Investment Research General Market Conditions 3 October 1 Economic Fact Book: was hit hard by the financial crisis and the bursting of the housing bubble and now has the EU s highest unemployment rate. It is now above and the decline in employment does not seem to have stopped. One major challenge is the extremely high youth unemployment (above 5). The decline in GDP in the first years of the crisis was not strikingly high but job destruction was severe compared with the rest of euro area. The housing market boomed prior to the crisis and credit expanded rapidly. In less than a decade household debt tripled. Spaniards now refer to this period as cuando pensábamos que éramos ricos when we thought we were rich. However, the housing market bubble burst. House prices began to decline and demand fell and as excess supply surged, housing starts came to a virtual standstill. House prices are still falling. Another challenge has for many years been the low productivity growth and high unit labour cost as a result of an inflexible labour market. However, over the last few years, high unemployment and lower wages have led to higher productivity growth. has been challenged by a substantial current account deficit but the deficit has been reduced substantially and the IMF expects to have a current account surplus by 1. The Spanish Prime Minister Mariano Rajoy (People s Party) announced in March 1 that could not meet its deficit target in 1 as a consequence of the worsened economic outlook. The budget deficit target for 1 has been revised several times and currently stands at.3 substantially higher than the. that was the target at the beginning of the year. It is consensus in the financial market that will have a hard time meeting this year s fiscal target as well as the official growth forecast for 13, which is currently -.5. During the summer, was granted up to EURbn in financial assistance to the country s banking sector funded via the EFSF. In the financial markets, focus is currently on when/whether will ask for a precautionary EFSF/ESM programme, which is a condition for ECB intervention in the secondary market. Key facts Population:.m ( 11) GDP per capita: EUR3,, 1 th highest in euro area(11) Government type: constitutional monarchy. bicameral parliament King: Juan Carlos I Majority government led by the Spanish Peoples Party (PP) Prime Minister: Mariano Rajoy (PP) Next election: 15 Central Bank Governor: Luis M. Linde Economic characteristics Large government deficit and public debt High youth unemployment Increased labour productivity Housing prices are stilling falling Outlook for key economic variables Resilience in export GDP (1) CPI (1) Unemployment () Govt. Budget (3) Govt. Debt (3) 1 13 1 13 1 13 1 13 1 13 Need for growth-enhancing reforms Danske Bank -1.5-1.5 1.9 1.7.9. -7. -5.5 8.5 9. IMF -1.5-1.3...9.1-7. -5.7 9.7 9.9 OECD -1. -.8 1..1.5.3-5. -3.3 81.1 8.1 EU (Commission) -1.8 -.3 1.9 1.1..1 -. -.3 8.9 87. 1) y/y. ) of labour force. 3). Source: OECD (spring), IMF (autumn), EU (spring), Danske Bank Senior Economist Frank Øland Hansen +5 51 franh@danskebank.dk Senior Economist Anders Møller Lumholtz +5 51 898 andjrg@danskebank.dk Assistant Analyst Mikael Olai Milhøj milh@danskebank.dk Important disclosures and certifications are contained from page 7 of this report.
Economic Fact Book: Key macroeconomic indicators Structural indicators versus the euro area (EMU) When EMU When EMU Sovereign ratings GDP(1) Q-1 -. -. GDP per capita (5) 11 3, 8,3 S&P BBB- / neg Public sector () 11.7 5.1 Economic size in EMU () 11.9 - Moody's Baa3 / neg Private cons () Q-1 57.8 57. Inflation - HICP (7) Sep-1 3.5. Fitch BBB / neg Investments () Q-1 19. 18.5 Public budget () EC fcst 13 -.3 -.9 Exports () Q-1 1.1 5.5 Public debt () EC fcst 13 87. 9. Sovereign bond yields C/A () - 1M av. Q-1 -.9 -. Long-term interest rates Sep-1 5.91 3.79 Y yield () 3.88 Unemployment (3) Aug-1.1 11.5 1Y yield ().31 Household loans () 11 8 5 1: q/q, : Pct of GDP, 3: of labour force, : based on nominal GDP, 5: EUR per capita, :, 3M av, 7: y/y Public finances Budget deficit is too large......and expenditure remains high.5. -.5-5. -7.5 General Govt budget, -1. EC forecast -1.5.5. -.5-5. -7.5-1. -1.5 8 38 3 Government budget, 1-month MA Expenditure Revenue 3 3 5 7 8 9 1 11 8 38 3 3 Source: Reuters EcoWin, Danske Bank High interest rates on govt bonds 5 3 1 Government bonds spreads to Germany, 1-days MA year 1 year -1 5 3 1-1 Debt below average but rising at high speed 9 8 7 5 General Govt debt, EC forecast 3 9 8 7 5 3 3 October 1
Economic Fact Book: National account No signs of economic recovery Index = Index = 13 GDP constant prices 13 Very large output gap Output gap -points - - - -8-1 -1 Jan Jan 7 Jan 8 Jan 9 Jan 1 Jan 11 Jan 1 Jan 13 OECD USA Source: OECD Decreasing consumption Investments below level Index = Index = 13 Private consumption constant prices 13 1 15 1 13 Index = Gross capital formation constant prices Index = 9 1 15 1 13 9 Export and trade Substantial improvement in CA High growth in industrial exports.5 Current account., Ecofin forecast -.5-5. -7.5, -1. Ecofin forecast -1.5.5. -.5-5. -7.5-1. -1.5 1 1 8 EUR bn, per month Industrial intermediate goods Exports by commodity, SA Consumer goods Capital goods Energy 1 1 8 Distribution of exports by regions Distribution of exports Rest of EMU EU China USA Other Monthly Exp., EUR bn 7. 7..9.3 17.3 Pct of total exp. 9.8 13.3 1.7.1 31. Pct of GDP 1.5.8.3.9 5.8 Key export countries France Germany Italy Pct of total exp. 1.9 1.5 7. Pct of GDP 3.. 1.5 Exports to other countries are increasing 7 5 3 1 Exports by region, SA China Other Rest of EU USA 1 3 5 7 8 9 1 11 7 5 3 1 3 3 October 1
Economic Fact Book: Industrial activity indicators Decreasing industrial production 9 8 Index = Industrial production, 3-months MA, SA Industry production excl. construction Index = New industry orders 9 8 Caused by decreases in all types of industrial activity Index = Index = Capital goods Industrial activity by type, SA Intermediate goods Consumer goods 5 5 Low and decreasing capacity utilisation Low confidence in construction 87.5 Capacity utilisation,. 8.5 8. manufacturing sector, SA 77.5. 7.5 7. 7.5 Euro area 87.5. 8.5 8. 77.5. 7.5 7. 7.5 Balance Construction Balance - Manufacturing Business survey, - confidence, 3-months MA - - - - Leading indicators Low manufacturing PMI 5 Diffusion index Diffusion index 55 5 5 35 PMI manufacturing, SA 3 5 55 5 5 35 3 And service sector not too optimistic 5 Diffusion index 55 5 5 PMI services, SA 35 3 5 55 5 5 35 3 Labour market and demographics Unemployment rate has reached Sharp increase in labour productivity 7.5. Unemployment, harmonized.5. 17.5 15. 1.5 Euro Area 1. 7.5 5. 7.5..5. 17.5 15. 1.5 1. 7.5 5.. 11.5. 17.5. 1.5. 97.5 Index = Labour productivity per hours worked, SA Index = 9 98. 11.5. 17.5. 1.5. 97.5 3 October 1
Economic Fact Book: Employment is still falling 1 Index = Index = 13 Employment, SA 1 13 Extremely high youth unemployment 5 3 1 Unemployment rate divided by age Under Between -5 Above 55 5 3 1 Declining population is a challenge Labour costs are falling, but still high 1. Millions.5 y/y... 39.5 -. 39. 38.5 38. Change in population >> << Population -. -. 37.5 -.8 5 1 15 3 35 1 Index = Index = 13 Unit labour costs (ULC) 1 13 Competitiveness indicators Spanish economy is not that competitive Prices grow faster than EMU average 9 Index = Real effective exchange rate Index = 9 15 Index = Index = 1 13 Harmonized consumer prices 9 15 1 13 9 Construction sector Construction share is decreasing 13 1 11 1 9 8 7 5 Construction as share of GDP 13 1 11 1 9 8 7 5 House prices are still falling 1 15 Index = Residental prices Index = 1 15 5 3 October 1
Economic Fact Book: Household debt tripled in the s Housing market is frozen 5 Index = Index = 35 Loans to households, SA 3 15 5 35 3 15 1 15 5 Index = Buildings completed Housing starts Index = 1 3 5 7 8 9 1 1 15 5 3 October 1
Economic Fact Book: Disclosure This research report has been prepared by Danske Research, a division of Danske Bank A/S ( Danske Bank ). The authors of this research report are Frank Øland Hansen (Senior Economist), Anders Møller Lumholtz (Senior Economist) and Mikael Olai Milhøj (Assistant Analyst). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication. General disclaimer This research has been prepared by Danske Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. 7 3 October 1
Economic Fact Book: This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a- and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non- U.S. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission. 8 3 October 1