Santander
Economic Research
Economic Outlook: Tailwinds for growth
June 2015
2
Economic Outlook: Tailwinds for Growth
• A number of tailwinds ensure a better growth outlook in Europe,
amplifying positive dynamics where they existed (Germany, Spain) and
creating some traction where they didn’t (France, Italy)
•
•
•
•
Lower oil prices
Lower euro
A more neutral fiscal policy
Monetary expansion
• In the US, abstracting from seasonal effects (Q1 winter freeze, West coast
port strike), the cycle is maturing & the Fed getting ready for rate lift-off
• China is slowing beyond what was designed, but also getting ready for
a bigger international role
3
Tailwinds for Growth: Lower Oil Prices
Brent oil price (€/b) and Euro zone CPI (% y/y)
Source. Eurostat, Bloomberg, Santander
• Oil prices in € terms are now 37% cheaper than in the summer of 2012
• Crude prices no longer tanking, but much of the decline is here to stay
• More on this later…
4
Tailwinds for Growth: Lower Euro
ECB total asset (€ bn) and Euro trade-weighted exchange rate (inverted scale)
Source. ECB, BoE, Bloomberg, Santander
• The trade-weighted Euro is now 13% lower than at the end of 2013
• Large part of decline in late 2014-early 2015, as market anticipated QE
• Much further depreciation unlikely
5
Tailwinds for Growth: A less hostile fiscal policy
Euro zone budget deficit and change in the structural deficit (% of GDP)
Source. European Commission, Santander
• From a 1.5% of GDP tightening to a 0.3% of GDP expansion
• Headline deficits narrowing anyway courtesy of (i) a little more growth, and (ii)
much lower funding costs
6
Tailwinds for Growth: Massive monetary expansion
Eurosystem holdings under the Extended Asset Purchase Programme (EUR bn)
Sources. ECB, Santander
• Commitment to stay at ZLB in policy rates for the foreseeable future
• Launch of EAPP: €60bn/month from March 2015 to September 2016
• No wavering in the commitment to execute the programme in full
• Will keep yields low across the curve for months to come
7
Tailwinds for Growth: Tide is lifting all boats
Euro zone GDP growth forecast. 1.6% in 2015E, 2.0% in 2017E
Euro Zone – GDP Breakdow n by Country (cont to annual grow th), 2015E
3.5
(pp, cont to annual GDP grow th)
2.5
Public Consumption
Total Investment
Net Exports
Stocks
GDP
Private Consumption
Public Consumption
Total Investment
Net Exports
Stocks
3.0
2.5
(pp, cont to annual GDP grow th)
3.0
Private Consumption
Euro Zone – GDP Breakdow n by Country (cont to annual grow th), 2016E
3.5
2.0
1.5
1.0
0.5
0.0
-0.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
Spain
So urce: DTS and Santander.
Germany
France
Italy
Euro zone
Spain
Germany
France
Italy
Euro zone
So urce: Datastream and Santander estimates.
• Tailwinds amplifying positive growth dynamics where they previously
existed (Germany, Spain) …
• …and generating traction where they did not previously present (France,
Italy)
• Structural reforms remain key (more on this later)
8
And a wildcard: credit growth
France: Loans to NFCs and households (% y/y)
Euro zone: % of banks tightening lending standards
Source. ECB, Bloomberg, Santander
Source. ECB, Bloomberg, Santander
• Bank credit about to return to growth, fostering personal and capital
spending
• Banks have been already easing lending standards for a few quarters
• Credit growth already present in some segments/countries
9
Another Q1 one-off
Sources. NOAA, Federal Reserve Bank of San Francisco
• A number of anomalies/distortions tarnishing Q1 GDP numbers
• Unusually cold weather
• West Coast port strikes
• Pitfalls in seasonal adjustment affecting Q1
10
Personal spending holding just fine
US: Consumer confidence and retail sales
Sources. Conference Board, US Census Bureau, Bloomberg, Santander
US: Household consumption
Sources. BEA, Bloomberg, Santander
11
Oil & gas drilling dragging down IP and capital spending
US: Inventory/sales ratio and IP
US – Inventories-Interm ediate Goods, Nondurable-Petroleum and coal products, 1992-1Q1
20.5
120
Volu me (L HS )
18.5
100
($bn)
YoY (RHS)
16.5
80
14.5
60
12.5
40
10.5
20
8.5
0
6.5
-20
4.5
-40
2.5
199 2
Sources. US Census Bureau, Federal Reserve, Bloomberg, Santander
-60
199 4
199 6
So urce: DTS and Santander.
199 8
200 0
200 2
200 4
200 6
200 8
201 0
201 2
201 4
12
Housing and construction again on a roll
US: Homebuilders’ confidence and housing starts
Sources. US Census Bureau, NAHB, Bloomberg, Santander
US: Construction spending
13
Labour market steadily improving
US: Weeklñy jobless claims (4-week m.a.)
US – Em ploym ent, Unem ploym ent and Working Population, 1985-Apr15
170 000
170 00
Civilian Labour Force (LHS)
Employment (LHS)
160 000
150 00
Unemployment (RHS)
150 000
130 00
110 00
130 000
900 0
120 000
700 0
110 000
100 000
198 5
198 8
199 1
So urce: B LS and Santander.
Sources. BLS, Bloomberg, Santander
199 4
199 7
200 0
200 3
200 6
200 9
201 2
500 0
201 5
('000)
('000)
140 000
So urce: B LS and Santander.
6.0
11.6
63.10
70
4
60
3
50
2
20.16
40
30
3.87
20
-1
6
65.3
2
19.9
8.9
3.9
-2
10
70
4
60
3
50
40
30
20
10
0
(% of Total Employ ment)
6
(% of Total Employ ment)
8.84
Other service s
Leisure an d h osp ital ity
11.21
Other service s
12.3
Edu cation an d he alth
service s
10.50
Leisure an d h osp ital ity
11.6
Pro fessional and bu sine ss
service s
6.12
Edu cation an d he alth
service s
2.6
Financial activities
Info rma tio n
Utili ties
11.74
Pro fessional and bu sine ss
service s
0.5
2.40
Financial activities
3.3
0.62
Info rma tio n
4.6
Transportation and
wareho usi ng
3.22
Utili ties
13.3
Retail trad e
4.58
Transportation and
wareho usi ng
5.0
Wholesale trade
14.89
Retail trad e
18.89
Trade, tran sp orta tion an d
utilities
6.04
Wholesale trade
5
Private Service-providin g
19.93
Trade, tran sp orta tion an d
utilities
8.4
Nondu rable good s
(% Interanual)
5
Private Service-providin g
5.1
Durabl e go ods
8.85
Nondu rable good s
0.5
4.46
Durabl e go ods
0
Manufactu ring
1
Manufactu ring
-1
Constru ction
0.58
Constru ction
1
Natural Re sou rce s and
Mining
Goo ds Pro ducing
0
Natural Re sou rce s and
Mining
Goo ds Pro ducing
(% Interanual)
How labour market metrics have previously
behaved around Fed tightening episodes (i)
14
US – Hours Worked, Earnings per Hour, Weekly Earnings and Distirbution of Em ploym ent by Sectors, 1Q 1994
80
0
Hours
worked
(weekly)
Earnings /
Hour
Weekly
Earnings
Weight in
Total
employme
nt (RHS)
So urce: B LS and Santander.
US – Hours Worked, Earnings per Hour, Weekly Earnings and Distirbution of Em ploym ent by Sectors, 2Q 1999
80
Hours
worked
(weekly)
Earnings /
Hour
Weekly
Earnings
Weight in
Total
Employm
ent (RHS)
So urce: B LS and Santander.
5.7
15.5
Other service s
13.8
67.0
70
4
60
3
50
2
40
19.4
30
9.5
4.1
20
-2
US – Hours Worked, Earnings per Hour, Weekly Earnings and Distirbution of Em ploym ent by Sectors, Mar 2015
6
70.6
10.7
4.0
-2
10
5
70
4
60
3
50
2
40
30
20
10
0
(% of Total Employ ment)
5
(% of Total Employ ment)
Other service s
13.0
Leisure an d h osp ital ity
6.2
Leisure an d h osp ital ity
19.0
Edu cation an d he alth
service s
12.4
Edu cation an d he alth
service s
11.0
Pro fessional and bu sine ss
service s
11.4
Pro fessional and bu sine ss
service s
2.0
Financial activities
2.4
Financial activities
0.4
Info rma tio n
0.4
Info rma tio n
3.4
Utili ties
3.2
Utili ties
4.2
Transportation and
wareho usi ng
Retail trad e
4.3
Transportation and
wareho usi ng
3.2
Retail trad e
13.8
Wholesale trade
4.1
Wholesale trade
1
Trade, tran sp orta tion an d
utilities
16.6
Trade, tran sp orta tion an d
utilities
5.5
Private Service-providin g
6.8
Nondu rable good s
6
Private Service-providin g
8.7
Durabl e go ods
Manufactu ring
10.9
Nondu rable good s
0.6
5.3
Durabl e go ods
-1
4.5
Manufactu ring
0
0.5
Constru ction
0
Constru ction
-1
Natural Re sou rce s and
Mining
Goo ds Pro ducing
(% Interanual)
1
Natural Re sou rce s and
Mining
Goo ds Pro ducing
(% Interanual)
How labour market metrics have previously
behaved around Fed tightening episodes (ii)
15
US – Hours Worked, Earnings per Hour, Weekly Earnings and Distirbution of Em ploym ent by Sectors, 2Q 2004
80
0
Hours
worked
(weekly)
Earnings
/ Hour
Weekly
Earnings
Weight in
Total
Employm
ent (RHS)
So urce: B LS and Santander.
80
Hours
worked
(weekly)
Earnings /
Hour
Weekly
Earnings
Weight in
Total
Employme
nt (RHS)
16
A slowdown that goes way beyond design
17
China getting ready for a much bigger international role
18
Imbalances looming large
Source: IMF, Asia-Pacific Regional Economic Outlook, April 2015
19
Some macro themes
Oil shock
Inflation/deflation
risks
Secular stagnation
debate
Taking stock of
structural reforms
Current account,
competitiveness, and
corporate margins
Emerging markets
20
Oil shock
=
Even one of the most basic iWatches would buy us today 1,831 liters of oil !!!
Oil shock:
Fall in oil prices (and other commoditiy prices) is substantial
Oil price drops in excess of 30%
Cumulative changes in commodity
price indexes
NOTE: Non-consecutive episodes of six-months for
which weighted average of WTI, Brent and Dubai oil
prices fell by more than 30%
NOTE: Unweighted average of 3 oil
benchmarks, 21 agricultural goods, 7 minerals
and metals prices
Source: European Commission
Source: The World Bank

Source: ICE, European Commission
The present fall in oil prices is a significant event compared to other similar historical episodes:






Duration of oil price declines
(1st day of selected period=100)
1985-86: Increase in oil supply and change in OPEC policy
1990-91: US recession
1997-98: Asian crisis
2001: US recession
2007-09: Global financial crisis
Significant declines also in other commodity prices
21
Oil shock:
Why has the oil price been tanking?
USA - Oil production, 1920-September 2014
IEA forecast of global oil demand
growth
22
Oil intensity of GDP and energy
consumption
11000
10000
(thousand barrels per day)
9000
8000
7000
6000
5000
4000
3000
2000
1920
1922
1925
1928
1931
1934
1937
1939
1942
1945
1948
1951
1954
1956
1959
1962
1965
1968
1971
1973
1976
1979
1982
1985
1988
1990
1993
1996
1999
2002
2005
2007
2010
2013
1000
Source: US Department of Energy's Energy Information Administration, Bloomberg, Santander
NOTE: Oil consumption relative to GDP, 1954=1.
Oil consumption as % of total energy consumption

A structural increase in SUPPLY


Source: The World Bank
Huge increase in US shale oil and gas production
Lower oil DEMAND, which is partly transitory, partly structural


Transitory decline in demand due to deceleration of global growth (downward revision of demand 0.8mb/d in 2014H2)
A structural decline in oil intensity of world GDP

Failure of OPEC to agree on production cuts in November 2014

Geopolitical concerns
23
Oil shock:
Economic effects of the lower oil price
Weight of energy in national CPIs
NOTE: In first scenario, supply shift accounts for 60% of price
decline, in scenario 2 the price shift is undone over time
Oil producer fiscal breakeven prices
Source: World Bank
Source: World Bank
Source: IMF

Real income changes




Decrease in input cost of production


Lower costs of producing goods
Lowers inflation



Gains for oil importers, losses for oil exporters
Depends on share of energy intensity and on share of exports/imports of oil in GDP
Might shift income from high savings exporters to high spending importers, decrease liquidity in wealth funds
Depends on pass-through of oil prices to wages and other prices
Depends on monetary policy response
Net effect on growth according to IMF: 0.3-0.7% in 20015, 0.4-0.8% in 2016
Oil shock:
Ukraine + Russia, two sides of the story
Gas and oil pipelines from Russia and gas supply
dependence on Russia
Export to Russia + Ukraine as % of GDP
• USA: no direct economic exposure or
energy exposure to Russia, only a
geopolitical one
• Europe: the farther to the north, the
farther to the East, the more exposed
24
25
Population and income growth in history
Contributions to global growth, 0-2010
Source: A. Maddison, Jutta Bolt and Jan Luiten van Zanden, “The first update of the Maddison Project: Re-estimating growth before 1820”, Maddison Project
working paper number 4, University of Groningen, January 2013; United Nations Population Division; McKinsey Global Institute “Global Growth: Can Productivity
Save the Day in an Aging World?”, January 2015
“Same as it ever was….”
Global GDP per capita, 0-2010
Distribution of World’s GDP, 0-2030f
Source: A. Maddison, “The World Economy: A Milenial Perspective” , OECD,
2001
Shares of World GDP (%)
•
“Chaiman Mao, what do you think of
the French revolution?”
•
“I think it is too early to tell”
26
27
Development mistakes/accidents can be very costly…
GDP per capita (1990 PPP USD)
• Argentina had about the same GDP per capita as the US in 1895, and
was richer than Japan until 1967
• Resources price swings/stock exhaustion can have massive impact
for commodity exporters
Source: The Maddison-Project, http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version
28
Models of reaction to the crisis
No loss of potential growth, eventual convergence to potential growth trajectory
Source: European Commission, “Impact of the current economic and financial crisis on potential output”, European Economy Occasional Papers 49, 2009
29
Models of reaction to the crisis
No change in potential growth in the long run, permanent loss in potential GDP level
Source: European Commission, “Impact of the current economic and financial crisis on potential output”, European Economy Occasional Papers 49, 2009
30
Models of reaction to the crisis
Permanent loss in potential GDP level and downward shift in potential growth
Source: European Commission, “Impact of the current economic and financial crisis on potential output”, European Economy Occasional Papers 49, 2009
31
Advanced vs. emerging economies (big picture)
A high-frequency measure of activity: industrial production (2005=100)
Advanced economies
Emerging economies
• Advanced economies took a 18.6% hit during the crisis, and seven
years later they are still 4% below the pre-crisis peak
• It took emerging economies just 15 months to recover the pre-crisis
peak and they are now 35.4% above that level
Source: CPB Netherlands Bureau for Economic Policy Analysis
32
Advanced vs. emerging economies (the gory details)
A high-frequency measure of activity: industrial production (pre-crisis peak=100)
Advanced economies
Emerging economies
• The devil is in the details…
• In advanced economies, USA doing well, Japan and Eurozone ex Germany
doing pretty miserably)
• In emerging economies, most of the gains come for Asia, and LatAm rapidly
losing steam in the last two years
Source: CPB Netherlands Bureau for Economic Policy Analysis
33
Country evidence on GDP post-crisis performance
Real GDP in Thailand
Real GDP in Morocco
Source: Bloomberg, National Statistical Institutes
Real GDP in Malaysia
Real GDP in Mexico
Real GDP in Colombia
Real GDP in Brazil
34
Country evidence on GDP post-crisis performance
Real GDP in the USA
Source: Bloomberg, National Statistical Institutes
Real GDP in the UK
35
Country evidence on GDP post-crisis performance
Real GDP in Eurozone
Real GDP in Germany
Real GDP in Spain
Source: Bloomberg, National Statistical Institutes
Real GDP in France
Real GDP in Italy
36
Secular stagnation debate
Sources: CBO, BEA, IMF; Larry Summers, “Reflections on the ‘New Secular Stagnation Hypothesis’, in C. Teulings & R. Baldwin (eds.) Secular Stagnation:
Facts, Causes and Consequences, VoxEU.org & CEPR, 2014
• Output is way lower than we thought before the crisis it was going to be
• Most of the difference reflects a sharp downward revision to potential growth, not
cyclical conditions
• Consequence: theories/policy prescriptions based on examining fluctuations/volatility
around trend are rendered useless
37
Competing explanations: slowing productivity
Sources: Robert Gordon, “The turtle’s progress’, in C. Teulings & R.
Baldwin (eds.) Secular Stagnation: Facts, Causes and Consequences,
VoxEU.org & CEPR, 2014
Sources: Edward Glaeser, “Secular joblessness’, in C. Teulings & R.
Baldwin (eds.) Secular Stagnation: Facts, Causes and Consequences,
VoxEU.org & CEPR, 2014
 Innovations of the past (electricity, internal combustion engine, indoor plumbing) were more effective in
boosting productivity and enhancing living standards that the present internet revolution
 Failure to invest in infrastructure, education and training
 We have completed the achievable increase in education levels
38
Competing explanations: negative equilibrium real rates
Implications of demographic change for required stock of savings
Sources: C. Teulings & R. Baldwin (eds.) Secular Stagnation: Facts, Causes
and Consequences, VoxEU.org & CEPR, 2014
Sources: Mervyn King, “Measuring the World Interest Rate”; Larry
Summers, “Reflections on the ‘New Secular Stagnation Hypothesis’,
in C. Teulings & R. Baldwin (eds.) Secular Stagnation: Facts,
Causes and Consequences, VoxEU.org & CEPR, 2014
 Full employment equilibrium real interest rate is now negative
 But we are constrained by the ZLB (zero lower bound)
 Why has the real interest rate might have moved lower?
 Higher savings due to demographic factors, balance sheet recession, rising inequality
 Lower investment due to shift to less capital intensive sectors (IT) and lower population growth
 We might have to choose between output growth and financial instability
 Ultra-low interest rates needed on a semi-permanent basis will induce bubbles
39
Demographic challenge: employment growth to collapse
Age distribution, G-19 and Nigeria
Compound annual growth, G-19 and Nigeria
Source: McKinsey Global Institute, “Global Growth: Can Productivity Save the Day in an Aging World?”, 2015
 Employment expanded rapidly between 1964 and 2014 (1.7% CAGR)
 Population growth quickened (from 1.2% to 1.4% per year)
 Rising share of working age cohorts in the population (from 58% to 68%)
 But these factors will reverse in coming decades to produce much lower employment growth (0.3%)
due to aging of the population
 Population growth to slow down to abut 0.4%
 Working age cohorts share to decline modestly (from 68% to 61%)
 Even under favorable propensity to be employed assumptions, employment growth to decline dramatically
 Global number of employees to peak around 2050
40
With unchanged productivity trends, much lower prosperity awaits
GDP and GDP p.c. At past productivity growth rates, G-19 and Nigeria
Source: McKinsey Global Institute, “Global Growth: Can Productivity Save
the Day in an Aging World?”, 2015
 Even if comparatively high productivity levels of
the recent past were sustained, prosperity to
decline dramatically
 GDP growth to drop about 40%
 GDP per capita to drop about 19%
41
Is a productivity enhancement possible? Some examples
World Bank’s Ease of Doing Business Index
Sectors with potential productivity gains, G-19 and Nigeria
Source: McKinsey Global Institute, “Global Growth: Can
Productivity Save the Day in an Aging World?”, 2015
Source: J. Jimeno, F. Smets & Y. Yiangou, “Secular stagnation: a view from the
Eurozone’, in C. Teulings & R. Baldwin (eds.) Secular Stagnation: Facts, Causes and
Consequences, VoxEU.org & CEPR, 2014
 Potential productivity gains in selected sectors
 Productivity could be raised up to 4%
 “Soft” structural reforms linked to business environment
 Broad package of labor, tax, product and pension reforms could raise GDP p.c. after 10 years by 11% in
EU, 5% in US
Current account, competitiveness and corporate margins:
Competitiveness adjustments continue . . . More to come




The peripheral countries still maintain the competitiveness gains achieved in recent years and are likely to continue
doing so in coming quarters. This is the case for Greece, Portugal and Ireland . In Spain, the decline in salaries and unit
labour costs continues and is significant when analysed at a global level (versus the 37 most-industrialised countries). In
the manufacturing sector, Spain is making solid gains in competitiveness.
We would highlight the adjustment in Italy’s nominal compensation per employee, which is falling quite significantly in
relative terms. However, this is negatively offset by poor productivity, which means the relative performance of ULCs is
still weak.
France is still not experiencing any significant adjustment in relative terms versus the other economies,
In Germany salaries and ULCs are rising in relative terms.
42
Current account, competitiveness and corporate margins:
No improvement yet in France and Italy




We calculate the GOS (Gross Operating Surplus) as a percentage of the GVA (Gross Value Added) as a proxy of
corporate margins.
Spain is well ahead of the rest of the largest economies in terms of margin recovery, courtesy of the big
adjustments in the labour market and the flexibility introduced by the government’s reforms. With the recovery of
the labour market, margins seem to be stabilising.
Germany seems to be settling at around the 41% level, after having reached more than 45% at the peak, and has
started transferring part of these gains in margins to salaries per employee.
Finally, we have not yet seen any significant improvement in margins in France and Italy. In fact, they seem to be
deteriorating (or stabilising at best) again in 2014E. We think labour reforms are a pre-condition for margins to
improve in both countries. Until then, the current situation is unlikely to change.
43
44
Deflation fears abating
45
Inflation:
Core inflation is much more stable
Euro zone - Core CPI and EC survey, 2005-Sep14
Spain - HICP at Constant Taxes, 2013-Sep14
50.0
2.1
Oils & Fats
Fruit
Wine
Liquid Fuels
Fuels & Lubes. for Personal Transp.Equip.
Eqp. Reception,Recrdg.& Reprod of Sound
Photo.& Cinem. Equip & Optical Inst.
Information Processing Equipment
Recording Media
Games Toys & Hobbies
Equip. for Sport Camping & Open Air Rec.
Jewellery, Clocks & Watches
115
1.9
40.0
1.7
105
30.0
(% YoY)
1.3
(% YoY)
1.5
95
20.0
10.0
1.1
85
0.0
0.9
75
Economic Sentiment (lagged 12m)
-10.0
0.7
Core inflation (RHS)
65
2005
0.5
2006
2007
2008
2009
2010
2011
Source: Eurostat, European Commission and Santander GBM.
2012
2013
2014
2015
-20.0
Jan13
Apr13
Jul13
Oct13
Jan14
Apr14
Jul14
Source: Eurostat and Santander.

After falling sharply in 2013, Euro zone core inflation has stabilized at around 0.8% YoY in 2014. Risks are biased to
the downside, due to disappointing GDP figures (stagnant in 2Q14) and deteriorating confidence surveys in 3Q14 (in
our view, this is mainly related to the trend in exports). We believe that a large part of the deterioration in growth is
caused by temporary factors, so we remain confident about a return to growth in the second half of the year and a
strengthening in 2015. This would underpin a gradual rise in core inflation, in particular in non-energy industrial goods.

The breakdown of harmonized CPI at constant taxes (to avoid the distortion of indirect taxation on final prices) helps
us identify the components that have been driving inflation lower in recent months, linked to the performance of oil
and food prices. 27% of the CPI basket posted a negative annual rate in September 2014, although here there were
significant divergences between countries. The lowest number is in Germany, with 20% of the total CPI basket in
negative territory, followed by France (38%), Italy (40%) and Spain (47%).
Inflation:
Inflation forecasts

We have significantly reduced our estimates for inflation in the Euro zone and the biggest member states in
2014E and 2015E since our last strategy report in June this year (from 0.9% for 2014E and 1.7% in 2015E in our
last report in June).

The main reasons for this are the strong euro exchange rate, oil prices and unprocessed food prices on the
downside, along with the limited impact on final prices of the last VAT hikes (in France and Italy) due to weak
domestic demand. We have also cut our forecast for Euro zone GDP, mainly due to the disappointing performance
in Germany and Italy. As shown below, we expect Euro zone inflation to be contained in 2016E and to stay below
the ECB’s threshold of 2.0% YoY. Germany is likely to have the highest inflation rate, but should not be a great
cause of concern for the ECB. We see risks for inflation biased to the downside and think it will remain very
dependent on the direction of oil prices.
46
47
Inflation: Deconstructing the final demand deflator

Import prices negative contribution and euro positive one more relevant now.

Germany: Moderate ULC (wage growth partly offset by productivity gains), increase in GOS.

France: Recovery in GOS.

Italy: the least affected by import prices

Spain: import prices and the euro are significant elements.
Why worry about ”lowflation”/”deflation”?
Real interest rates and debt as % of GDP
48
Spain: Nominal and real wage adjustment
Sources: IMF
•
Debt deflation channel: it makes debt more difficult to be repaid
•
•
Erodes competitiveness: It partly offsets the impact on real wages of a nominal wage adjustment
•
•
An issue for the most indebted countries/sectors
Given inertia in wage-setting, it makes the burden of adjustment fall more on the quantity space (unemployment)
and less on prices (real wages)
Inhibits spending: consumers, investors postpone spending decisions waiting for lower prices
49
Taking stock of structural reforms:
Calibrating the impact of reforms
period Germany France
Market competition Service sector markups
1996-2007
14.0
16.0
& regulation
Entry costs
2012
4.6
0.9
Tax reform
Implicit consumption rate
2011
20.1
19.9
Implicit labour tax rate
2011
37.1
38.6
Skill enhancing
Share of high skilled workers
2011
7.9
7.1
reforms
Tertiary education expense as % GDP
2011-12
1.3
1.3
Share of low skilled workers
2011
14.8
27.1
Secondary education as % GDP
2011-12
2.5
2.7
Labour market
Female non-participation (25-59y):
2011-12
reforms
- low skilled
2011-12
29.0
22.1
- medium skilled
2011-12
14.7
13.5
- high skilled
2011-12
9.1
8.5
Pre-school expenditure as % GDP
2011-12
0.6
0.7
Low-skilled male non-participation (25-59y) 2011-12
16.7
13.8
Pension related non-participation (60-64y): 2011-12
- low skilled
2011-12
5.2
15.8
- medium skilled
2011-12
3.5
8.9
- high skilled
2011-12
2.2
4.6
ALMP % GDP
2010
0.9
1.1
Benefit replacement rate
2010
61.5
58.4
R&D
R&D tax credit rates
2008-09
0.0
0.4
Source: European Commission
Germany and Italy - Breakdown of Potential GDP Effects from Reforms
Average 3 best
Italy
Spain Ireland Portugal Greece EU performers
14.0
23.0
12.0
23.0
34.0
13.3
18.2
4.7
0.4
2.3
20.1
0.1
17.4
14.0
22.1
18.0
16.3
28.6
42.3
33.2
28.0
25.5
30.9
n.a.
3.4
9.0
7.9
3.3
6.0
9.7
0.9
1.1
1.5
1.1
1.2
2.2
42.2
45.5
25.3
62.3
34.0
8.0
2.2
1.9
2.6
2.6
2.4
3.1
46.4
25.2
15.7
0.5
18.0
34.8
19.3
11.2
0.7
14.4
40.0
25.3
12.7
0.1
22.4
26.2
10.2
8.3
0.6
12.8
42.3
30.5
13.9
0.6
10.4
25.0
12.1
6.4
1.1
11.3
6.9
2.8
2.1
0.4
9.1
0.1
2.1
0.7
0.7
0.8
47.7
0.4
6.2
2.0
1.3
0.9
82.5
0.1
3.5
1.1
1.3
0.7
58.8
0.3
7.1
2.9
2.7
0.2
24.7
0.0
2.6
1.0
0.7
1.5
55.7
0.4
25
R&D promoting policies
20
Labour market reforms
Skill-enhancing measures
Tax reforms
(GDP, % dev iation from baseline)
Euro Zone- Structural Indicators
15
Product market reforms
10
5
0
-5
Germany 5y
Germany 10y
Germany long
run
Italy 5y
Italy 10y
Italy long run
Source: European Commission

Euro zone countries (notably, but not exclusively, those in the periphery) have scope for structural reforms in many fields:
product market regulation and competition, professional services (where entry barriers and protection from competition lead
to abnormally high returns and inefficiencies), credit markets (addressed elsewhere in this report), R&D and the digital
economy, tax shifts away from labour income and into consumption and, critically, changes to the labour market.

Closing the gap with the best performing countries can lead to large potential gains in output and employment, and the
results would be even more significant if the countries were to act together on reform. The European Commission has
estimated that the reforms would boost GDP between 2.6% and 14.8% after 10 years, with the largest contribution coming
from labour market reforms that increase participation. A strand of academic discussion has argued reforms could be
counter-productive in the short term if monetary policy is constrained at the zero lower bound, but analytical work by the
European Commission finds no support for such claim.
Taking stock of structural reforms:
Germany, still some pending issues to be addressed
50
Taking stock of structural reforms:
France, a challenging path ahead & hard-to-forge consensus
51
Taking stock of structural reforms:
Italy: Reform agenda gradually implemented, but more is needed
Germany, France, Italy, Spain, UK - Female Labour Market Participation Rates, 2013
85
Gross Operating Rates in Professional Services, 2011
Administrative and support services
75
Germany
France
Spain
UK
Average of 5 EU lowest
Portugal
Engineering
Spain
Italy
(participation rate, %)
Italy
Management consultancy
65
Other professional services
55
Accounting
45
Architectural
35
Legal
0
25
20-24
25-54
(Age range, years)
10
Source: Eurostat, and European Commission
Source: Eurostat
20
30
40
50
60
(Gross operating surplus as a % of turnover)
55-64
70
80
52
Taking stock of structural reforms:
Spain, a resounding success but more needs to be done
53
Emerging markets:
Slower growth, less trade and the global value chain
54
Emerging markets:
Capital (out) flows

Net capital outflows from 15 largest emerging markets rose to $600.1bn in the 3Q14-1Q15, which is even
higher than the 545.2bn outflows in 2Q08-1Q09.
- Unwinding
of carry trades
- Growth decay

However, that pales compared to the $2.2tn capital inflows from July 2009 to June 2014.

Plunge in foreign exchange reserves. FX reserves declined by $374.4bn in 1Q15
- Defending the local currencies against USD appreciation
- Slower export growth
55
56
Emerging markets:
Increasingly pivotal role of China
South Korea - Export destinations market shares, 1982-Apr 2014
Brazil - Export destinations market shares, 1982-Apr 2014
50%
35%
China
40%
USA
30%
25%
20%
15%
10%
China
U.S.A.
25%
20%
15%
10%
5%
5%
0%
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0%
Source: IMF, Bloomberg, Santander
Source: IMF, Bloomberg, Santander
South Africa - Export destinations market shares, 1982-Apr 2014
Germany - Export destinations market shares, 1982-Apr 2014
14%
China
30%
U.S.A.
25%
20%
15%
10%
5%
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0%
Source: IMF, Bloomberg, Santander
12%
China
U.S.A.
10%
8%
6%
4%
2%
0%
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
35%
(% exports market share, 12-month moving average)
(% export sahre, 12-month moving average)
40%

30%
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
(% export share, 12-month moving average)
35%
(% export sahre, 12-month moving average)
45%
Source: IMF, Bloomberg, Santander
While it might sound like a platitude to state the increasingly important role of China in the global economy, a few numbers
(such as those shown in the charts) help to illustrate the pivotal role that China has come to play in global demand, and
its rising importance as an export destination not only for most other emerging markets –particularly those in Asia and
commodity exporters in Asia and Latin America- but also for advanced economies, as well as an equally key supplier of
imports to those countries. China has quickly surpassed the US (or is about to surpass it) as an export trading partner,
highlighting the importance of economic conditions in China for the global economic cycle. China remains somewhat more
opaque than other large economic blocs such as the US, Japan or Western Europe, so in a way it is harder to ascertain
what exactly is going on at a particular point in time and to monitor developments as accurately as in other countries. An
unexpected change in China’s economic conditions (either to the upside or to the downside) can easily catch the world
off-guard.
Emerging markets:
Don’t lose sight of the big picture
57
58
Economic projections
Economic projections
•
•
•
•
•
•
•
Eurozone
Germany
France
Italy
Spain
UK
US
59
Summary of economic projections
Euro zone: Euro zone GDP: 1.6% in 2015E and 2.0% in 2016E
After the release of 1Q15 numbers, we have introduced a modest revision to our 2015E GDP estimates, revising GDP growth downwards to 1.6% from 1.7% previously. At
the same time, we maintain our estimates on 2016E at 2.0% and the main views on the recovery process and the composition of GDP growth. We expect internal demand to be
the main driver of GDP growth this year and next, with private consumption going up by 1.8%, public consumption increasing 1.2% and investments also moving up by a
relatively string 1.9%. On the contrary, the external sector should trim 0.2pp of GDP growth this year and adding 0.2pp next. Despite that the depreciation of the Euro is
helping exports to have a good performance, the stronger growth rates forecasted for internal demand are also pushing imports growth rates higher. The problem with exports
would come more from the weakness of internal demand in the destination countries rather than by a loss of competitiveness of Euro zone. Regarding prices, we expect modest
growth rates in inflation this year and next. Unemployment will keep falling, like the budget deficit, while the CA surplus would remain.
Euro Zone GDP historical and forecast figures, 2012-2016E
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15E
2Q15E
3Q15E
4Q15E
0.2
0.3
0.3
0.1
0.2
0.3
0.4
0.7
0.5
0.5
2012
2013
2014
2015E
2016E
QoQ a
0.7
1.1
1.1
0.3
0.7
1.3
1.6
2.7
1.8
2.1
YoY
-0.2
0.4
1.1
0.8
0.8
0.9
1.0
1.6
1.9
2.0
-0.7
-0.4
0.9
1.6
2.0
Private Consumption QoQ
-1.3
-0.6
1.0
1.8
1.6
-0.1
0.2
0.7
1.2
0.9
-3.5
-2.3
1.0
1.9
3.1
-0.7
-0.1
-0.1
0.2
0.1
2.7
2.2
3.7
3.8
5.1
-0.9
1.4
3.8
4.8
5.0
1.5
0.4
0.1
-0.2
0.2
2.5
1.4
0.4
0.2
1.6
Unemployment rate
10.2
11.9
11.6
10.8
10.2
Budget deficit (a)
-3.7
-2.9
-2.6
-2.1
-1.6
Current account (a)
1.3
2.4
2.3
2.4
2.4
Real GDP
QoQ
0.2
0.1
0.2
0.2
0.5
0.4
0.5
0.4
0.4
0.4
QoQ a
0.6
0.6
0.9
1.0
2.0
1.8
2.1
1.8
1.5
1.7
YoY
-0.4
0.2
0.7
0.8
1.1
1.4
1.7
1.9
1.8
1.8
Public Consumption QoQ
0.2
0.0
0.2
0.2
0.2
0.2
0.6
0.3
0.2
0.2
QoQ a
0.7
0.2
0.9
0.6
1.0
0.7
2.4
1.0
0.8
0.8
YoY
0.4
0.5
0.6
0.6
0.7
0.8
1.2
1.3
1.2
1.3
QoQ
0.7
0.5
0.4
-0.5
0.0
0.4
1.0
0.4
0.7
0.6
QoQ a
2.7
2.0
1.8
-2.1
0.0
1.6
4.0
1.5
2.7
2.3
YoY
-1.3
-0.4
2.3
1.1
0.4
0.3
0.8
1.8
2.5
2.6
Euros bn
-0.7
-4.3
-3.0
-3.6
-6.7
-12.1
-9.0
1.9
2.2
2.6
Cont GDP
0.3
-0.1
0.1
0.0
-0.1
-0.2
0.1
0.4
0.0
0.0
QoQ
0.6
0.8
0.4
1.3
1.5
0.8
0.7
0.6
1.2
1.5
QoQ a
2.5
3.1
1.7
5.3
6.0
3.3
2.8
2.3
4.7
6.2
YoY
1.9
3.5
3.6
3.1
4.0
4.1
4.4
3.6
3.3
4.0
QoQ
1.5
0.2
0.5
1.3
1.7
0.4
1.6
1.0
1.1
1.4
QoQ a
6.2
1.0
2.2
5.5
6.9
1.7
6.5
4.1
4.6
5.6
YoY
2.3
3.2
3.6
3.7
3.9
4.1
5.1
4.8
4.2
5.2
Euros bn
-7.8
5.6
-0.8
0.9
-0.5
4.8
-8.2
-3.9
1.5
3.0
Cont GDP
-0.3
0.2
0.0
0.0
0.0
0.2
-0.3
-0.2
0.1
0.1
(56.0% of GDP)
(21.4% of GDP)
Total Investment
(17.8% of GDP)
Inventories
Exports
(46.4% of GDP)
Imports
(41.5% of GDP)
Net external sector
CPI (HICP)
Source:Datastream, Eurostat and Santander estimates. (a) as a % of GDP. Cont GDP: contribution to QoQ GDP grow th
Germany: German GDP: 2.0% in 2015E and 2.5% in 2016E
Germany still remains as one of our preferred economies in the Euro area. Despite that we have revised downwards our estimates for 2015E GDP growth, on the back of
weaker than expected performance (0.3% QoQ) of the economy in 1Q15, we believe that fundamentals are strong and would push GDP growth to 2.0% this year and 2.5%
next. Growth in 1Q15 has been in our view misleading, since the headline performance does not reflect the real strength of the breakdown. Internal demand is accelerating its
growth rates, with domestic final sales up by 0.8% QoQ in 1Q15 and private domestic final sales growing by 0.9% QoQ in the same quarter. Weakness in the 1Q15 came from
negative contributions of net exports and inventories. We expect a rebound in 2Q15E GDP growth and relatively strong growth rates during the rest of the year. Fundamentals
for private consumption and investments are still quiet strong and numbers are finally reflecting that, while public consumption should also accelerate this year and next.
Inflation should move towards 2.0% next year while the unemployment rate could probably decline again.
Germany – GDP, 2012-2016E
Real GDP
Private Consumption
(55.7% of GDP)
Public Consumption
(18.8% of GDP)
Capital Investment
(6.7% of GDP)
Construction Inv.
(9.8% of GDP)
Inventories
Exports
(46.9% of GDP)
Imports
(40.1% of GDP)
Net external sector
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15E
3Q15E
4Q15E
QoQ
0.3
0.5
0.8
-0.1
0.1
0.7
0.3
1.0
0.6
0.7
QoQ a
1.2
1.8
3.1
-0.3
0.3
2.8
1.1
4.1
2.3
2.6
YoY
0.3
1.1
2.3
1.4
1.2
1.5
1.0
2.1
2.6
2.5
QoQ
0.6
-0.8
0.8
0.0
0.7
0.7
0.6
0.6
0.5
0.5
QoQ a
2.3
-3.0
3.2
0.1
2.8
2.8
2.4
2.5
1.8
2.0
YoY
1.5
0.7
1.4
0.6
0.7
2.2
2.0
2.7
2.4
2.2
QoQ
0.6
-0.1
0.0
0.7
0.6
0.3
0.7
0.4
0.4
0.5
QoQ a
2.4
-0.4
0.0
3.0
2.4
1.3
2.7
1.6
1.4
1.8
YoY
1.0
0.5
0.5
1.2
1.2
1.7
2.4
2.0
1.8
1.9
QoQ
-0.6
2.6
2.0
0.6
-1.4
0.4
1.5
2.4
1.0
1.5
QoQ a
-2.4
10.9
8.2
2.5
-5.3
1.6
6.2
9.7
3.9
5.9
YoY
-0.9
0.6
7.0
4.7
3.9
1.6
1.1
2.9
5.3
6.4
QoQ
1.8
0.7
4.5
-3.7
-1.5
1.3
1.7
0.4
1.0
0.6
QoQ a
7.4
2.9
19.3
-14.1
-6.0
5.5
7.0
1.6
4.1
2.4
YoY
1.3
2.7
10.4
3.2
-0.2
0.4
-2.3
1.9
4.5
3.7
Euros bn
-10.5
-9.9
-11.2
-11.9
-15.3
-12.6
-14.6
-13.1
-11.2
-11.0
Cont GDP
0.3
0.1
-0.2
-0.1
-0.5
0.4
-0.3
0.2
0.3
0.0
QoQ
0.3
1.8
0.1
1.0
1.5
1.0
0.8
1.5
1.0
1.8
QoQ a
1.3
7.4
0.2
4.0
6.0
4.1
3.2
6.1
4.1
7.4
YoY
0.6
4.5
3.6
3.2
4.4
3.5
4.3
4.8
4.4
5.2
QoQ
1.8
0.7
0.2
0.7
0.8
1.9
1.5
1.5
1.7
1.8
QoQ a
7.4
2.6
0.8
3.0
3.2
7.6
6.0
6.3
6.8
7.4
YoY
4.5
5.0
4.2
3.4
2.4
3.6
4.9
5.8
6.7
6.6
Euros bn
40.9
44.8
44
45.6
48.0
46.2
45
45
43.8
44.6
Cont GDP
-0.6
0.6
-0.1
0.2
0.4
-0.3
-0.2
0.1
-0.2
0.1
2012
2013
2014
2015E 2016E
0.6
0.2
1.6
2.0
2.5
0.6
0.9
1.2
2.3
2.0
1.2
0.7
1.2
2.0
1.6
-2.3
-2.1
4.3
3.9
5.5
1.6
0.1
3.4
2.0
3.5
-1.4
0.1
-0.2
0.0
0.2
3.5
1.8
3.7
4.7
5.8
0.4
3.2
3.4
6.0
6.6
1.4
-0.5
0.3
-0.2
0.0
CPI
2.0
1.5
0.9
0.7
2.1
Unemployment rate
6.8
6.7
6.7
6.4
6.3
Budget deficit (a)
0.1
0.1
0.3
0.0
0.0
Current account (a)
7.2
7.3
7.2
6.9
6.7
(a) as a % of GDP. Cont GDP: contribution to QoQ GDP grow th. Source: Datastream, Deutsche Bundesbank, Santander Estimates.
France: French GDP: 1.2% in 2015E and 1.5% in 2016E
The French economy surprised on the upside in 1Q15, after growing by 0.55% QoQ (the strongest growth rate since 2Q13). The annual growth rate accelerated to 0.7%. 1Q15
GDP growth was slightly better than what we expected (0.4% QoQ) so we have not had to introduce any significant change in our annual estimates for GDP growth. We have
revised upwards to 1.2% from 1.1% our 2015E GDP growth estimate, while maintaining 2016E estimates at 1.5%. The downward revision introduced to 2014 numbers also
helps to explain this change in our forecasts. Despite this upward revision, economic fundamentals are still not string enough to justify much higher growth rates in the short
run. The composition of GDP growth is still quite biased to private consumption and public consumption, with investments still suffering. 1Q15 GDP growth was also helped
by an accumulation of inventories, while net exports trimmed 0.5pp of GDP growth. Excluding inventories, growth in 2015E could be limited to just 0.7%, while private
domestic final sales would go up by 0.9% this year. We are still expecting the impact on growth. of the reforms already approved.
France – GDP, 2012-2016E
Real GDP
Private Consumption
(53.1% of GDP)
Public Consumption
(24.5% of GDP)
Investment Total
(21.5% of GDP)
Capital Investment
(12.1% of GDP)
Inventories
Exports
(28.8% of GDP)
Imports
(30.6% of GDP)
Net external sector
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15E
3Q15E
4Q15E
QoQ
-0.1
0.2
-0.2
-0.1
0.2
0.0
0.6
0.4
0.3
0.4
QoQ a
-0.5
0.8
-0.6
-0.3
0.8
0.1
2.2
1.6
1.2
1.4
YoY
0.8
1.0
0.7
-0.2
0.2
0.0
0.7
1.2
1.3
1.6
QoQ
0.0
0.5
-0.4
0.5
0.3
0.1
0.8
0.2
0.3
0.3
QoQ a
-0.2
2.2
-1.6
1.8
1.3
0.6
3.2
0.8
1.0
1.2
YoY
0.4
1.1
0.4
0.6
0.9
0.5
1.7
1.5
1.4
1.6
QoQ
0.3
0.4
0.3
0.4
0.5
0.5
0.4
0.3
0.4
0.2
QoQ a
1.2
1.6
1.1
1.6
1.9
1.9
1.7
1.2
1.4
0.8
YoY
1.7
1.8
1.6
1.4
1.5
1.6
1.8
1.7
1.5
1.3
QoQ
0.1
0.1
-0.6
-0.6
-0.5
-0.4
-0.2
0.1
0.3
0.2
QoQ a
0.3
0.5
-2.4
-2.5
-1.9
-1.5
-0.8
0.5
1.2
1.0
YoY
-0.3
0.2
0.0
-1.0
-1.6
-2.1
-1.7
-0.9
-0.2
0.5
QoQ
0.8
1.5
0.0
0.2
0.2
-0.1
0.2
0.4
0.6
0.5
QoQ a
3.3
6.2
0.0
0.8
0.7
-0.6
0.7
1.6
2.4
2.0
YoY
1.1
2.9
3.3
2.6
1.9
0.2
0.4
0.6
1.0
1.7
14.6
12.7
13.8
13.4
15.0
13.4
16.2
15.9
17.0
17.8
Cont GDP
0.5
-0.4
0.2
-0.1
0.3
-0.3
0.5
-0.1
0.2
0.2
QoQ
-1.2
0.9
0.5
0.2
0.9
2.5
0.9
1.2
0.8
1.3
QoQ a
-4.8
3.6
1.9
0.8
3.5
10.3
3.5
4.7
3.0
5.3
YoY
1.2
2.3
2.8
0.3
2.4
4.0
4.5
5.4
5.3
4.1
QoQ
1.1
0.3
0.7
0.9
1.8
1.5
2.3
0.3
1.3
1.4
QoQ a
4.3
1.2
2.9
3.7
7.2
6.3
9.5
1.2
5.3
5.7
YoY
2.2
3.4
4.0
3.0
3.7
5.0
6.7
6.0
5.5
5.4
Euros bn
-8.5
-7.7
-8
-9.2
-10.7
-9.5
-12
-11
-11.6
-11.9
Cont GDP
-0.7
0.2
-0.1
-0.2
-0.3
0.2
-0.5
0.2
-0.2
-0.1
Euros bn
2012
2013
2014
2015E 2016E
0.2
0.7
0.2
1.2
1.5
-0.2
0.5
0.6
1.5
1.1
1.6
1.7
1.5
1.6
1.0
0.3
-0.4
-1.2
-0.6
1.9
-0.1
0.8
2.0
0.9
2.8
-0.6
0.2
0.2
0.5
0.2
2.6
1.8
2.4
4.8
4.5
0.8
1.8
3.9
5.9
3.9
-0.7
0.5
0.0
-0.5
-0.4
CPI
2.0
0.9
0.5
0.2
1.1
Unemployment rate
9.8
10.3
10.3
10.4
10.1
Budget deficit (a)
-4.9
-4.1
-4.4
-4.5
-4.0
Current account (a)
-2.1
-1.4
-1.3
-1.0
-1.1
(a) as a % of GDP. Cont GDP: contribution to QoQ GDP grow th. Source: INSEE, Datastream and Santander Estimates.
Italy: Italian GDP: 0.7% in 2015E and 1.2% in 2016E
The Italian economy confirmed the recovery process in which is immersed in 1Q15 numbers. After having been in recession since 2011, the economy grew by 0.3% QoQ in
1Q15. Despite this positive growth rate seen in the first quarter of the year, the breakdown of 1Q numbers is not as good as what the headline could suggest. Private
consumption is still very weak and not likely to improve substantially during the rest of the year, despite that it should be positive, in our view. The performance of
investments in 1Q was positive, but mainly thanks to the fantastic performance of transport goods (28.7% QoQ) which in our view is not sustainable in coming quarters. The
external sector had a negative contribution to growth rates due to the lack of traction in exports and a rebound in imports. Finally, there was an accumulation in inventories. In
summary, the economy is moving forward, it is improving but there is still a lot to do before having high quality numbers in the GDP breakdown. We maintain our growth
estimates for this year and next and believe that reforms will have a positive impact on GDP growth in coming years.
Italy – GDP, 2012-2016E
Real GDP
Private Consumption
(58.4% of GDP)
Public Consumption
(21.1% of GDP)
Investment
(17.1% of GDP)
Inventories
Exports
(30.4% of GDP)
Imports
(26.7% of GDP)
Net external sector
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15E
3Q15E
4Q15E
0.1
0.0
-0.2
-0.2
-0.1
0.0
0.3
0.4
0.3
0.4
QoQ a
0.3
-0.1
-0.6
-0.7
-0.6
-0.1
1.3
1.4
1.0
1.4
YoY
-1.4
-0.9
-0.1
-0.3
-0.5
-0.5
0.0
0.5
0.9
1.3
QoQ
0.1
0.1
0.2
0.1
0.2
0.1
-0.1
0.2
0.2
0.1
QoQ a
0.5
0.2
0.6
0.5
0.6
0.5
-0.5
0.8
0.6
0.5
YoY
-2.5
-1.7
-0.1
0.5
0.5
0.5
0.3
0.4
0.4
0.4
QoQ
-1.0
0.0
-0.3
-0.6
0.2
0.4
0.1
0.0
-0.1
0.0
QoQ a
-3.8
0.1
-1.2
-2.3
0.7
1.6
0.2
0.0
-0.2
0.0
YoY
-0.9
0.0
-1.0
-1.8
-0.7
-0.3
0.0
0.6
0.4
0.0
QoQ
0.2
-0.8
-2.1
-0.6
-0.7
0.2
1.5
-1.2
0.5
0.3
QoQ a
0.8
-3.1
-8.1
-2.3
-2.7
0.8
6.1
-4.9
2.1
1.4
YoY
-4.1
-3.8
-2.4
-3.2
-4.1
-3.1
0.4
-0.2
0.9
1.1
Euros mn
92
435
463
55
-189
-2463
-550
-605
-3090
-3293
Cont GDP
0.4
0.1
0.0
-0.1
-0.1
-0.6
0.5
0.0
-0.6
-0.1
QoQ
1.3
-0.3
0.3
1.3
0.4
1.8
0.0
1.9
1.3
1.5
QoQ a
5.4
-1.4
1.3
5.2
1.5
7.3
0.1
7.8
5.1
6.1
YoY
0.0
1.1
1.4
2.6
1.6
3.8
3.5
4.1
5.0
4.7
QoQ
2.2
-0.3
-0.3
1.2
0.8
0.5
1.4
0.4
-1.3
0.7
QoQ a
9.3
-1.1
-1.2
4.8
3.1
1.9
5.7
1.6
-5.1
2.8
YoY
-1.5
0.8
0.4
2.8
1.3
2.1
3.8
3.1
0.9
1.2
Euros mn
-739
-103
662
246
-331
1502
-1381
1760
2792
1057
Cont GDP
-0.2
0.0
0.2
0.1
-0.1
0.4
-0.4
0.5
0.7
0.3
QoQ
CPI (HICP)
2012
2013
2014 2015E 2016E
-2.8
-1.7
-0.4
0.7
1.2
-4.0
-2.8
0.3
0.3
0.6
-1.2
-0.3
-1.0
0.3
0.2
-9.4
-5.8
-3.2
0.6
1.2
-1.1
0.3
-0.1
-0.3
-0.2
2.0
0.7
2.4
4.3
4.6
-8.3
-2.2
1.7
2.3
2.3
2.9
0.8
0.2
0.7
0.8
3.0
1.2
0.2
0.1
1.1
Unemployment rate
10.7
12.2
12.7
12.7
12.2
Budget deficit (a)
-3.0
-2.8
-3.0
-2.7
-2.1
Current account (a)
-0.5
1.0
1.8
1.9
2.0
(a) as a % of GDP. Cont GDP: contribution to QoQ GDP grow th. Source: Bloomberg, Datastream, Santander estimates
Spain: Spanish GDP: 1.4% in 2014; 3.0% in 2015E and 3.0% in 2016E
We maintain our forecasts for the Spanish economic growth this year and next. We believe the economy is likely to grow by 3.0% in both years and could actually maintain
those growth rates going forward. In our view, fundamentals are strengthening and risks are progressively coming down. The composition of GDP growth is also changing and
getting more stable than in the past. The first phase of the economic recovery is already behind us and growth is progressively being explained more and more by internal
demand instead that by just the external sector. Private consumption would grow around 3.0% this year and next, with households income fundamentals improving, thanks to
the recovery in employment, healthier balance sheets and tax cuts. The improvement in consumer confidence, together with the pent up demand generated during the recession
years, is also driving consumption upwards. Investments also show a very good performance, thanks to the strong recovery in business activity and the need of increasing
progressively and, modestly in the short run, capacity in some sectors.
Spain – GDP, 3Q13-2016E
2012
2013
-2.1
-1.2
1.4
3.0
3.0
-3.0
-2.3
2.4
3.2
3.0
-3.7
-2.9
0.1
0.8
0.1
-8.3
-3.7
3.4
5.1
5.8
-9.0
5.8
12.3
8.1
8.4
-9.3
-9.2
-1.4
4.6
4.1
-0.1
0.0
0.1
0.0
0.0
1.2
4.3
4.2
6.2
7.0
-6.3
-0.5
7.7
6.9
7.0
2.3
1.4
-0.8
0.0
0.1
2.4
1.4
-0.2
-0.5
1.0
Unemployment rate
24.8
26.1
24.4
22.0
19.9
Public Budget (a)
-6.6
-6.3
-5.7
-4.0
-2.6
Current account (a)
-0.4
1.5
0.5
0.7
1.0
Real GDP
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15E
3Q15E
4Q15E
0.1
0.3
0.3
0.5
0.5
0.7
0.9
0.8
0.8
0.8
QoQ a
0.5
1.1
1.2
2.1
2.1
2.7
3.8
3.1
3.2
3.0
YoY
-1.0
0.0
0.6
1.2
1.6
2.0
2.7
2.9
3.2
3.3
0.4
0.4
0.6
1.0
0.8
0.9
0.7
0.8
0.7
0.7
QoQ
Private Consumption QoQ
(54.9% of GDP)
Public Consumption
(19.7% of GDP)
Total Investment
(20.3% of GDP)
Capital Goods
(6.8% of GDP)
Construction
(10.6% of GDP)
QoQ a
1.5
1.4
2.4
4.0
3.2
3.8
2.7
3.1
2.9
3.0
YoY
-2.2
-0.1
1.3
2.3
2.8
3.4
3.5
3.2
3.1
2.9
QoQ
-0.2
-0.1
1.0
-0.4
-0.1
-1.0
1.6
0.1
0.0
0.1
QoQ a
-0.7
-0.5
4.0
-1.5
-0.5
-3.9
6.5
0.4
0.0
0.4
YoY
-2.4
-1.1
0.3
0.3
0.3
-0.5
0.1
0.6
0.7
1.8
QoQ
1.2
0.2
0.4
2.0
1.1
1.4
1.3
0.9
1.3
1.3
QoQ a
5.0
0.7
1.8
8.4
4.7
5.7
5.1
3.8
5.1
5.3
YoY
-2.6
-0.5
0.8
3.9
3.9
5.1
6.0
4.8
4.9
4.8
QoQ
4.7
1.7
2.3
3.6
2.2
1.9
1.4
2.1
2.2
1.5
QoQ a
20.3
7.0
9.4
15.1
9.3
7.6
5.7
8.8
9.2
6.2
YoY
11.4
14.7
15.8
12.9
10.2
10.3
9.4
7.8
7.8
7.5
QoQ
-0.3
-0.9
-0.9
1.3
0.5
1.4
1.5
1.0
0.7
0.8
QoQ a
-1.0
-3.5
-3.5
5.3
2.2
5.8
6.2
4.1
2.8
3.2
YoY
-9.7
-8.3
-7.4
-0.7
0.1
2.4
4.9
4.6
4.7
4.1
Inventories
Cont GDP
Exports
QoQ
0.5
-0.2
0.1
0.7
3.9
0.0
1.0
2.0
2.3
1.1
QoQ a
1.8
-0.9
0.4
2.9
16.7
-0.2
4.2
8.2
9.5
4.5
YoY
4.9
5.1
6.4
1.0
4.5
4.7
5.7
7.1
5.4
6.6
QoQ
1.4
0.2
1.1
2.1
5.0
-0.6
0.8
2.3
2.9
1.0
QoQ a
5.8
0.9
4.3
8.7
21.5
-2.3
3.2
9.5
12.1
4.1
YoY
0.5
3.8
9.4
4.9
8.6
7.7
7.4
7.6
5.5
7.2
(30.9% of GDP)
Imports
(27.4% of GDP)
Net external sector
Cont GDP
CPI
(a) as a % of GDP. Cont GDP: contribution to Annual GDP grow th. Public Budge t e x Financial Se ctor Trans fe rs
Source : INE, BoS, Santande r e s tim ate s and fore cas ts .
2014 2015E 2016E
UK: Decisive election clears the way for growth
The UK economy has experienced an eventful start to 2015, with growth slowing to just 0.3% q-o-q in Q1 and the general election providing an unexpectedly decisive
outcome. The threat of a prolonged period of coalition-building in the event of an indecisive election, or even the prospect of a second vote in H2, had appeared as key risks
facing UK growth this year. Although the EU referendum – likely to occur in H1-17 – and questions over Scottish devolution will worry some, we do not expect such issues to
weigh on activity this year. We continue to expect 2015 GDP growth of 2.4% - fractionally below the consensus forecast – and look for activity to rebound in Q2, with a
degree of the weakness seen in the first quarter – caused predominantly by the volatile construction data - also likely to be revised away, in our opinion. Overall, we expect the
structure of UK growth in 2015 to look very similar to that of 2014, although the ‘star’ of the recovery to date – very strong employment growth – is in our view likely to prove
a more troublesome issue for the Bank of England in the final months of the year given continued disappointment around productivity. With wage inflation now finally on the
rise, we believe that the labour data will remain at the centre of the policy debate, and expect an interest rate hike before year-end.
UK GDP history and forecast figures
3Q13
4Q13
1Q14
2Q14
3Q14E
4Q14E
1Q15E
2Q15E
3Q15E
4Q15E
QoQ
0.7
0.4
0.9
0.8
0.6
0.6
0.4
0.6
0.7
0.7
QoQ a
2.9
1.6
3.6
3.4
2.5
2.5
1.6
2.5
3.0
2.7
YoY
1.6
2.4
2.7
2.9
2.8
3.0
2.5
2.3
3.0
2.4
Private Consumption QoQ
0.6
0.4
0.8
0.5
1.0
0.6
0.6
0.5
0.7
0.7
QoQ a
2.3
1.6
3.4
2.0
4.1
2.5
2.4
2.0
2.8
2.8
YoY
2.0
1.7
2.1
2.3
2.8
3.0
2.8
2.8
2.8
2.5
Public Consumption QoQ
0.5
-0.1
0.2
1.7
0.5
-0.2
0.0
0.2
0.2
0.2
QoQ a
2.0
-0.3
0.9
6.8
1.9
-0.9
0.0
0.8
0.8
0.8
YoY
0.2
0.0
0.0
2.3
2.3
2.1
1.9
0.4
0.8
0.6
QoQ
2.7
2.3
3.2
0.7
1.7
-0.6
0.4
0.8
1.5
1.4
QoQ a
11.2
9.5
13.2
3.0
7.1
-2.4
3.2
3.2
6.1
5.7
YoY
5.5
6.8
9.0
8.2
5.1
5.1
2.3
2.3
2.1
4.2
GBP bn
5.3
5.2
4.2
3.5
3.6
1.7
1.8
3.1
3.2
3.0
Real GDP
(65.8% of GDP)
(21.8% of GDP)
Total Investment
(14.3% of GDP)
Inventories
Exports
(31.6% of GDP)
Imports
(33.8% of GDP)
Net external sector
Cont GDP
1.3
0.0
-0.2
-0.2
0.0
-0.5
0.0
0.3
0.0
0.0
QoQ
-3.4
-1.3
1.7
-0.7
-0.1
4.6
0.0
0.5
1.2
1.2
QoQ a
-12.9
-5.2
7.0
-2.6
-0.5
19.9
0.0
2.0
4.9
4.9
YoY
0.0
0.3
1.4
-3.7
-0.5
5.6
3.8
5.0
6.4
2.9
QoQ
3.8
1.9
-1.4
1.2
-1.2
1.4
1.6
0.6
1.0
1.2
QoQ a
16.3
7.6
-5.5
5.0
-4.8
5.7
6.6
2.4
4.1
1.2
YoY
2.6
2.0
5.5
0.4
-0.1
3.0
2.4
4.7
4.5
4.1
GBP bn
-12.7
-12.4
-12.0
-11.1
-13.2
-9.6
-10.4
-11.2
-11.3
-11.4
Cont GDP
-1.7
0.1
0.1
0.2
-0.5
0.8
-0.2
-0.2
0.0
0.0
2012
2013
2014E
2015E
2016E
0.7
1.7
2.8
2.4
2.7
1.5
1.7
2.5
2.6
2.5
2.3
-0.3
1.7
0.8
0.8
0.7
3.4
7.8
2.7
5.3
0.1
0.2
0.2
-0.1
0.1
0.7
1.5
0.6
4.5
4.8
3.1
1.4
2.2
3.9
4.5
-0.8
0.0
-0.5
0.1
0.0
CPI
2.8
2.6
1.5
0.5
1.7
Unemployment rate
8.0
7.5
6.2
5.3
4.9
Budget deficit (a)
7.3
4.9
5.5
5.0
3.8
Current account (a)
-3.7
-4.5
-5.5
-3.9
-2.9
Source: ONS and Santander estimates. (a) as a % of GDP. Cont GDP: contribution to QoQ GDP grow th
QoQ a : Quarter on Quarter annualised
US: US GDP: 2.4% in 2015E and 3.0% in 2016E.
We have revised downwards 2015E GDP growth to 2.4% from 2.7% previously on the back of the negative 1Q15 GDP growth. The US economy keeps moving in the right
direction. Despite that 1Q15 GDP growth was disappointing with a decline of 0.7% SAAR, in our view, prospects for economic performance during the rest of the year are
much better. Once factors that have been negatively affecting 1Q15 GDP growth disappear, the economy would move up again, growing at rates around 3.0%. Before
normalising GDP growth, we will probably see a sharp rebound in 2Q15E, for which we estimate GDP to advance by 4.0% SAAR. The performance of the external sector,
inventories and some components of investments would be key in order to reach this strong growth rate in 2Q15E. Once visibility about the future performance of the economy
increases and it becomes clearer that 1Q15 GDP growth was a one off, the Federal Reserve will move again into “lift-off” mode. We maintain our view that September will be
the chosen FOMC meeting to introduce the first interest rates hike of the new cycle.
US – GDP, 2012-16E
Real GDP
Private Cons um ption
(67.8% of GDP)
Federal Governm ent
(6.4% of GDP)
State and Local
(10.6% of GDP)
Bus ines s Inves tm ent
(14.0% of GDP)
Structures
(3.0% of GDP)
Equipm ent
(6.9% of GDP)
Intellectual Prop.
(4.1% of GDP)
Res idential Inv.
(3.6% of GDP)
Inventories
Exports
(13.6% of GDP)
Im ports
(16.2% of GDP)
Net external sector
QoQ a
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15E
3Q15E
4Q15E
4.5
3.5
-2.1
4.6
5.0
2.2
-0.7
4.0
3.0
2.9
YoY
2.3
3.1
1.9
2.6
2.7
2.4
2.7
2.6
2.1
2.3
QoQ a
2.0
3.7
1.2
2.5
3.2
4.4
1.8
3.1
2.9
2.6
YoY
2.3
2.8
2.2
2.4
2.7
2.9
3.0
3.1
3.1
2.6
QoQ a
-1.2
-10.3
-0.1
-0.9
9.9
-7.3
0.1
-1.0
-1.5
-1.0
YoY
-7.0
-6.3
-3.9
-3.2
-0.6
0.2
0.3
0.2
-2.5
-0.8
QoQ a
1.1
0.6
-1.2
3.4
1.1
1.6
-1.8
1.2
1.6
1.2
YoY
0.8
1.2
0.8
0.9
0.9
1.2
1.0
0.5
0.6
0.5
QoQ a
5.5
10.4
1.6
9.7
8.9
4.7
-2.8
9.5
6.5
7.3
YoY
3.0
4.7
4.7
6.8
7.6
6.2
5.0
5.0
4.4
5.0
QoQ a
11.1
12.8
2.9
12.6
4.8
5.9
-20.8
17.4
7.4
9.1
YoY
-0.4
4.5
8.4
9.8
8.2
6.5
-0.2
0.8
1.4
2.2
QoQ a
4.7
14.1
-1.0
11.2
11.0
0.6
2.7
7.8
8.2
7.8
YoY
4.8
6.2
4.7
7.1
8.7
5.3
6.3
5.5
4.8
6.6
QoQ a
2.8
3.6
4.7
5.5
8.8
10.3
3.6
4.5
3.2
5.3
YoY
2012
2013
2014
2015F
2016F
2.3
2.2
2.4
2.4
3.0
1.8
2.4
2.5
2.9
2.6
-1.8
-5.7
-1.9
-0.7
-0.6
-1.2
0.5
1.0
0.7
1.6
7.3
3.0
6.3
4.8
5.7
13.5
-0.5
8.2
1.0
5.5
6.9
4.6
6.4
5.8
6.8
3.9
3.4
4.8
5.8
3.9
3.1
2.7
2.2
4.1
5.6
7.3
7.0
6.8
5.4
4.2
QoQ a
11.2
-8.5
-5.3
8.8
3.3
3.8
4.9
9.5
7.8
13.4
YoY
14.4
6.9
3.5
1.2
-0.7
2.5
5.2
5.4
6.5
8.9
13.5
12.0
1.6
6.5
8.8
$ bn
95.6
81.8
35.2
84.8
82.2
80.0
95.0
75.0
65.0
70.0
57.1
63.6
70.6
76.3
62.5
0.1
0.0
0.0
0.0
-0.1
3.3
3.0
3.2
2.6
5.4
Cont. GDP
1.3
-0.3
-1.2
1.2
-0.1
-0.1
0.4
-0.5
-0.2
0.1
QoQ a
5.1
10.0
-9.2
11.0
4.6
4.5
-7.6
10.2
4.1
2.6
YoY
3.0
5.1
2.8
3.9
3.8
2.4
2.9
2.7
2.6
2.1
QoQ a
0.6
1.3
2.2
11.3
-0.9
10.4
5.6
2.4
2.8
5.3
YoY
1.2
2.5
3.1
3.8
3.4
5.6
6.5
4.3
5.2
4.0
2.3
1.1
4.0
5.0
3.6
$ bn
-425
-384
-447
-460
-431
-471
-548
-513
-510
-531
-452
-420
-453
-526
-505
0.5
1.0
-1.6
-0.3
0.7
-1.0
-1.9
0.9
0.1
-0.5
0.0
0.2
-0.2
-0.4
0.1
CPI (%YoY)
Cont. GDP
2.1
1.5
1.6
0.2
2.4
Core CPI (%YoY)
2.1
1.8
1.7
1.6
2.0
Unem ploym ent rate
8.1
7.4
6.2
5.3
4.6
Indus trial Production (%YoY)
3.8
2.9
4.2
3.1
3.0
Productivity (%YoY)
0.9
1.2
0.5
0.4
1.6
Unit Labour Cos ts (%YoY)
1.9
0.2
1.9
1.8
2.2
Budget deficit (Federal) (%GDP)
-6.7
-4.0
-2.8
-2.6
-2.0
Current account (%GDP)
-2.9
-2.4
-2.3
-2.3
-2.1
Co nt GDP = Co ntributio n to GDP . So urce: B lo o mberg, Datastream and Santander estimates.