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Presentation of the report 'Spain Economic Outlook', Third Quarter 2012
BBVA Research considers that the adjustments and reforms being undertaken need time to achieve their objectives, as well as the backing of the European institutions
- The measures taken by Spain to boost economic growth and reduce imbalances are "positive," but they need time to achieve their objectives, as well as the backing of the European institutions
- Financial aid to strengthen the solvency of the Spanish financial system "easily" covers potential capital requirements. The conditions distinguish between banks, and focus on those that need aid
- BBVA Research forecasts -1.4% growth for 2012. The information available suggests that the GDP will shrink by -0.4% in the third quarter, similar to the figure in the second. Continued financial tension may extend economic stagnation into 2013, giving a similar growth figure to that for 2012
- According to the latest issue of Spain Economic Outlook, application of the recently approved measures and the adoption of additional ones will enable Europe to take advantage of the growth in the global economy, which will be at around 3.5%
BBVA Research considers that the economic reforms announced by Spain and Europe are positive, but they need time to prove their effectiveness. It warns that uncertainties regarding their success will remain for a "prolonged" period of time. To prevent this situation from leading to episodes of financial market volatility, "there has to be a stronger commitment between Spain and the European institutions”. The latest issue of Spain Economic Outlook also points out that the government has already adopted most of the necessary fiscal measures. It must now ensure they are complied with and "focus on reforms that increase the Spanish economy's growth capacity”.
BBVA Research forecasts that the Spanish economy will shrink by 1.4% in 2012 and in 2013. The reasons for revising the growth outlook for 2013 are based on the lack of certainty regarding policies at European level: those that have to resolve solvency and liquidity problems, and others that must remove completely any market uncertainty regarding the risk of a break-up of the single currency. As a result of this scenario, Europe's weak economic growth in 2012 and 2013 will not provide any boost or support for the Spanish economy.
BBVA Research considers that the bias in this scenario will depend on how quickly and efficiently the series of instruments and policies announced in recent weeks can be implemented. It explains that the Spanish government has "correctly" decided to request financial assistance from its European partners in order to complete the recapitalization of the financial system.
It points out that the volume of finance in question "easily" covers the system's possible capital requirements, and was established before these requirements have been made known. It provides credibility to the process by involving the European authorities and establishes a timetable of specific stages.
The conditions to which the Spanish economy is subject as a result of this aid is "reasonable," and includes measures that have been on the table since the start of the crisis. BBVA Research considers it important that no additional commitments on fiscal matters have been added to those already in place, and recalls that measures have been announced that "considerably increase the probability of complying with the 2012 target”.
It also makes clear that the government has set out a timetable of reforms focused on areas which have traditionally been bottlenecks to improving competitiveness. However, it points out that the "anchor provided by the ambitious labor reform should be bolstered with decisive actions to improve the medium-term prospects for public finances and growth in the Spanish economy”.
Positive measures that require time
Although the measures that are being taken in Spain and Europe as a whole are "positive," they need time to prove their effectiveness. BBVA Research highlights that uncertainties regarding their success will remain for a "prolonged period”. To prevent this scenario from triggering episodes of financial-market volatility that feed into the vicious circle affecting the economy, it believes "it is necessary to strengthen the commitment between Spain and the European institutions”.
BBVA Research also points out that the government has now adopted most of the fiscal measures that are necessary. It must now ensure they are complied with and focus on reforms that increase the Spanish economy's growth capacity, thus guaranteeing a better starting position in the blocks when the recovery occurs.
BBVA Research also states that the European institutions must give a "qualitative leap at institutional level" to speed up the solution to the debt crisis. In its opinion, they have to back the policies implemented in Spain, and use all the mechanisms available as effectively as possible to reduce the risk premium and guarantee it reflects the fundamentals of the Spanish economy.
With respect to the global economy, BBVA Research forecasts a growth of 3.5% in the period 2012-2013, boosted by continued progress in emerging markets. It considers that the application of the measures already approved and the adoption of additional ones will allow Europe to take advantage of the growth of the world economy.
Companies gain competitiveness
BBVA Research stresses that there are factors that continue to act as a counterweight. Specifically, the European Central Bank's (ECB) monetary and liquidity policy will continue its aim of supporting aggregate European demand and financial stability. Combined with different growth rates between Europe and the rest of the world, this will maintain the downward pressure on the euro's exchange rate and contribute positively to the gains in competitiveness of exporting companies.
Spain Economic Outlook also expects that the supplier payment program will continue to have a positive impact on expenditure over the coming months. Combined with the reduction in employers' Social Security contributions, this will increase the competitiveness of Spanish companies against their foreign competitors.
With respect to quarterly economic growth, the information available so far suggests that third-quarter GDP this year will contract by 0.4%. The decline is similar to that in the second quarter, so the economy will have experienced four successive quarterly falls.
On the foreign front, BBVA Research explains that the first half of the year began with a positive contribution from the net foreign sector to growth, due to a moderate fall in exports and above all the persistent weakness of imports. However, in the second quarter exports of goods were up by 1.1% and services by 2.2%, backed by downward pressure on the euro's exchange rate and its positive effect on price competitiveness.
The latest issue of Spain Economic Outlook also states that employment will continue to fall in the second half of 2012 and 2013. As a result, there will be an upturn in the unemployment rate to around 26% next year, despite the expected fall in the active population.
Although the reform of the labor market approved in February will not prevent the economy from continuing to destroy jobs in the short term, it could help provide the "necessary rebalance" between adjustment to the extensive (employed people) and intensive (hours of work and remuneration) margin, reduce segmentation and increase productivity.
BBVA Research also notes that when the results of the bank-by-bank stress tests of the financial system are released, the approximate maximum capital requirements of the system will be expected to be "similar" to the 62 billion euros estimated by Oliver Wyman and Roland Berger.
"Major but unavoidable sacrifices"
BBVA Research considers that the series of measures approved send a "strong" message in favor of the sustainability of public finances by announcing actions with significant scope in terms of correcting the public deficit, and representing "major but unavoidable sacrifices”.
However, doubts with respect of the revenue-collection capacity of certain measures, the risks of implementing some expenditure cuts and uncertainty regarding the impact of the recession on the public deficit, all mean that new actions have been necessary to make compliance with the target for the end of the year credible. These new measures include additional public revenue and expenditure efforts, improving the operation of the public administration, and speeding up the timetable of structural reforms.
Finally, BBVA Research points out that the consolidation of the structural reforms will lay the foundations for improvement in the growth capacity and sustainability of the public finances in the medium and long term.
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