranking 2 Ranking 3
Eurostoxx 50EEUU
18,7%
Francia
9,3%
Alemania
8,5%
Dax AlemaniaEEUU
22,09%
Alemania
19,2%
China
5,9%
CAC 40 FranciaFrancia
18,9%
EEUU
16,3%
Alemania
5,1%
MSCI UKUK
23,2%
EEUU
22,3%
China
5,9%
MSCI ItaliaItalia
42,8%
EEUU
9,7%
Alemania
6,5%
BEL-20 BélgicaBélgica
17,4%
EEUU
15,2%
Brasil
6,8%
AEX P.BajosEEUU
19%
P.Bajos
12%
China
5,2%
SMI SuizaEEUU
28,7%
Suiza
8%
China
5,1%
ISEQ IrlandaIrlanda
24,3%
UK
19,2%
EEUU
18,5%
...In Asia, exposure to the US through its stock exchanges
is lower than in Europe *
* Asia’s exposure to the US derives mainly from its trade relationsNote: these markets above account for 60% of the world market capitalisation
Ranking 1 Ranking 2 Ranking 3
Eurostoxx 50US
18.7%
France
9.3%
Germany
8.5%
Dax GermanyUS
22.09%
Germany
19.2%
China
5.9%
CAC 40 FranceFrance
18.9%
US
16.3%
Germany
5.1%
MSCI UKUK
23.2%
US
22.3%
China
5.9%
MSCI ItalyItaly
42.8%
US
9.7%
Germany
6.5%
BEL-20 BelgiumBelgium
17.4%
US
15.2%
Brazil
6.8%
AEX NetherlandsUS
19%
Netherlands
12%
China
5.2%
SMI SwitzerlandUS
28.7%
Switzerland
8%
China
5.1%
ISEQ IrelandIreland
24.3%
UK
19.2%
US
18.5%
IBEX 35 SpainSpain
36.36%
US
10.8%
Brazil
7.5%
MSCI ChinaChina
92.5%
US
2.2%
Hong-Kong
1%
MSCI JapanJapan
57.1%
US
12.9%
China
7.5%
Kospi South KoreaCorea Sur
57.5%
China
9.1%
US
7.7%
Sensex IndiaIndia
69.3%
US
11.4%
China
2.4%
TAIEX TaiwanTaiwan
35.6%
US
20.4%
China
18.5%
S&P/ BMV IPC MexicoMexico
65.1%
US
11.4%
Brazil
4.4%
Bovespa BrazilBrazil
70.6%
China
6%
US
3.3%
S&P 500 USUS
62%
China
5.5%
Japan
2.9%
Financial markets: business composition (V)
38Source: Círculo de Empresarios based on Bloomberg and Banca March, 2018
The market capitalisation of Facebook, Apple, Amazon and Google combined is equivalent to
2.7 times the Spanish GDP
Technology sector weight by markets% of total
Transformation of the US business compositionTop 5 companies by stock market capitalization 1960-2018
1
2
3
4
5
1960 2018
0
5
10
15
20
25
30
S&P 500 Nikkei 225(Japan)
Sensex (India) Hang Seng(Hong-Kong)
Ibex
39
40
Executive Summary
The expected deceleration of the Spanish economy is taking place against a backdrop of an uncertain
international context marked by the monetary policy normalisation by central banks, the rising oil price, the
terms of the final agreement for Brexit, Trump's protectionist policy and the recent downward revision of
forecasts for growth and global trade
On the national level, there is an apparent weakness in some leading indicators of growth such as employment,
economic sentiment, exports and tourism. Moreover, the presentation of a draft of the National Budget thatproposes increased spending and additional taxes, despite the fact that Spain urgently needs to reduce the
structural public deficit (3% of GDP) and increase competitiveness
According to the forecasts in October by the IMF, Spain will grow by 2.6% in 2018 (one-tenth lower than that
predicted in April) and 2.2% in 2019, which will curb employment creation and reduction of debt
41
2018* 2019*2017
3.1%
* Forecast
Source: Círculo de Empresarios based on the Bank of Spain, 2018
The Bank of Spain has reduced the growth of Spain by one-tenth for 2018 and two-tenths for 2019, in line with FUNCAS and Bloomberg.
2.6% 2.2%
Growth deceleration confirmed for Spanish
economy
2020*
2%
The update of the macroeconomic scenario for the government includes a growth forecast of 2.6% in 2018 and 2.3% in 2019
In 2018, domestic demand will be the main
driver of economic growth
Source: Círculo de Empresarios based on the Bank of Spain, September 2018 42
Forecast of the composition of annual GDP growth in 2018
* Forecast by the Bank of Spain
% annual change and percentage points
Forecast 2018: +2,6%
• Private consumption = 2.2%
• Public consumption = 1.9%
• Gross Capital Formation = 5.1%
Domestic demand
2.7 ppcontribution to growth
• Exports = 2.6%
• Imports = 3.1%
External demandof goods & services
-0.1 ppcontribution to growth
In 2Q18, the pace of GDP
growth slows to 2.5% year-on-
year
Growth deceleration
Source: Círculo de Empresarios based on the Bank of Spain, September 2018 43
GDP (year-on-year change) and contribution of domestic and
foreign demand (pp)
Household spending
represents 55% of GDP
A sharp increase in
investment: 8.3%
(vs. 5.4% for the whole of 2017
and 2.5% in 2016)
Negative contribution by the external sector for the second consecutive quarter (-0.9 pp)
2.9
3.4 3.63.8
3.5 3.43.2
3.0 3.0 3.1 3.1 3.1 3.02.7
2.5
-1
0
1
2
3
4
5
4Q 2014 2Q 2015 4Q 2015 2Q 2016 4Q 2016 2Q 2017 4Q 2017 2Q 2018
Domestic demand
External demand
GDP
Risks
44
• The impact of inflation on purchasing power
• A persistent structural unemployment
• Productivity stagnation
• The reform impulse faces prolonged paralysis with a minority parliamentary government
• Rise in the prices of raw materials, especially oil
• Monetary policy normalisation
• Fiscal policy announcements generate uncertainty: tax rate hikes & increased public
expenditure
• Weak growth of the euro area and global trade (impact of the trade war)
The leading economic indicators anticipate the end of the
expansion phase of the current Spanish business cycle
45
Moderation in the creation of employment and
reduction of unemployment
Downward trend in manufacturing and services PMI
A deceleration in exports
A lower contribution of tourism to growth
46Source: Círculo de Empresarios based on the Ministry of Labour, Migrations & Social Security and Ministry of the Treasury, 2018
Evolution of affiliation & registered unemploymentNumber of people and % year-on-year change September/September
Moderation of employment creation
& the fall in unemployment
The progressive increase in affiliates improves
the affiliates-pensioners ratio to 2.29, up from
2.23 in December 2017
-5.9
-8.0
-9.1-8.3
-6.1
2.23.2 3.0
3.52.9
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
16000000
18000000
20000000
2014 2015 2016 2017 2018
Unemployment (left axis) Affiliates (left axis)
Unemployment decrease (right axis) Affiliates increase (right axis)
Persons %
2.662.62
2.56
2.47
2.34
2.27 2.25 2.25 2.272.23
2.29
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Affiliates-pensioners ratio
The unemployment in Spain continues doubling
the euro area average
47Source: Círculo de Empresarios based on Eurostat, 2018
Spain is the 2nd country of the EU-28 after Greece in
total and youth unemployment. However, since its
peak in 2013, it fell by 42% (-37.6% in the EU)
EU-28 unemployment rateAugust 2018, % of active population
Total and youth unemployment rateAugust 2018, % of active population
19.1
15.2
9.7 9.38.1
6.8 6.85.6
4 3.9 3.4
-30.5 -42 -21.1 -8.8 -32.5 -57.5 -37.6 -57.9 -47.4 -48 -34.6
Unemployment August 2018
▼2018/2013 (%)
19.1 15.2 9.739.1 33.6 31
Total< 25 years
Spain
Norway
Switzerland
Luxembourg
Denmark
Sweden
48Source: Círculo de Empresarios based on BCG, 2018
The situation of the labour market in Spain conditions
the achievement of sustainable growth
TOP 10 - Sustainable Economic Development Assessment Rankings (SEDA)2018, 152 countries
Employment pillarScore
Spain scores the worst in the employment pillar
1
2
3
4
23
5
Income
Economic stability
Employment
Health
EducationInfrastructure
Equality
Civil society
Governance
Environment
64.6 47.8
77.9
84.5
33.4
89.6
83.1
79.9
77.4
73.5
71.8
Index and subindexes for SpainScore
2009
2011
2013
2015
2018
…
49
26.7
17.8
18.6
33.4
Need for educational reform…
49Source: Círculo de Empresarios based on OECD, 2018
Population distribution by educational attainment%, population, age 25-34
There is a positive correlation between educational attainment and unemployment level
Unemployment rate by educational attainment%, population, age 25-64
23.4
14.3
15.1
13
12.8
13.1
13.3
12.5
8.5
6.7
9.2
6.6
7.5
5.6
15.1
8.5
8.5
8
6.9
6.1
3.9
4.7
4.2
4
3.3
4.4
3.1
3.1
9.3
6.1
4.7
4.9
4.4
3.8
3.9
3
3.8
4.6
2
2.8
2.3
2.3
Spain
Italy
France
Finland
EU22
Belgium
Sweden
Austria
Switzerland
Denmark
Germany
Netherlands
Norway
UK
Below upper secondary education
Upper secondary or post-secondary non-tertiary education
Tertiary education
11.5 9 13.1 9.8 13.3 13.8 16.7 16.6 14.419.3 17 12.5
25.233.87.9 10
7.5 10.1 6.7 9.89.8 10.5 14.7
12 14.6 21.5
12.5
12.640.332
4838.9
33.332 26.9 27.2
28.8 20.3 21 14.4
35.511
15.8
11
0.3
01.4
14.1
5.1 0.5
4.812.7 11.1
7.6
0
13.2
24.5
38 31
41.3 45.2
30.241.4 45.3
37.3 35.6 36.344
26.8 29.4
Au
stri
a
Swit
zerl
and
Ge
rma
ny
Fin
lan
d
Net
her
lan
ds
Fran
ce
De
nm
ark
Be
lgiu
m
EU
22
No
rway
Swed
en
UK
Ital
y
Spa
in
Tertiary
education
Advanced
Vocational
Training
Intermediate
Vocational Training
Upper secondarygeneral education
Below uppersecondary education
… to boost the participation of women…
50Source: Círculo de Empresarios based on McKinsey, Association of Economists Madrid, Spencer Stuart, WEF & OECD, 2018
Female activity rate%
8%
Full equality for women in the labour market
GDP 11%
until 2025 2025
North European countries average of equality for women
GDP
In the last 25 years, the female labour force participation has increased by 50%, more than in most
OECD countries Spain in the Global Gender Gap 2017-18 (WEF)
Global Ranking144 countries
24
Pillar 1
Economic Participation 81
• Pay gap
• Positions of power
• High-skilled employment
• Remuneration
122
68
67
60
77,7%100%
Woman's earningsas a % of man's
Share of female board members in publicly listed companies, 2017
78.7 70.2 67.1 63.5 62.6 61.5 58.8 58.2 58.2 57 55.9 55.4 54.1 53.2 52.3 52.1 51.5 51.2 44.7 40.9
Icel
and
Swed
en
No
rwa
y
Fin
land
Swit
zerl
and
Cana
da
Net
her
lan
ds
De
nm
ark UK
US
Ger
man
y
Ire
lan
d
Po
rtu
gal
Spai
n
EU28
OEC
D
Fra
nce
Japa
n
Gre
ece
Ital
y
2017 1992
42 38.3 31 30.4 28.7 28 25.5 22.2 22.2 17
… and to retain "senior talent" in the labour market
51Source: Círculo de Empresarios based on OECD, 2018
The Spanish old-age dependency ratio will be 2.5
times higher in 2050, from 30.6 to 77.5 individuals aged
65+ for every 100 people of working age (20–64)
The employment rate for labour force aged 55-64 was less
affected by the recession, increasing by 0.1% since 2008
compared with the fall by 0.2% in young workers under the
age of 25
Employment rate by age group & % change 2008-2017% of total number of people in that same age group
Old-age dependency ratiosNumber of individuals aged 65 and over per 100 people of working age (20–64)
19
30.6
77.5
55.9 53.2
0
10
20
30
40
50
60
70
80
Jap
an
Spai
n
Gre
ece
Port
uga
l
Ital
y
Ger
man
y
EU28
OEC
D
Fra
nce UK
Chin
a
US
Ind
ia
1975 2015 2050
TOP 5
41.6
22.9▼0.2%
77.8 73.2
≈0%70.1
6460.4
52.2 51.450.5
▲0.1%
0
10
20
30
40
50
60
70
80
90
Germany UK OECD Italy France Spain
15 to 24 years 25 to 54 years 55 to 64 years
PMIs continue a downward trend
52Source: Círculo de Empresarios based on Markit, 2018
PMIs Spain
50 = pivot ( value > 50 points = expansion)
Spain Manufacturing PMI is close to its two-year low (51), and
Services PMI sets a new two-year low
Spain maintains a downward trend for manufacturing & service PMIs, although it
has remained above 50-point mark since 2013
The moderation of the PMIs
confirms the deceleration of theSpanish economy in the
coming quarters51
55.6
52.4
56.1
51.4
54.1
58.3
54.4
57.3
52.5
50
51
52
53
54
55
56
57
58
59
Manufacturing PMI Services PMI
Visits in August: 10.2 millions
Due to:
• Reduced geopolitical instability in
Turkey, Tunisia and Egypt
• Signs of deceleration in major tourist
sending economies (United Kingdom,
France and Germany)
• Good weather conditions in Northern
Europe
Falls in the number of visits to Spain
53
Visits and spending for overseas residents' visits to Spain% change from year earlier
Source: Círculo de Empresarios based on FRONTUR and EGATUR (INE), 2018
Between January and August, 57,296,084 international tourists arrived in Spain, 0.1% fewer than the
corresponding period a year earlier, although they spent €62,2 billion, 2.8% more than in 2017
-1.9% year-on-year
-10
-5
0
5
10
15
20
25
20
18
M0
8
20
18
M0
7
20
18
M0
6
20
18
M0
5
20
18
M0
4
20
18
M0
3
20
18
M0
2
20
18
M0
1
20
17
M1
2
20
17
M1
1
20
17
M1
0
20
17
M0
9
20
17
M0
8
20
17
M0
7
20
17
M0
6
20
17
M0
5
20
17
M0
4
20
17
M0
3
20
17
M0
2
20
17
M0
1
20
16
M1
2
20
16
M1
1
20
16
M1
0
20
16
M0
9
20
16
M0
8
Tourists % annual change Expenditure % annual change
… and its contribution to Spain’s GDP and business confidence
54Source: Círculo de Empresarios based on Exceltur (ISTE & ICTUR), Bank of Spain, & Eurostat, 2018
Evolution of tourism GDP% change YoY
Evolution of Business Confidence Index for the tourism sector(% of positive replies) less (% of negative replies)
Evolution of real tourism earnings% change YoY
The EU sends more than 80% of its
tourists to Spain
Tourism GDP growth contracts by 2.8 pp since reaching its peak in 2Q17
3.8
-5.6
1.65.3
2
4.2
-3.6
0
3.32.5
-6
-4
-2
0
2
4
6
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Q1
20
17
Q2
20
17
Q3
20
17
Q4
20
17
Q1
20
18
Q2
20
18
Tourism GDP (ISTE)
Spain´s GDP
48.3 40.7 44.4 37 39.757 47.3
32.2 36.1 16.6
Q1
20
16
Q2
20
16
Q3
20
16
Q4
20
16
Q1
20
17
Q2
20
17
Q3
20
17
Q4
20
17
Q1
20
18
Q2
20
18
▼ 71%
-5
-4
-3
-2
-1
0
1
2
3
-10
-5
0
5
10
2009 2010 2011 2012 2013 2014 2015 2016 2017 1S2018
Tourism revenues (left axis)
EU GDP (right axis)
55Source: Círculo de Empresarios based on INE and Eurostat, 2018
Upward trend in inflation continues
A similar upward trend is
observed in the Economic andMonetary Union (EMU), withwhich Spain maintains a positivedifference of two-tenths
Inflationary pressures comefrom the most volatile goods &services of the basket, mainlyenergy, as indicated by thedifference with core inflation
Evolution of prices% change YoY
In line with the cyclical position, although it poses a risk to competitiveness
2.3
0.8
2.1
-2
-1
0
1
2
3
4
20
18
M0
9
20
18
M0
7
20
18
M0
5
20
18
M0
3
20
18
M0
1
20
17
M1
1
20
17
M0
9
20
17
M0
7
20
17
M0
5
20
17
M0
3
20
17
M0
1
20
16
M1
1
20
16
M0
9
20
16
M0
7
20
16
M0
5
20
16
M0
3
20
16
M0
1
20
15
M1
1
20
15
M0
9
20
15
M0
7
20
15
M0
5
20
15
M0
3
20
15
M0
1
20
14
M1
1
20
14
M0
9
20
14
M0
7
20
14
M0
5
20
14
M0
3
20
14
M0
1
20
13
M1
1
20
13
M0
9
20
13
M0
7
20
13
M0
5
20
13
M0
3
20
13
M0
1
20
12
M1
1
20
12
M0
9
Spain headline CPI
Spain core* CPI
Euro area headline CPI
*General index without unprocessed foods and energy products
Soaring house prices
56Source: Círculo de Empresarios based on Eurostat and FUNCAS, 2018
Number of years needed to pay off housing property
Profitability of rental housing and Spain 10-year
government bond
% annual
House prices continue to rise faster than European average
Since 2014, the profitability of buying rental housing has
increased
Increase in house prices, Europe, 2Q18
% change YoY
The price increase is higher than the increase in gross
household income
2013 2018
6.4 7.3
12.6 11.2 9.3 8 6.8 4.7 4.3 3.42.8
-0.2 -1.7
Irel
and
Por
tuga
l
Net
herl
and
s
Icel
and
Spai
n
Ger
man
y
EU UK
Fran
ce
Ital
y
Swed
en
-10.1
-6.3
4.9
8.19,19.1
10.4 10.9
5.84.6
2.7
1.7 1.4 1.6 1.3
2012 2013 2014 2015 2016 2017 2018
Housing (rent and prices change) Spain 10 year government bond
1.9
-4.4
-11
-9.4 -9.6-10.5
-7-6
-5.3-4.5
-3.1 -2.8
35.5
100.496.7
30
40
50
60
70
80
90
100
110
-12
-10
-8
-6
-4
-2
0
2
4
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Public balance (left axis)
Public debt (right axis)% %
Public finances (I)
57Source: Círculo de Empresarios based on IMF and the Bank of Spain, 2018
Public expenditure over GDP stabilises in the face of rising nominal GDP
Evolution public revenue & expenditure% GDP
Deficit & Public debt% GDP
Public debt target: 60%
In 2Q18, public debt stood at 98.1% of GDP (38.1 pp above the European target)
The deceleration jeopardises Spain’s efforts to hit the target deficit for 2018 as agreed with Brussels
and the reduction of public debt
The Bank of Spain forecasts that the budget gap will be 2.8% of GDP, one-tenth above the target
* Deficit forecast for 2018 by the Bank of Spain
34.8
37.638.2 38.2
45.8
48.1
41.340.7
33
35
37
39
41
43
45
47
49
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Revenues
Expenditures
Public finances: revenue (II)
58Source: Círculo de Empresarios based on IMF, Spanish Tax Agency, Schneider & Eurostat, 2018
The greatest tax collection differences in the Top 10 of EU economies are endemic in Income Tax
and Social Security contributions, especially due to the high unemployment rate and shadow
economy
Tax collection 2016*% GDP
Shadow economy% of total economy
* Latest data available
6.4 7.3
2.3
11.4
6.8
9.7
2.7
13.4
VAT PersonalIncome Tax
CorporateIncome Tax
SocialContributions
Spain
Top 10 EU average
2.5
0.4
0.5
2
22.2 19.8 17.2 15.6 13.5 12.8 12.1 10.4 9.4 8.4 7.10
5
10
15
20
25 2017 2007
The draft of the National budget (2019):
sources of expenditure (I)
59Source: Círculo de Empresarios based on the Ministry of the Treasury, 2018
Global impact of expenditure€ mn
5,098€ mn
Expenditure ceiling 2011-2019€ bn
In the calculation of the ceiling of operating public expenditure, transfers to Autonomous Communities and to Local Communities are excluded by the autonomous and local financing systems
The draft of the 2019 National Budget sent to Brussels uses an expenditure ceiling not approved by the Spanish parliament
122
119
127
133
129
123
118
120
125
2011 (PSOE)
2012 (PP)
2013 (PP)
2014 (PP)
2015 (PP)
2016 (PP)
2017 (PP)
2018 (PP)
2019 (PSOE)+4.4%
60
The draft of the National budget (2019):
sources of revenue (II)
Global impact of sources of revenue€ mn
▲ revenue
▼ revenue
Source: Círculo de Empresarios based on the Ministry of the Treasury, 2018
5.678€ mn
The expenditure limit is based on a projection of tax revenues that, in addition to being recurrently overestimated in the General State Budgets, sets out from a more favourable economic context than the current one
Private indebtedness in decline and household
savings at record low
61Source: Círculo de Empresarios based on the Bank of Spain, 2018
Evolution of debt and interest charges% of Gross Disposable Household Income (GDHI)
Evolution of Gross Disposable Household Income (GDHI), consumption & savings% of GDHI, % annual change
2
3
4
5
6
7
8
95
100
105
110
115
120
125
130
135
Q2
20
09
Q4
20
09
Q2
20
10
Q4
20
10
Q2
20
11
Q4
20
11
Q2
20
12
Q4
20
12
Q2
20
13
Q4
20
13
Q2
20
14
Q4
20
14
Q2
20
15
Q4
20
15
Q2
20
16
Q4
20
16
Q2
20
17
Q4
20
17
Q2
20
18
Debt (left axis)
Interest burden (right axis)
% %
5.8
13.4
4.7
-6
-4
-2
0
2
4
6
8
4
5
6
7
8
9
10
11
12
13
14
Savings rate (left axis)
GDHI % (right axis)
Consumption (right axis)
% GDHI % annual change
62
Balance of trade, January – July 2018 Change on the same period of the previous year
Source: Círculo de Empresarios based on Ministry of Industry, Trade and Tourism, September 2018
The trade deficit continues to widen
Exports ▲ 3.8% €169.3 bn
Imports ▲ 6.2% €187.1 bn
BALANCE ▲ Deficit 35.2% - €17.8 bn
Energy deficit ▲ 9%
Sectorial distribution, January – July 2018 % of total
Geographical distribution, January – July 2018 % of total
Evolution of trade in goods, January – July 2018 January-July, % GDP
* GDP based on growth forecasts for 2018 by the Bank of Spain = 2.6%
-2.2-2.9 -2.5
-2.1-0.7 -1.3 -1.2
-0.7-1.1 -1.5
-4
-2
0
2
4
6
8
10
12
14
16
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Exports Imports Balance
Exports ImportsEurope 71.9 60.3
EU 66.1 54.5
America 10.5 10.4
Asia 8.9 20.5
China 2.1 8
Africa 6.4 8.4
Other 2.3 0.4
Exp
ort
s
Capital goods
Automobile
Food, beverages and tobacco
Imp
ort
s
Capital goods
Chemical goods
Energy goods
19.7
16.7
16.2
20.7
15.3
14.3
63Source: Círculo de Empresarios based on Datacomex, Frontur and Baker McKenzie, 2018
The impact of Brexit on SpainSpanish exports to the UK represent 6.8% of the total (1.8% of GDP), lower than the exposure of
the euro area to the UK (13% of its exports)
Spanish companies that export to the UKTop 10 export destinations forSpanish goods€ bn and % of total
“Brexit and Business: The EU Outlook” survey → 46% of Spanish businessmen affirm that
Brexit has led them to reduce trade or operations in the UK and 43% have reduced their
investment in the UK
-0.8%
11,695
+8%
2012-2016 2017
Arrival of British tourists in SpainNumber of visitors and % of total
UK €77 bn2nd Spanish FDI
destination(2016)
Position of Spanish investment abroad
16.8% of total23.1 23.3 23.5
23
15006744 15832729 17675367 18806776
22
23
24
0
5000000
10000000
15000000
20000000
2014 2015 2016 2017
% total (right axis) Persons (left taxis)
€ bn % of total
1 France 41.6 15.0
2 Germany 30.9 11.2
3 Italy 22.2 8.0
4 Portugal 19.8 7.2
5 UK 18.9 6.8
6 US 12.5 4.5
7 Netherlands 9.5 3.4
8 Belgium 8.3 3.0
9 Morocco 8.0 2.9
10 China 6.3 2.3
Spain’s exposure to crisis in emerging economies
Source: Círculo de Empresarios based on the Bank of Spain, 2018
Spain’s exposure to Turkey and Argentina, 2017% of total Spanish exports & total Spanish FDI
The Spanish economy’s exposure to Turkey and Argentina through exports is moderate, with the foreign
investment and banking channels being more important
64
2.1(0.5% GDP)
1.20.5
(0.1% GDP)
2.6
Exports FDI
Turkey Argentina
Export
destinations
Turkey 11º
35ºArgentina
FDI
destinations
19º
12º
Spanish FDI in Turkey is concentrated in:
• Banking sector (40%)
• Insurance sector (12%)
In Argentina, the finance and telecommunications sectors take the spotlight
Catalonia
65Source: Círculo de Empresarios based on DataInvex, INE and Axesor, 2018
Since October, GDP growth has slowed down by 0.5 decimals (national average of 0.4)
Flight of companies from CataloniaOctober 2017 - September 2018
Year-on-year change in GDP%
Evolution of received FDI inflows€ mn and % of national total
3,854
companiesquit
3 2.8
2.5
3.5
3.23.1
Q4 2017 Q1 2018 Q2 2018
Spain Catalonia
112
373
813 863
445 387
170236 182
121 69 83
Oct
-17
No
v-1
7
Dec
-17
Jan
-18
Feb
-18
Mar
-18
Ap
r-1
8
May
-18
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
In 2017, annual fall in the received FDI inflow
-▼7.4%National total
-▼61.3%Catalonia
14.9
22.1
31.5
13.1
30645493
8243
3185
20511
2479926177
24246
0
5
10
15
20
25
30
35
0
5000
10000
15000
20000
25000
30000
2014 2015 2016 2017
Catalonia (right axis) Catalonia (left axis) Spain (left axis)%€ mn
Interest rates and risk premium
66Source: Círculo de Empresarios based on Bank of Spain & Bloomberg, 2018
The risk premium exceeds 140 basis points, but remains well below Italy and 28 bp from Portugal
Risk premiums of Spain, Portugal, and Italycompared with the 10-year German bond (bp)
Evolution of Spain’s rating2010-2018
Jan
-10
Jun-
10N
ov-
10
Ap
r-11
Sep
-11
Feb
-12
Jul-1
2D
ec-1
2M
ay-1
3O
ct-1
3M
ar-1
4A
ug-
14Ja
n-1
5Ju
n-15
No
v-1
5A
pr-
16Se
p-1
6Fe
b-1
7Ju
l-17
Dec
-17
May
-18
Oct
-18
Moody´s S&P FitchAaa AAA
AA+AA
AA-
Aa1Aa2
Aa3
A+A
A-
A1A2
A3
BBB+BBB
BBB-
Baa1Baa2
Baa3
Grade
50
70
90
110
130
150
170
190
210
230
250
270
290
310
330
Jan
-18
Jan
-18
Jan
-18
Feb
-18
Feb
-18
Mar
-18
Mar
-18
Ap
r-1
8
Ap
r-1
8
May
-18
May
-18
Jun
-18
Jun
-18
Jul-
18
Jul-
18
Jul-
18
Au
g-1
8
Au
g-1
8
Sep
-18
Sep
-18
Oct
-18
Spain risk premium
Italia risk premium
Portugal risk premium
88
90
92
94
96
98
100
102
104
106
108
110
Jan
-18
Jan
-18
Feb
-18
Mar
-18
Mar
-18
Ap
r-18
May
-18
May
-18
Jun-
18
Jul-1
8
Jul-1
8
Au
g-1
8
Sep
-18
Oct
-18
S&P 500 Eurostoxx 50 IBEX 35
67Source: Círculo de Empresarios based on BME, 2018
Financial markets
Evolution stock marketJanuary 2018=100
* Includes: continuous market, trading floors of the four stock exchanges, MAB (The Alternative Spanish Equity Market) & Latibex
After a feint of recovery in European stock markets in September, the rise in volatility and
turbulence in the US, once again exert downward pressure on the IBEX 35 causing it to wilt
The recent fall is explained in part by:
➢ Downward revision of forecasts for
growth and global trade by the IMF
➢ Interest rate hikes by the Fed
➢ Political uncertainty
➢ Market corrections in advanced
markets and rise in volatility
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‘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 theCírculo 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 deEmpresarios 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.