BBVA Research estimates that the Spanish economy will have grown by 0.7% on average in 2011. It is also forecasting a 1.3% contraction in 2012. Recovery could accelerate with the structural reforms underway The measures announced by the Spanish government to further the fiscal consolidation process are forceful and have been well-received. Moreover, the Draft Organic Law on Budget Stability puts Spain at the vanguard and includes several of the initiatives repeatedly called for by BBVA Research in recent years To successfully culminate the restructuring underway, it is important that implementation of the Spanish financial system restructuring plan prioritize achievement of a more profitable and better managed system that is capable of generating sustainable earnings and credibly tapping the capital markets The delicate state of the labor market calls for brave measures, which is why the mooted labor market reform must make a decisive commitment to internal flexibility as an alternative to job destruction, according to the latest ‘Spain Economic Outlook’ report BBVA Research believes that current forecasts for the Spanish economy, which point to a fresh contraction in 2012 followed by a moderate recovery in 2013, may begin to look up if ambitious structural reforms are implemented swiftly and decisively. In its most recent ‘Spain Economic Outlook’ report, presented today, BBVA Research states that if this were to happen, the adjustment required would be less painful, especially in terms of employment, “paving the way for a stronger recovery”. In this respect, BBVA Research believes that Spain has sent a “clear and firm” message to the rest of its European partners by becoming one of the first member states to commit constitutionally to public finance stability. In recent quarters, the downslide in Europe’s economic prospects has continued, hurt particularly by the uncertainty predominating in the sovereign debt markets. In Spain, the effort underway to address the economy’s imbalances has been compounded by a loss of confidence and slowdown in exports. Access to financing remains tight and expensive. The spike in sovereign risk premiums in several countries in the eurozone, coupled with the need to implement more ambitious fiscal austerity measures than those contemplated one year ago and the slowdown in international trade, has eroded Europe’s growth prospects, which is in turn likely to translate into weaker demand for Spain’s exports. Although the official breakdown is still pending, the preliminary estimate is that Spanish GDP contracted by 0.3% in the fourth quarter, which would put GDP growth for the full year at 0.7%. Although current forecasts point to a contraction in the Spanish economy of up to 1.3% in 2012, there are “some mitigating factors”. In contrast to the situation three months ago, BBVA Research underscores that the ECB’s monetary (and liquidity) policy is now more propitious to supporting demand and financial stability. This, together with the wider growth gap between Europe and the rest of the world, will lead to a weaker currency, which should accelerate competitiveness gains among exporters. Moreover, the current climate warrants “ambitious structural policies”, “adopted swiftly and decisively”, as we are already seeing in Spain, which, if “implemented properly”, would result in a less painful adjustment, particularly in terms of employment, “paving the way for a faster and stronger recovery”. BBVA Research notes that the measures announced to date by Spain’s new government are generally positive. Specifically, it highlights that the draft Law on Budget Stability sends a “clear and firm” message to the rest of its European partners regarding the commitment assumed by Spain in this respect. Nevertheless, BBVA Research warns that “time is of the essence and the room for maneuver on the part of Spain’s economic agents and authorities in terms of coping with the adjustments is increasingly slim”. The ‘Spain Economic Outlook’ report also writes that the economic indicators released to date point to a decline in domestic demand and in trade flows. This correction is likely to be more pronounced in the case of imports, suggesting that the growth pattern will once again be characterized by “the boost provided by net foreign demand offset by a negative contribution from internal demand”. BBVA Research also states that private spending stagnated in 2011, having registered growth of 0.8% in 2010. Its analysts expect this metric to contract by 2.0% in 2012, moderating its fall in 2013 to 0.9%. ‘Spain Economic outlook’ also reports that it is probable that the Spanish risk premium will hold steady, on average, at current levels throughout 2012 and that its reduction to “levels more aligned with fundamentals” will be slow, although stating that this equilibrium point is substantially lower than current levels. According to the report, this deterioration in financing costs will prove one of the biggest burdens to be tackled in both the public and private sectors, despite the fact that the ECB is expected to cut interest rates by another quarter point and continue with its current expansive liquidity policies. Public deficit: credible governmental measures On the deficit front, BBVA Research believes that the measures taken by the government are credible because of the anticipated impact on revenue (€6.1 billion) and, above all, the fact that they are grounded in spending cuts (€8.9 billion). According to its estimates, the public deficit may have ended 2011 at 8.2% of GDP, more than two whole points higher that the target set in the Stability Program. Its analysts are forecasting a public deficit of 5.3% of GDP in 2012 and of 3% in 2013. Nevertheless, bringing the deficit down to these levels implies far more stringent structural adjustments than those contemplated in the Stability Program of one year ago. The failure to meet the targeted deficit for 2011 has increased the urgency of implementing measures designed to offset last year’s deviation, measures that guarantee that these breaches will not happen again this year, to which end they must entail tools for overseeing compliance by the regional governments (the main culprits) and, in short, restoring the utmost credibility in the nation’s commitment to getting its accounts in order. Against this backdrop, the central government’s response has been forceful and well-received. The Draft Organic Law on Budget Stability sends a clear and firm message to Spain’s European partners as Spain is one of the first countries to pass legislation of this kind, legislation that includes several of the proposals put forward by BBVA Research in recent years, such as the definition of fiscal targets in terms of the structural deficit, generalization of fiscal confines at all levels of government and increased disclosure transparency to facilitate the correct assessment of fiscal policies. The legislation passed also contemplates practical and credible instruments for stimulating compliance with these rules and regulations. As for the labor market, BBVA Research expects employment to continue to fall in 2012 and 2013, causing the unemployment rate to continue to tick higher, edging towards the 25% mark in 2013, despite the anticipated decline in the size of the active population. BBVA Research is estimating an unemployment rate of 24.4% this year. Against this backdrop, one of the goals the labor reform must tackle, according to BBVA Research, is that of facilitating as soon as possible the “required equilibrium” between correction of the extensive margin (employment) and the intensive margin (work hours). This would minimize the fallout from the recession on the labor market and prevent the multiplier effects that job destruction could trigger. The report also states that in addition to boosting internal flexibility as an alternative to job cutting, the new labor reform needs to include particularly decisive on other fronts. Specifically, it should eliminate salary safeguard clauses in order to prevent transitory price increases from translating into salary growth and sparking an inflationary spiral through second-round effects. Moreover, the current collective bargaining structure should be modernized and the system of wage opt-out clauses made more flexible. The labor market is said to be crying out for brave measures that go beyond the agreements reached to date by the unions and employer associations in order to keep the economic slowdown anticipated for 2012 from causing employment to plummet once again. Spanish financial system: a positive restructuring pending successful execution The ‘Spain Economic Outlook’ Report also stresses that the plan for restructuring the Spanish financial system marks a step in the right direction insofar as it imposes a higher provisioning effort for real estate exposures and forces the banks to use more realistic assumptions to value their assets. BBVA Research says that the scale of the impact that these significantly more onerous requirements will have on the sector’s configuration will depend on how they are applied. Another positive aspect is the government’s goal of limiting the cost of this restructuring process that is borne by taxpayers. The experts note that to successfully culminate the restructuring underway, it is important that implementation of the plan prioritize achievement of a more profitable and better managed financial system that is capable of generating sustainable earnings and credibly tapping the capital markets, all of which points in the direction of reduced fragmentation. To this end, it is vital to clearly delineate which entities are not viable, providing them with a definitive solution. Moreover, it is necessary to accelerate the pace of sector downsizing in terms of both branches and personnel. Lastly, it is worth recalling that all of the foregoing lays the groundwork for getting credit flowing once again to the productive sector, so that the inevitable deleveraging process does not prevent the sectors and companies with bright prospects from getting the financing they need. The global economy has slowed, albeit temporarily The global economy slowed towards the end of 2011 as a result of weaker growth in Europe and a slowdown in emerging economies. However, the still-bright outlook for the developing world will pave the way for a recovery in global GDP in the second half of 2012. Emerging market growth looks set to once again outpace that of the developed economies by about four percentage points. Emerging market economic policies are expected to swing towards the stimulus pendulum. In Europe, meanwhile, the actions taken by the European authorities are expected to gradually ease financial tensions and mitigate global risk aversion, nurturing an overall recovery during the second half of 2012. Although US GDP growth is expected to lag that of earlier periods, the US economy is expected to prove immune from the recessionary environment engulfing Europe in the first half. The report also says that the pan-European fiscal adjustment process needs to prove sustained and vigorous if it is to prove credible, albeit balanced so as not to exacerbate the recession with an overly procyclical policy. To this end, BBVA Research recommends assessing the fiscal adjustment effort in terms of structural deficit cutting rather than in nominal or current deficit account terms. Contact: Corporate CommunicationsTel: +915375858comunicacion.corporativa@grupobbva.com For more financial information on BBVA, click here:http://inversores.bbva.com/TLBB/tlbb/bbvair/esp/index.jsp For more information on BBVA, click here: http://prensa.bbva.com/ About BBVA BBVA is a customer-centric global financial services group founded in 1857. The Group has a solid leadership position in Spain, it is the largest financial institution in Mexico and it has leading franchises in South America and the Sunbelt Region of the United States. Its diversified business is biased to high-growth markets and it relies on technology as a key sustainable competitive advantage. BBVA ranks among the leading Euro zone banks in terms of ROE and efficiency. Corporate responsibility is inherent to its business model, promotes inclusiveness and supports scientific research and culture. BBVA operates with utmost integrity, long-term vision and best practices, and is included in the main sustainability indexes
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