Europe Economic Outlook - BBVA Research · 2018. 12. 21. · force in the recovery. Sovereign crisis to impact growth, but with positive news As noted in section 1, the sovereign

Economic OutlookThird Quarter 2010

Economic Analysis

Europe

• The main risk to the European outlook is still coming from financialmarkets.

• There have been some progresses with the publication of stresstests,althoughbankrestructuringisfarfromcomplete.

• Afterthegoodperformanceinthefirsttwoquartersof2010,we expect a slowdown in activity during the second half and mildgrowthin2011.

• Fiscal policy: well designed austerity plans can limit their effectonactivity.

REFER TO IMPORTANT DISCLOSURES ON PAGE 20 OF THIS REPORT

Europe Economic OutlookThird Quarter 2010

PAGE 2

Contents

1.Reassessingtherisksfortheglobaleconomy....................................... 3

2. Forcesshapingtherecovery................................................................................ 5

Endoffiscalstimulusandconsolidation,broadlyasplanned....................................................... 5

Sovereign crisis to impact growth, but with positive news............................................................ 5

Someprogressintherestructuringinthefinancialsystem.......................................................... 5

Euro depreciation partially reverted, but only temporarily............................................................. 5

Ongoing debate on institutional reforms in Europe....................................................................... 5

3. Recenttrendsandprojections.......................................................................... 6 Recent indicators.......................................................................................................................... 6

ProjectionsfortheEurozone......................................................................................................... 9

Projectionsforcountries............................................................................................................. 10

4. InflationandECBrates............................................................................................11

5. Fiscalmonitor:theeffectsoffiscaltightening...................................... 13

Tables: summary of forecasts ................................................................................. 16

Closing date: August 3, 2010



PAGE 3

1.Reassessingtherisksfortheglobal economy

Theeffectfromthefiscaladjustmentongrowthin

Europe will be lower than commonly assumed

Medium-term risks from unsustainable fiscal positions in other developed regions are probablybeingunderestimated.Asshownbelowinsection4,consolidationplansinEuropearebeingwidelyimplementedandapositivefactoristhattheplannedadjustmentisfastandtiltedtowardsreducingexpenditure,whichwillboostconfidenceandalmostcompensatethenegativeeffectongrowthfromreducedpublicdemand.Otheradvancedeconomies like theUS,wherefiscal impulseshavebeensubstantial and debt levels have increased at a pace similar to that in Europe, are relatively slow in comingtogripswithreducingdeficitsand–atleast–stabilizingdebtlevels.Thisisamedium-termriskthatisbeingunderestimated,asexperienceshowsthattheeffectoflaxfiscalpolicyoninterestratesis highly non-linear, and there is a risk of sudden increase in long-term rates and a displacement of privatedemand;exactlytheoppositeeffectintendedbythefiscalstimuluspackages.

The main risk to the global outlook is still coming from

financialmarkets

Althoughriskshavebeenreducedthepotentialfalloutfromrenewedtensionsisstillsizable.Financialrisks, which stemmed from sovereign debt concerns, formed a feedback loop that ended up increasing marketriskanddryingupliquidity,especiallyinEurope.Nonethelessthesharpincreaseinfinancialtensionsinthesecondquarterisstartingtoabate(seeChart1),inpartduetothereleaseofEuropeanstresstestsresultsNonethelesstherisktotheglobaleconomycomingfromfinancialmarketsisstillthemainsourceofconcern.

Increasing divergence in monetary policy strategies

Heightened uncertainty will prompt the Fed and ECB to postpone the exit from accommodativepolicies.Onthecontrary,tighteninghasresumedacrossmuchofAsiaandLatinAmerica.Financialstrains in Europe and uncertainty about the pace of recovery in the US will prompt central banks in bothregionstopostponetheirfirstraterisesandkeepverylowpolicyratesforanextendedperiod.Inflationarypressuresinbothareaswillremainsubdued,allowingthemtokeeplaxmonetarypolicies.Nonetheless, a faster recovery in the US will mean that the monetary exit will be earlier there than in Europe.Ontheotherhand,inemergingeconomiesmonetarytighteningisresuming,afterapause(especiallyinAsia)astheEuropeandebtcrisisunfolded.ThiswillhelpreduceinflationarypressuresinAsia–wheretheywerestartingtobuild–andpreventpotentialpressuresfromdevelopinglaterintheyearinSouthAmerica.AnimportantexceptionisBancodeMéxico,likelytoholdratesuntilthesecondquarterof2011.

The global economy is on track for a mild and

differentiated slowdown

InChinaandelsewhereinAsia,amoderatinggrowthtrendshouldreducetherisksofoverheating.However, in the US private demand will remain weak without policy support, whereas in Europe confidence will be negatively affected by the fallout from the financial crisis. Spillovers from theEuropean financial crisis to other geographical zones have been relatively limited. Nonetheless,theglobaleconomywillslowdowngoingforward(seeChart2). IntheUS,therecoveryis likelytolosemomentumonaccountofsofteninglaborandhousingmarkets.Thisshowsthelimitsofprivatedemandtakingoverasanautonomousdriverofgrowth.InChina,slowingGDPgrowthinthesecondquarterandmoderatingactivityindicatorsareevidencethattheauthorities’tighteningmeasuresarebeingeffectivetosteertheeconomytowardasoftlandinginthesecondhalfoftheyear.LatinAmericawillalsoslowdownin2011,butkeeprobustgrowthratesgoingforward.Thereforedivergenceswithcontinuetowidenbothbetweenadvancedandemergingeconomiesandwithineachofthosegroups.

Although there were some steps in the right

direction, going forward the necessary global

rebalancing of demand and the narrowing of global imbalances is

still pending

Themedium-termrebalancingof theChineseeconomytowardsmore internaldemand(particularlyconsumption)hasbegun,andtherecentrenewalofcurrencyflexibilityshouldhelp.However,furtherreforms are needed to help boost consumption toward regional levels. Other advanced surpluscountries also need to implement reforms to increase domestic demand, most notably in the service sector.Ontheotherhand,theUSandothercountrieswithsubstantialexternalfinancingneedsneedto switch froma consumption-led growthmodel to investment, especially in tradable sectors.Therecentfinancialcrisishasshownthelimitstoforeignfinancingofgrowth.Economieswithhighexternalfinancingneedsarehighlyvulnerabletoanupsurgeofinternationalfinancialtensions,andtheresultingsuddenmovementsinexchangeratesriskunderminingglobalfinancialstability.



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Chart 1

Financial Stress Index*Chart 2

Contributions to Global GDP growth

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*Compositeindicatoroffinancialtensionsin3creditmarkets(sovereign,corporateandfinancial),liquiditystrainsandvolatil-ityininterestrate,foreignexchangeandequitymarkets Source:BBVAResearch

Source:BBVAResearchbasedonnationalaccounts



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2.Forcesshapingtherecovery

As shown in the previous section, the shape of the global recovery is partly determined by what is happening in Europe, as the sovereign crisis that has taken place as from this spring, together with the uncertainty created at a global level, and the associated depreciation of the euro and central events in theglobaloutlook.MorespecificallyforEurope,thissectionreviewsthekeyforcesbehindtheoutlookfortheEurozoneeconomy,whicharebroadlythesameasspelledoutinthepreviousissuesofthispublication,buthavenonethelessevolvedsomewhatoverthelasttwomonths.

Endoffiscalstimulusandconsolidation, broadly

as planned

Herethenewsisnomajornews,andthereforegoodnews.Thatis,fiscalausterityplansasdesignedattheendoflastyearbynationalauthoritiesandapprovedbyBrusselsarebeingfulfilledwithbudgetdiscussionsfor2011,whichhavebeeninthenewsoverthepastquarter.France,GermanyandItalyhavepresenteda rangeoffiscalmeasures,stillunderdiscussion, thathave tobe implemented indetailanddonotchangedeficittargets.Inthissense,despitealltherepercussionsinthemedia,thereis no additional tightening.Spain, Portugal and now (outside the area) theUnitedKingdom, haveacceleratedtheirconsolidationeffortandfrontloadthem,inlinewithmarkets’demandsofmorerapidconsolidation.Theequilibriumbetweentheneedofadjustmenttoreducedeficitratiosandtheneedto avoid a sharp contraction is about right, and clearly differentiated across countries, as it should be giventhedifferentstartingpoints.Asshowninsection4,wecalculatethattheimpactoftheseplansonactivityislikelytobesmall,butstillnegative,andthereforefiscalretrenchmentwillactasadownwardforceintherecovery.

Sovereign crisis to impact growth, but with

positive news

Asnotedinsection1,thesovereigncrisisthathashitseveraleurozonecountriessinceMayincreasedfinancialstress,althoughthesituationhasimprovedveryrecentlyafterthepublicationofstresstests.Weconsiderhowever,thatthesituationisfarfrombeingnormalized,andexpectfurtherprogressforthecomingthreemonths.Still, the impactonconfidence,riskaversionandtheliquiditysituationofcompaniesandfinancialinstitutionsinseveraleuroareacountriesislikelytohaveanimpactongrowthin the second half of the year and is one of the main factors behind the deceleration we foresee for thatperiod.

Some progress in the restructuring in the financialsystem

Thisfactorisbeingaddressedafterthepublicationofthestresstests(notablyinSpain),butremainsanissueinothercountriesinthearea.Theweaknessofthefinancialsystemismostlyamediumtermissue, since although not necessarily affecting activity in the short run, risks deriving in a “Japanese style” situation whereby weak banks are unprepared to provide enough finance to the economy.MoneyandcreditaggregateshaverecoveredonlyveryslightlyinEurope(andonlyformortgages),andremainbasicallyflat.Withoutrecapitalizationandtheabilitytoprovidecredit,adurablerecoverywillnotbepossibleinthearea.

Euro depreciation partially reverted, but

only temporarily

The exchange rate of the euro versus the dollar has recovered somewhat over the last month and ahalf, andnow is close to1.30afterhavinghit 1.20.Still, ourprojectioncontinues tobe that theequilibriumleveloftheeuroissomewherebetween1.10and1.25,andthatitshouldnotdriftmuchfromthoselevels.Indeed,theveryrecentappreciationobeysmoretorelativelybetterdatainEuropethanintheU.S.attheendofthesecondquarter,butitdoesnotrespondtofundamentals.Alowlevelfor theeurowill continue toplay in favourof exports.Onour calculations, thedepreciationof theeurosincethestartoftheyearimplieshighergrowthofabout0.4%in2010and0.8%in2011(duetodelayedeffects).

Ongoing debate on institutional reforms

in Europe

Thereisnotmuchnewhere.AneventualreformofeurozonefiscalpolicyandgovernancestructureswillbeanalyzedinOctoberbytheVanRompuytaskforce,andcouldpositivelyaffectgrowthifitprovidesaviablesolutiontofiscalcoordinationinEuropewhileensuringthatfuturefinancialcrisisdonotdamagethecredibilityoftheeuro,asithashappenedwiththeGreekcrisis.Therehavebeenproposalsinthisrespect(bytheECB,theEuropeanCommissionandtheFrenchandGermangovernments)whichallgo in the line for enforcing surveillance of road imbalances, coordination and sanctions, but the key issueofacrisisresolutionregimehasnotfullybeenaddressedyet.



PAGE 6

3.Recenttrendsandprojections

Eurozoneeconomywillgrow strongly in Q2, but

several indicators suggest that the recovery is fading

and it will slow in H2

Economic data available for Q2 show that the economic upturn has gained strength, while our syntheticeconomicactivityindicatorpointstogrowthofaround0.5%q/qintheEuroarea,afteramildimprovementinpreviousquarters.Forthecomingmonths,thekeyquestionnowishowsustainabletheeconomicrecoveryis,andinthisrespecttherelativelystrongmomentumofthelastquartercouldnot be sustainable:

• First,confidencedatahavebeeneasingsinceMay,aswellasotherleadingindicatorssuchasindustrialorders.Nevertheless, theuncertaintysurrounding theeconomicoutlook isveryhigh.Indeed, economic sentiment from the PMI survey and from German Ifo data showed a surprising improvement in July, pointing to a better than expected start for the second half of the year after twomonths ofweakness. It is however too early to draw any conclusions in this respect, asinformation is limited to soft data and the shape of the recovery will likely be determined by factors such as the impact of stress tests and measures applied by national governments to restructure thebankingsectorandachievefiscalconsolidation.

• Second,therecoveryhasbeensupportedbytemporaryfiscalstimulus,whichhasstartedtoberemoved. Inparticular,peripheralcountriessuchasGreece,PortugalandSpainhavealreadyimplementedstrongfiscalconsolidationmeasures,whiletherestofEuropeancountrieswillstartapplyingausteritymeasuresasfromnextyear.

• Finally, the weakness of domestic demand has been partly offset by the strong inventory rebuilding process,butinventoriesarealreadyclosetonormallevels.

In short, the picture above suggests that economic growth will slow in the second half of the year, while externaldemandwillbethekeydriveroftheeconomy.

Chart 3

Eurozone: Synthetic activity indicatorChart 4

Eurozone: Sentiment from PMI survey

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Domestic demand is still subdued,withflatprivate

consumption and a further fall in investment, while

public consumption slows

Householdspendingshowednosignsof recovery in thesecondquarter.RecentdatashowedthatretailsalesintheeurozoneincreasedslightlyinMay,butwithoutoffsettingthefallrecordedinApril,and thus the level in these months remained slightly below the average observed in Q1, showing the weaknessofprivateconsumptioninQ2afterdecliningby-0.1%q/qinthepreviousquarter.Underlyingtheweaknessofhouseholdspendingisthedropindisposableincome,drivenbyjoblossescoupledwith a moderate growth of wages, and only supported by lower inflation. The stabilization in thedeteriorationofthelabourmarket,resultedinaslightlyimprovementinconsumers’confidenceinthelastquarteroflastyear,althoughsincethenithasbeenstableatlowlevels,apartfromapick-upinJuly.Thepositivenewsfromtheimprovementinconfidenceshouldbereflectedinareductionintherateofprecautionarysavings,whichwasalreadynoted in the last twoquartersof2009(when thesavingsratefellfrom15.7%inQ2to15.1%inQ4,interruptingtheupwardtrendobservedsinceearly2008)andthustheyshouldnotresultinlowerconsumerspending.Itisalsonoticeablethatboththeendoffiscalincentives(suchasvehiclescrappingschemes)andtaxhikesonconsumption(suchasVATinsomecountries)haveloweredconsumers’spendingandcouldalsohaveanimpactincomingmonthsduetofrontloadingpurchasesandapossiblesubstitutioneffect.



PAGE7

Across large countries, the weakness of private consumption is widespread, especially seen in the strong drop in private consumption inGermany in the first quarter, while retail sales remain verysubdued inApril andMay (leaving the average of bothmonths only 0.1% aboveQ1). In France,households’consumptionalsodroppedinJune,remainingalsobelowthelevelrecordedinQ1(-0.9%q/q).Takingintoaccountalldata,weexpectprivateconsumptiontoremainflatintheeurozoneasawholeinQ2.

Chart 5

Eurozone: Households’ consumption

Chart 6

Eurozone: Households’ disposable income

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Public consumption is beingaffectedbyfiscal

restraint measures

Public consumption increased substantially sincemid-2008 as national governments implementedfiscalstimulus.However,governmentspendingstartedtodeclinesincethelastquarterof2009,asexpansionaryfiscalmeasuresendedand themoodchanged towards theneed to restraintdeficits.Inparticular,publicconsumption in theeurozonedeclinedby -0.2%q/q inQ42009and increasedbyamodest0.2%q/qinQ1,farfromtheaveragequarterlygrowthofaround0.8%theendof2008.Itislikelythatpublicspendingwillcontinuetoslowincomingquarters,especiallyasfromnextyearwhenallcountrieswillhavetoimplementausteritymeasurestocomplywiththeSGP.ThiswillreduceconsiderablyitscontributiontoGDPgrowth.

Industrial output has been strong recently but presents doubts for the

coming future

Positive data come from the strong recovery of the industrial sector: Output in April and May grew ataround2.5%overQ1,whenitalsorecordedahighgrowthrate.Inaddition,industrialnewordersgrewstronglyagain inMay,suggesting that the industrialupturncouldcontinue incomingmonths.Across large countries, industrial output has increased at different speeds, more markedly in Germany, while itsgrowthwasmoremoderate inFranceand Italyandwasnegative inSpainandPortugal.Thestrong industrialsector recovery reflectsmostlyexportgrowth,sustained in turnby the robustglobalupturnandtheeurodepreciation.Forthecomingmonths,theoutlookonindustrialproductionisuncertain.WhilethemostrecentconfidenceindicatorshavebeenstronginJulyintheindustrialsector,orders from abroad have slowed in recent months, and the outlook at the global level is moderating rapidly.Withoutaclearrecoveryofdomesticdemand,whichwedonotforesee,thecurrentstrengthofindustrialproductionislikelytomoderateincomingmonths.

Investment has been falling as capacity

utilizationislow,whileinventories build-up is

unlikely to add much more to output

Uptothefirstquarterofthisyear,investmenthasfallenbyaround1%q/qonaverageeachquartersinceQ32009,andalthoughthedeterioratingpaceslowedwithrespectthatobservedinlate2008,itshows the weakness of the economic recovery and might have possible adverse effects on potential growthinthemediumterm.Withindustrialoutputcontinuingtogrow,butamoremoderatepace,andwith capacity utilisation still at low levels, companies can cope with the increase in production without the need to invest further, as both shown by the low investment rate and the fall in credit to non-financialcorporations(around2.5%overthelastyear).

Asforinventories,theyfelldrasticallyduringtherecession.Afterthat,withtheglobaleconomicrecoveryand increasing orders, companies embarked in an intense process of rebuilding stocks, contributing significantlytoGDPgrowthandpartiallyoffsettingthestrongdeclineindomesticdemand.However,thisprocessistemporary,andrecentdatashowthatthestockoffinishedproducts,takingintoaccountnew orders, is reaching levels similar to those observed before the crisis, exhausting its positive effect ontheeconomy.



PAGE8

Chart7

Eurozone: Capacity of ulitization

Chart8

Eurozone: Industrial production and exports

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Exports have become the main driver of the recovery in Q2, which should result

in GDP growing by 0.4%q/q

According to monthly data for trade balance, nominal exports growth in April and May slowed but remainedclearlypositive,reachingalevelwhichis4%overtheaverageofQ1(whentheygrewat7.1%q/qoverthepreviousquarter).Inaddition,thevolumeofexportshascontinuedtoincreaseaswell,stayingnowabove the levels recorded in the lastquarterof2009and recoveringabout85%ofthedropduringtherecession.However,thecumulativegrowthofimportsinthesetwomonthsofthesecondquarterwasevenhigher(6.3%),andshouldpartlyoffsetthecontributionofnetexportstoeconomicgrowth.Asaresult,weseeasimilarpatternoftheexternalsectorinQ1,i.e.anegativecontributiononnetexportsof-0.6percentpoints.ThestronggrowthinimportsinQ1andinthefirsttwomonthsofQ2isdifficulttoexplaingiventheweaknessofdomesticdemand,andweattributeittotheneedofinputsrequiredbythestrongrecoveringindustrialsector,whichonthedemandsidegotoexportsandrebuildinginventories.

All in all, and despite some uncertainty surrounding the evolution of GDP components, our synthetic activityindicatorsuggeststhatGDPwillgrowby0.4%-0.5%q/qinQ2.

Chart 9

Eurozone: Exports

Chart 10

Eurozone: Contribution to quarterly GDP growth

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PAGE 9

Labour market deterioration levelled off in Q2, while hiring intentions

improved

Followingtherecoveryoftheeurozoneeconomy,thedeteriorationofthelabourmarkethasdiminished,althoughwithdecharacteristiclagandveryslowlyasgrowthhasnotbeenenoughtocreatenewjobs.Inparticular,employmentwasflat inQ1,after falling forsixconsecutivequarters (accumulatinga fallofaround2.5%).Thesharpdeclineoftheemploymentexperiencedsincemid-2008slowedinthelastquarterof2009andunemploymenthasremainedvirtuallystableataround10%inthefirsthalfoftheyear.

Acrosscountries,thedivergenceoverthepastquartershasbeensignificant,withfallingunemploymentin Germany on the one side thanks to the short-time work scheme and to the recovery of industrial production(theratestandsat7.6%)andveryhighratesinIrelandandmostlyinSpainontheother(13.3%and20%,respectively).InFranceandItalyunemploymenthasbeenstableinrecentmonths,itstandsat10%and8.5%,respectively).

Chart 11

Eurozone: EmploymentChart 12

Eurozone: Unemployment rate

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Our medium term scenario is of a slowdown in the next two quarters and a mild recovery in 2011OurprojectionofGDPgrowthfor theeurozoneisofaround1%forboth2010and2011.However,these broad numbers hide disparities, both in the performance of the economy in the two halves of 2010andacrosscountries.Thebaseeffectfromthefirsthalfof2010isrelativelyhigh:althoughthefigureforthefirstquarterwasweak(0.1%q/q),our0.4%projectionforthesecondquarterisaboutthegrowthpotentialoftheeurozoneeconomy,andifanythingtherisksofthesecondquarteraretiltedtotheupside.Forthesecondhalfoftheyearweexpectaslowdownastheeffectfromthesovereigncrisis starts tobiteand theglobal slowdownmoderatesexports.Growth shouldbebarelypositivein thisperiod.Once thefinancialsituation isnormalizessomewhatafter thesummer,growthcouldrecoverduringnextyear,butmoderatelyduetothecompensatingeffectsfromaloweuroandfiscalretrenchment,andwithstillhighuncertainties.Duetothedifferentbaseeffectsfor2010and2011(highforthefirstandlowforthesecond),averagegrowthshouldbesimilarinbothyearsdespitethebetterdynamicsof2011.

The same growth composition(tilted

towardsexports)willbeaccentuated by the low

value of the euro and the fiscaladjustment

The trend of exports-based growth seen so far is likely to continue in the comingmonths. Fiscalausterityandfinancialstresswillputabreaktoaneventualrecoveryofdomesticdemand,whilethemoderation of global growth will be compensated by the continued and delayed effects of the recent euro depreciation:

• Investment is likely to fall on average in 2010, due to the uncertainty surrounding the recovery, creditrestrictionsandespeciallythelowuseofcapacityutilization.Aslongastherecoverysetsin,andpartlythankstoforeigndemand,businessconfidenceshouldstrengthfurther,riskaversionrecoverandinvestmentplansincrease,butthisshouldbeaslowprocess.Overallweexpectamildlypositivegrowthrateforinvestmentin2011.

• Withrelativelyweakgrowthandcapacityutilizationwellbelowpotential,employmentisnotexpectedtogrowin2011,whichwillaffect therecoveryofconfidencehouseholddisposable income.Thiswill restrainprivateconsumption, together taxhikes inseveraleurozonecountries.Onaverage,consumptionisexpectedtobeflatthisyearandgrowbyabouthalfapercentagepointin2011.

• Publicconsumptionwillmoderatesubstantiallyduetofiscalausterityprograms,mostlyin2011.Fromagrowthrateof2.7%in2009itisexpectedtoslowdownto0.5%in2011.



PAGE 10

• Exports are expected to decelerate somewhat in the second half of 2010, with counteracting effects from a low euro and slowing global demand, but still be robust and grow on average at closeto8%forthewholeyear,andbroadlythesameratein2011.Importsareprojectedtofollowthrough,withratescloseto7%peryear,belowthatofexportsassluggishdomesticdemandpullsthembacksomewhat.Asaresult,netforeigndemandwilladd0.4pointstogrowthin2010and0.6pointsin2011,abovethehistoricalaverage.

Chart 13

Eurozone: GDP GrowthChart 14

Eurozone: GDP Growth by countries

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Across countries, Germany will continue to be above the average, while South European countries will perform worse• Germany is the country which is leading industrial pickup thanks to its export strength to emerging

economies.GDPgrowthisexpectedtobeabovetheaverageinboth2010and2011,withaverysharpcontributionofnetexportsthisyearandstillstrongnextyear.However,privateconsumptionhasfallenmarkedlyinthefirstquarter,andindicatorsofretailsalesforthesecondquarterhavealsobeennegativedespitethegoodrecordsofunemployment.Consumptionislikelytorecover,butonlymoderately,andcouldgrowbyaround0.5%in2011.

• Francehadaweakfirstquarterandconsumptionindicatorsforthesecondarenotverypositiveeither.ItisexpectedtogrowslightlyabovetheEurozone,withalargercontributionofdomesticdemand thanGermany, especially due tomore resilient private consumption.As inGermany,therearestillsomemeasuresoffiscalstimulusapprovedin2009thatarehavingapositiveeffectin2010.Thecontributionoftheexternalsectorlikelytobeslightlypositive.

• Italyenjoyedrelativelyhighgrowthinthefirstquarter(0.5%),butthiswasduetotemporaryfactorssuchasstrongstockscontributionandafallofimports,togetherwithresilientconsumption.Forthecomingquarters,itisexpectedtogrowinlinewiththeaverageEurozone,butbelowFranceandGermany,duetoitslowerpotential.AsinthecaseofFrance,growthislikelytobemorebasedondomesticdemandandlessoftheforeignsector,whichisstillprojectedtobemildlypositive.

• The Spanisheconomyshoweditsfirstpositivegrowthratein1Q10sincethebeginningofthecrisis(0.1%q/q).Besides,mostrecentdatasuggestthat,supportedmainlybytheSpanishexportsstrength,GDPgrowthremainedpositivein2Q10(between0.1%q/qand0.2%q/q).Nevertheless,theaccelerationof thefiscal consolidationprocess, togetherwith theuncertaintyandvolatilitypersistenceinfinancialmarkets,arelikelytohaveanegative-buttransitoryandsmall-impactonGDPgrowthduringsecondhalfofthisyear.AllinallweexpectanaverageGDPgrowthof-0.6%for2010and0.7%for2011.

• Portugalenjoyedsurprisingly fastgrowth in thefirstquarterof thisyear(1.1%q/q)duetothestrength of all components of domestic demand and the contribution of inventories, together with afallinimportsthatresultedinacontributionofnetexportsof0.8points.Thisanomalouspatternisunlikely tobesustainable incomingquarters,weexpectasignificantmoderationofactivity,withaverageGDPgrowthfallingform1.1%thisyearto0.5%in2011,withadecelerationalreadyinthesecondhalfofthisyear.TheprogramoffiscalausterityandthehighlevelsofleverageofPortuguesehouseholdsarelikelytoresultinaclearslowdownofdomesticdemand.



PAGE 11

4.InflationandECBrates

Headlineinflationaccelerated in Q2 driven

by energy prices, while coreinflationremained

broadly stable

Inflationhassurged in thesecondquarterof2010to1.5%y/y from1.3%y/y in thefirst,mainlyduetotheevolutionofenergypricesthathavesoaredfrom4.4%y/yobservedinQ1to8.2%inQ2.Theaccelerationofenergypricescanbeattributedbothtoabaseeffect(thesamemonthslastyear,pricesfellsharply)andtotheevolutionofoilpricesandthedepreciationoftheeuro.Infact,theaccelerationontheheadlineinflation(0.3pp)correspondsmainlytoasimilarincreaseinthecontributionofenergyprices(0.3pp).Coreinflationhasremainedbroadlystablesincethebeginningoftheyearataround0.8-0.9%y/y,butafterslowinginAprilandMay(largerEastereffect), ithasacceleratedagaininJuneto0.9%a/a.Thisreaccelerationhasbeenanupwardssurprise.Across itscomponents,servicespriceshaveremainedrelativelystableinthefirsthalfoftheyear,whileinflationhaspickedupslightlyinbothnon-energyindustrialgoodsandprocessedfood.InJulyinflationhasincreasedagainto1.7%,withapossibleincreasealsoincoreprices.TheJulydatareflectthesaleseffectcoupledwithVAThikesinSpain.

Inflationisexpectedtoremain well under

ECB’starget

Forthesecondhalfoftheyear,weexpectinflationtoremainrelativelystable,reflectingthemoderationofeconomicactivity,whichshouldoffsetthepriceincreasesduetohighertaxes.Additionally,industrialinflationhasreturnedtopositiveterritorywithsignificantannualrates,afterayearregisteringnegativefigures.However,itisunlikelytoendupmovingtoconsumerprices,giventheweaknessofdomesticdemand.Regarding, core inflation,we expect it to remain stable around current levels or to slowslightly.Theoutlookforthecomingyearisofamoderateinflation,wellbelowtheECB’starget,withoutinflationarypressuresgiventheweaknessoftheeconomicrecovery.Finally,weseesomedownsiderisks to our projections to the extent that the slowdown in economic activity expected should pitdownward pressures on consumer prices, although these downside risks could be offset by a higher impactoftheVAThike.

Chart 15

InflationChart 16

By countries

-1.0-0.50.00.51.01.52.02.53.03.54.0

2006

-1

2006

-3

2007

-1

2007

-3

2008

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2008

-3

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2009

-3

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Headline Core

-2

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0

1

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Jan-

08M

ar-0

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ay-0

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09M

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ay-0

9Ju

l-09

Sep

-09

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0M

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0

Eurozone Germany France

Italy Portugal


TheECBhasnotbeenvery active buying bonds,

but we expect now it to remain on hold until at

least the end of 2011

Asexplainedinthepreviousissueofthispublication,theECBreactedtothesovereigncrisisinvariousways,includingarelaxationofcollateralrulesforGreekdebtinMarch,threefurtherlong-termliquidityauctions with full allotment and the purchase of public and private debt in secondary markets, in order torelaxtensions infinancialmarkets(SecuritiesMarketsProgramme,SMP).DuringtheonlypressconferencebyMrTrichetafteranECBmeetingsinceour lastpublication, thestanceofmonetarypolicywasbarelyaddressed,and thestatementof theCouncildidnot includeanymajorchanges(mostofthepressconferencewasdevotedtotheissueofstresstestsandthesovereigncrisis).

TheactivationoftheSMPhavebeendiminishingsinceitsstart(seeChart),andinrecentweekstheamountofbondsboughtbythenationalinstitutionshasbeenverylow.AlthoughthisraisesdoubtsonthewillingnessoftheECBtoexpandfurthertomitigateliquiditytensionsindebtmarkets,weforeseethat itwill remaincommitted todowhatever isnecessary tosustainactivityand to reduce liquiditytensionsinfinancialinstitutions,maintainingextraordinaryliquiditymeasures(fullallotmentinweeklyauctions)foraslongasitisnecessary.Giventheveryinflationoutlookandtheprojectedsoftnessofactivity,wehaverevisedourprojectionforofficialreporatesandnowforeseethattheywillremainat1%fortheforeseeablefuture,andatleastuntiltheendof2011.



PAGE 12

Chart17

ECB Sovereign debt purchase programChart18

Eurozone:OfficialInterestRates

02468

1012141618

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k 1

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REFI ECB FED funds

Official Interest Rates




PAGE 13

5.Fiscalmonitor:theeffectsoffiscaltightening

Thefiscalsituationhasdeteriorated rapidly in

many EU countries, but not only due to

the stimulus

Fiscalstimulusprogrammesapprovedattheendof2008andimplementedduringthelastyearandanhalfimplied,ontheirown,anincreaseinpublicdeficitswhichwasmanageableinprinciple:thesizeofthestimulusinallEuropeancountrieswasbelow2%ofGDPandthecyclicaldeteriorationofpublicaccountshasnotaddedingeneralmorethan2percentagepointsofGDPtothedeficit.However,therehasbeenanadditionaldeteriorationofstructuraldeficits,mostlyduetothepermanentlossofrevenuesderived,amongotherthings,fromtheburstofassetpricebubbles.ThishastranslatedintoveryhighdeficitsinseveralsouthernEuropeaneconomies,IrelandandtheUnitedKingdom.Inthecontextofsuchunprecedenteddeficitsinpeacetime,fearsofanuncontrollablesituationonthefiscalfronthavecometothefore,increasingsovereigncreditriskandunderminingconfidenceonthefinancialhealthofinstitutionssuspectedofholdingsizableamountsofsovereignassets.Thishasledmanyofthesecountriestodesignandimplementfiscalconsolidationplansbeforetherecoveryiscompleteinordertorestoremarketconfidence.

Chart 19

Europe: size and composition of consolidation: year on year difference

-8

-6

-4

-2

0

2

4

6

8

09 10 11 12 13 14 09 10 11 12 13 14 09 10 11 12 13 14 09 10 11 12 13 14 08 09 10 11 12 13 14 09 10 11 12 13 14 09 10 11 12 13 14 09 10 11 12 13 14

Germany France Italy Greece Ireland Portugal Spain UKCyclical difference Stimuli withdrawal Structural difference Net Lending difference

Source:BBVAResearchandEC

Consolidation plans in Europe are being

implemented according to schedules presented to the EC at the beginning

of 2010

TheseconsolidationplanshadalreadybeenpresentedtotheEuropeanCommissioninlate2009.Theaimwastobringdeficitsdownbelow3%by2013or2014,butpostponingthebulkoftheadjustmentuntilaftertheendof2010.Sincetheoutsetofthesovereigncrisis,twoofthecountriesmostaffectedbythelackofconfidencefrommarkets(SpainandPortugal)haveannouncedadditionalmeasurestobringtheadjustmentforward,whereastheUnitedKingdomhaspresentedawholenewprogrammeaftertheMayelectionsthatalsoresultsinafasteradjustment–somethingwhichwasbadlyneeded,giventhatpreviousplanspresentedtoBrusselsfailedtoincludeatargetbelow3%evenby2014.InthecaseofGreece,consolidationeffortshavebeenactuallyspreadoutoveralongerhorizoninthecontextoftheIMF/EC/ECBprogram,makingthemmorecrediblethantheexcessivelytightadjustmentprojectedintheoriginalplanpresentedbytheGreekgovernment.Forothercountries,despitetheflurryofnewsinrecentmonthsonfiscalconsolidation,deficit-reductionpathsareunchanged,andinsteadsomedetailshavebeenannouncedonwhatexactlywillbedone,especiallyforthe2011budget.ThefactremainsthatforthelargestEurozoneeconomiestheadjustmentwillonlystartin2011,whereasforthosecountrieswithweakerstartingpointsdeficitcutmeasureshavealreadystartedtobite.

The fact that a sizable share of the increase in fiscal deficits can be attributed to an increase inthe structural deficit calls for consolidation plans that focus on the structural side.And that is, infact,what plans presented to theECenvision (seeChart 19).Nevertheless, aswe stress above,mostconsolidationplansstilllackcrucialdetailsabouthowthatstructuraladjustmentistobemade,especiallyafter2011,whichrisksunderminingthecredibilityoftheexercise.



PAGE 14

Well designed austerity plans can limit their effect

of activity

Fiscal consolidation will end up having a limited impact on economic growth if it is accompanied by the right policies and if the uncertainties currently besetting international financialmarkets recedesignificantly.Specifically,empiricalevidenceusuallyshowsthat,afterdecisivefiscalconsolidationsomecountries actually experienced economic growth, as rising private demand more than compensate the fall in public consumption. This positivewealth effect and resurgent confidence tend to be higherwhentheprocessoffiscalconsolidation(i) isperceivedasa“changeinregime”,that is,whenit isaccompaniedbyastringofstructuralreformsdesignedtoenhanceeconomicgrowthandthusfiscalsustainability;(ii)reliesheavilyonreducingpublicexpenditure,morethanincreasingrevenues(andthusthedistortionsassociatedwithincreasedtaxation);(iii) issizableandperceivedaspermanent,thus increasing credibility, for example focusing on spending cuts, including legislation that creates bindingmulti-yeartargetsandstrengtheningfiscalinstitutions,and(iv)isimplementedinaneconomythat has reached extreme levels of macroeconomic instability, for example due to increasing levels of publicdebtorbalance-of-paymentsdifficulties.

Contrary to the conventional wisdom, our calculations show that the short- and long-run effects of deficit-reductionprogramsoneconomicactivityaresmall,andinlinewithsomepreviouscontributionsto this literature, forexample,Alesina,2010)1.Toobtain this result,wehavebuiltadynamicpaneldatamodeltomeasuretheimpactoffiscaltighteningoneconomicperformance2.Theresultofabasicspecificationshowsthatafiscalimpulse(tightening)raises(depresses)output,buttoalimitedextent,afiscaltighteningof1%ofGDPlowersoutputcontemporaneouslybyaround0.13%(seeCharts20and21).Chart20alsoshowsthatthedragongrowthofareductioninthecyclicallyadjustedprimarydeficitistempered(andcanevenbereversedinthelongrun)whensuchreductionisdoneinthecontextofaconsolidationprogram(definedasareductionofthedeficitofatleast1%ofGDP)3.Wealsoexplorethe role of the starting debt level as consolidation processes have less negative effects on growth in highly-indebtedeconomies.Theshort-runnegativeeffectsareabit lower in low-indebtedcountriesandabithigherinhighly-indebtedones.Ourdatasetallowsalsodistinguishingbetweenspendingandrevenue-basedconsolidations,soweanalyzethefiscalbalancesdevelopmentsbybreakingitupintoprimaryexpenditureandrevenue(bothcyclicallyadjusted),inordertocapturethedifferentialeffectsofexpenditure-basedconsolidations.Econometricevidencealsosupportstheevidencethatspending-basedconsolidationsaremorefavourabletogrowth.

Chart 20

ResponseofGDPgrowthtoanincreaseof CA primary surplus of 1% of GDP

Chart 21

ResponseofGDPgrowthtodiscretionaryreduction in expenditure of 1pp of GDP

-1.0-0.8-0.6-0.4-0.20.00.20.40.60.81.0

Initial year Cumulativefrom year 1 to 3

BaselineConsolidation starting with low debt (40%)Consolidation starting with high debt (80%)

-0,80

-0,60

-0,40

-0,20

0,00

0,20

0,40

0,60

Year 0 Cumulativefrom year 1 to 3

BaselineConsolidation starting with low debt (40%)Consolidation starting with high debt (80%)

*Coefficientsfromapanelregressionof15Europeancountriesfrom1970-2010,including63consolidationepisodes,definedasyearswherethecyclicallyadjustedprimarydeficitwasreducedbyatleast1%ofGDP Source:BBVAResearch

Source:BBVAResearch

1:Alesina(2010),“Fiscaladjustments:lessonsfromrecenthistory”,preparedfortheEcofinmeetinginMadridApril152010. 2: The baseline version of the model includes the following variables, the dependent variable is real GDP growth while the ex-planatoryvariables:LaggeddependentvariablesareWorldGDPgrowth,publicdebt(%GDP),“regression-based”fiscalimpulse/tighteningmeasure,realeffectiveexchangeratesandthereallong-terminterestrates:10-yearbondrate.Thefiscaltighteningmeasurewasconstructedfollowingthesesteps:(1)RuncountryregressionsofFiscalRevenue(%GDP)onGDPgrowth,timetrendandconstant(2)RuncountryregressionsofFiscalExpenditure(%GDP)onGDPgrowth,timetrendandconstant(3)Obtaintheseriesofestimatedresidualsofbothregressionsforeachcountry.(4)Obtainthefirstdifferencesoftheseestimatedresiduals(proxyofinnovation)and(5)Subtractthesefirstdifferencesofrevenueandexpenditure,obtainingimpulse/tighteningmeasureexpressedintermsoffiscalsurplus(%GDP). 3:Theconsolidationdummytakesonvalue1whenthereissuchconsolidationepisodeinthesampleand0otherwise.



PAGE 15

Furthermore, the beneficial effects of a fiscal consolidation are strongerwhen started froma highlevelofpublicdebt,inlinewiththediscussionabove.TheparticularcasesoffiscalreforminIreland(1985-1989),Denmark (1983-1986) andSpain (1993-1999) are good examples of how a crediblefiscaladjustmentaccompaniedbyan improvement in themacroeconomicenvironmentcanensurethatincreasedprivateconsumption,investment–bothresultingfromimprovedexpectations–andnetexports more than offset declining public expenditure and, therefore, have a growth-generating impact evenintheshortterm.

In the current EU context, some countries are

applying accompanying structural reforms, most

notably on pensions

On the first condition cited above for a successful fiscal consolidation (a change in regime withstructuralreforms),severalcountriesareapprovingstructuralreforms,notablyGreeceandtoalesserextentSpain.InthecaseofGreece,reformsonlabour,taxesandcompetitionaretoalargeextentdeterminedbytheneedtomakespendingcutsandobtainhigherrevenues(andinthatsensetheyarenot“accompanying”deficitmeasuresbutattheheartofthem);theyarealsopartlyimposedbytheinternationalinstitutionsthatsurveytheaidpackage.InSpainafinancialreformhasbeenapprovedtorestructure savings banks and a labour reform is under way, in the process of being approved by the Parliament.Severalcountrieshaveapproved(Greece),areintheprocessofapproving(France)orhaveannounced(Spain)pension’sreforms,whichareprobablynotlikelytoreducespendingmuchintheshortrun,butwillresultinsavingsinthemediumtolongrunandthusincreaseconfidenceonthelong-termsustainabilityoftheirfinances.

Theplannedadjustmentis fast and tilted towards

reducing expenditure, which will

boostconfidence

Onthesecondcondition forasuccessfulfiscalausterityplan, it is important tohighlight thatplansapprovedsofarinEurope,althoughlackingdetail(especiallyfor2012andbeyond)aremostlybasedonspendingcuts,notablyinGermany,ItalyandIreland(seeCharts22and23).Inothercountries,partly because of the large effort needed, tax measures have been also approved or planned, as in Portugal,SpainorespeciallyGreece.Francehasamixtureofboth,while theUnitedKingdomhasapprovedhigher taxes for 2011and left a large shareof themoredifficult to implement spendingcutsfor2012andbeyond.Inallcases,itmustbeborneinmindthatfiscalplansafter2011areonlyintentional, and most of them have to be spelled out and approved, which implies that they could be subjecttosubstantialchangesincomingyears.

Chart 22

All detailed expenditure measures as % of GDP

Chart 23

All detailed revenue measures as % of GDP

-2-10123456

Ger

man

y20

10-1

4

Fran

ce20

10-1

4

Italy

2010

-12

Irela

nd20

09-1

0

Por

tuga

l20

09-1

4

Spa

in20

09-1

4

UK

2009

-14

Gre

ece

2009

-14

Wage Bill C+I Transfers Social benefitsPension Other expenditure meas. Not defined

Ger

man

y20

10-1

4

Fran

ce20

10-1

4

Italy

2010

-12

Irela

nd20

09-1

0

Por

tuga

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in20

09-1

4

UK

2009

-14

Gre

ece

2009

-14-2

-10123456

Income Taxation VAT Other taxesTax Evasion Corporate Tax

Source:BBVAResearch Source:BBVAResearch

DeficitcutsinEuropearelikely to have a mild effect

on growth

Allinall,thefactthatinmostcountriestheadjustmentwillbefastandsizable(seeChart19),tiltedmore towards lower spending than higher taxes (Chart 21 and 22) and –in some countries– isaccompaniedby structural reformsshowsclearly thatpolicymakershave internalized the lessonsfromthepast.Thesefeaturesincreasetheplans’chancesofsuccessandminimisestheirlong-termimpactoneconomicgrowth.ThusweexpecttheeffectoffiscalconsolidationinEuropetobelimitedandtransitory,muchlowerthanusuallyassumed.



PAGE 16

Tables

Summary of forecastsTable 1

Euro Area (YoY) 2007 2008 2009 2010 2011GDP at constant prices 2.8 0.4 -4.1 0.9 1.0 Private consumption 1.6 0.3 -1.2 0.0 0.4

Public consumption 2.3 2.2 2.7 1.0 0.5

Gross Fixed Capital Formation 4.6 -0.9 -10.9 -3.4 0.3

Inventories(*) 0.0 0.1 -0.8 1.0 0.0

Domestic Demand (*) 2.4 0.5 -3.3 0.5 0.4Exports(goodsandservices) 6.3 0.7 -13.2 7.7 7.9

Imports(goodsandservices) 5.5 0.8 -11.9 6.9 6.7

External Demand (*) 0.4 0.0 -0.8 0.4 0.6

Prices and Costs CPI 2.1 3.3 0.3 1.3 1.2

CPI Core 2.0 2.4 1.3 0.8 0.8

Labour Market Employment 2.0 0.9 -1.8 -0.6 0.0

Unemploymentrate(%oflabourforce) 7.5 7.6 9.4 10.1 10.5

Public SectorSurplus(+)/Deficit(-)(%GDP) -0.6 -2.0 -6.3 -6.8 -5.5

External SectorCurrentAccountBalance(%GDP) 0.4 -0.9 -0.6 -0.5 -0.2* Contribution to growth Source:BBVAResearch

Table 2

Macroeconomic Forecasts: Gross Domestic Product(YoY growth rate) 2007 2008 2009 2010 2011United States 2.1 0.4 -2.4 3.0 2.5

UK 2.6 0.5 -4.9 1.4 1.7

Latin America * 5.8 4.0 -2.4 5.2 4.2

Asia 7.6 4.2 2.0 6.4 5.5

China 14.2 9.6 9.1 9.8 9.2

Asia(exc.China) 5.2 2.2 -0.7 5.1 4.1

World 5.3 3.0 -0.6 4.4 4.1Forecast closing date: 31st July 2010 *Argentina,Brazil,Chile,Colombia,Mexico,Peru,Venezuela Source:BBVAResearch



PAGE17

Table 3

MacroeconomicForecasts:Inflation(Avg.)(YoY growth rate) 2007 2008 2009 2010 2011United States 2.9 3.8 -0.4 1.6 1.8

Latin America * 6.0 9.0 7.4 8.1 8.4

Asia 2.8 4.9 0.3 2.9 2.8

China 4.8 5.9 -0.7 2.9 3.3

Asia(exc.China) 2.1 4.6 0.6 2.8 2.6

World 4.1 6.1 2.0 3.5 3.3Forecast closing date: 31st July 2010 *Argentina,Brazil,Chile,Colombia,Mexico,Peru,Venezuela Source:BBVAResearch

Table 4

Financial variablesOfficialInterestRates(Endperiod) 2007 2008 2009 2010 2011United States 4.3 0.6 0.3 0.1 0.8

EMU 4.0 2.5 1.0 1.0 1.0

China 7.5 5.3 5.3 5.6 6.1

10-yearInterestRates(Avg).

United States 4.6 3.6 3.2 3.4 3.7

EMU 4.2 4.0 3.3 2.8 3.0

ExchangeRates(USDollarpernationalcurrency)UnitedStates(EURperUSD) 0.7 0.7 0.7 0.8 0.8

EMU 1.4 1.5 1.4 1.3 1.2

UK 2.0 1.8 1.6 1.5 1.4

China 7.6 6.9 6.8 6.7 6.4

Forecast closing date: 31st July 2010 Source:BBVAResearch



PAGE18

GermanyTable 5

GDPgrowthandinflationforecastsYoY rate 2007 2008 2009 2010 2011Private consumption -0.3 0.2 0.0 -0.8 0.6


Gross Fixed Capital Formation 5.3 2.3 -8.9 1.5 2.8

Inventories(*) -0.2 0.5 -0.5 0.3 0.0

Domestic Demand (*) 1.0 1.5 -1.7 0.5 1.1Export 7.8 2.4 -14.5 6.9 6.0

Import 5.0 3.9 -9.5 4.9 5.6

Net export (*) 1.6 -0.5 -3.2 1.1 0.5GDP 2.6 1.0 -4.9 1.6 1.5Inflation 2.3 2.8 0.2 0.9 1.1(*)Contributiontogrowth Source:BBVAResearch

FranceTable 6

GDPgrowthandinflationforecastsYoY rate 2007 2008 2009 2010 2011Private consumption 2.5 0.5 0.6 0.9 1.1


Gross Fixed Capital Formation 5.9 0.3 -7.0 -2.0 2.3

Inventories(*) 0.0 0.3 -1.9 0.5 0.1

Domestic Demand (*) 3.4 0.4 -2.4 0.9 1.2Export 2.5 -0.8 -12.2 5.5 5.6

Import 5.7 0.3 -10.6 4.1 5.0

Net export (*) -1.0 -0.3 -0.2 0.2 0.0GDP 2.3 0.1 -2.5 1.2 1.3Inflation 1.6 3.2 0.1 1.6 1.4(*)Contributiontogrowth Source:BBVAResearch

ItalyTable7

GDPgrowthandinflationforecastsYoY rate 2007 2008 2009 2010 2011Private consumption 1.1 -0.8 -1.8 0.7 0.8


Gross Fixed Capital Formation 1.3 -4.0 -12.2 -0.2 2.1

Inventories(*) 0.1 -0.3 -0.4 0.2 0.0

Domestic Demand (*) 1.2 -1.4 -3.8 0.6 0.9Export 3.9 -3.9 -19.1 3.7 4.2

Import 3.3 -4.3 -14.6 3.1 3.8

Net export (*) 0.2 0.1 -1.2 0.1 0.1GDP 1.4 -1.3 -5.1 0.7 0.9Inflation 2.0 3.5 0.8 1.5 1.6(*)Contributiontogrowth Source:BBVAResearch



PAGE 19

PortugalTable8

GDPgrowthandinflationforecastsYoY rate 2007 2008 2009 2010 2011Private consumption 2.5 1.8 -1.0 1.4 -0.1Public consumption 0.5 0.6 3.0 -0.7 -1.2Gross Fixed Capital Formation 2.6 -1.8 -11.9 -3.5 -1.5Inventories(*) -0.1 0.3 -0.6 0.0 0.0Domestic Demand (*) 2.2 1.2 -3.3 0.1 -0.6Export 7.6 -0.3 -11.8 5.4 5.1Import 5.5 2.8 -10.8 1.6 1.3Net export (*) 0.2 -1.2 0.7 1.0 1.1GDP 2.4 0.0 -2.6 1.1 0.5Inflation 2.0 3.5 0.8 1.5 1.6(*)Contributiontogrowth Source:BBVAResearch

SpainTable 9

GDPgrowthandinflationforecastsYoY rate 2007 2008 2009 2010 2011Private consumption 3.6 -0.6 -5.0 -0.3 0.3Public consumption 5.5 5.5 3.9 1.4 0.2Gross Fixed Capital Formation 4.6 -4.4 -15.2 -9.5 -3.2Equipmentandotherproducts 6.8 -2.7 -20.6 -9.4 -1.9 Construction 3.2 -5.5 -11.1 -9.5 -4.0 Housing 3.0 -10.3 -24.5 -16.8 -6.1 Other construction 3.3 -0.4 1.6 -4.3 -2.5Inventories(*) -0.1 0.1 0.0 0.0 0.0Domestic Demand (*) 4.4 -0.5 -6.4 -2.2 -0.6Export 6.6 -1.0 -11.3 6.6 7.3Import 8.0 -4.9 -17.7 0.0 1.5Net export (*) -0.9 1.4 2.8 1.5 1.3GDP 3.6 0.9 -3.6 -0.6 0.7Inflation 2.8 4.1 -0.3 1.6 1.4(*)Contributiontogrowth Source:BBVAResearch

United KingdomTable 10

GDPgrowthandinflationforecastsYoY rate 2007 2008 2009 2010 2011Private consumption 2.2 0.4 -3.3 0.4 1.3Public consumption 1.3 1.8 1.0 1.6 -2.1Gross Fixed Capital Formation 7.8 -5.0 -15.0 2.8 2.2Inventories(*) 0.1 -0.5 -1.1 0.7 0.5Domestic Demand (*) 3.0 -0.3 -4.4 1.0 0.7Export -2.6 1.0 -10.6 3.0 5.9Import -0.8 -1.2 -12.4 5.4 2.8Net export (*) -0.5 0.7 0.8 -0.7 0.7GDP 2.7 -0.1 -4.9 1.4 1.7Inflation 2.3 3.6 2.2 3.0 2.5(*)Contributiontogrowth Source:BBVAResearch


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Europe Economic Outlook - BBVA Research · 2018. 12. 21. · force in the recovery. Sovereign crisis to impact growth, but with positive news As noted in section 1, the sovereign