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Spain Country Risk Report Q2 2015

Spain Country Risk Report Q2 2015

Core Views

Spain’s economic recovery will remain steady in 2015 and 2016,with real GDP growth set to outperform the eurozone average.

However, growth rates will struggle to match pre-crisis levels duea lack of sustainable growth drivers. An over-reliance on privateconsumption for growth is a threat, given underlying labour marketvulnerabilities.

The era of export driven growth is over in Spain as improving domesticdemand boosts imports and exports struggle amid tepid demandfrom Spain’s main eurozone trading partners.

Spain will adopt a more expansive fiscal policy in the run-up toparliamentary elections in December 2015 and probably beyond.Spain will struggle to pull away from deflationary territory in 2015due to declining energy and food prices. ECB monetary expansionand a gradual recovery in domestic demand will do just enough toprevent deflation persisting over the long term.

Declining support for Spain’s two main parties means the December2015 election will produce Spain’s first coalition government sincedemocratisation, most likely without the ruling People’s Party.

Major Forecast Changes

We have revised up our real GDP forecasts for 2015 and 2016 to1.7% for both years, from 1.6% in both years previously. This is dueto deflation and loWenergy prices boosting household disposableincomes.


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Political Change On The Horizon
Declining support for Spain's two main parties means the December 2015 election will produce Spain's first coalition government since
democratisation, most likely without the ruling People's Party.
Table: Political Overview
Long-Term Political Outlook
Political Challenges Beyond The Recession
Spain's ongoing economic malaise has put several structural political issues into the spotlight. Challenges over the next decade will
include unemployment, demographic changes and constitutional questions.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Growth Built On Shaky Foundations
Although Spain's economy will strengthen further in 2015 and 2016, we think the recovery is built on unstable foundations.
Table: Economic Activity
Balance Of Payments
Export-Driven Growth Era Finished
Ailing demand from core eurozone economies and a gradual pickup in domestic demand will widen Spain's trade deficit again over the
coming years, pushing the current account back into deficit. This suggests Spain's era of export-driven growth is over.
Table: Balance Of Payments
Fiscal Policy
Era of Austerity Over
Spain will regularly miss budget deficit targets over the next few years, as the government abandons austerity in favour of a more
growth orientated fiscal position.
Table: Fiscal Policy
Monetary Policy
Deflation Unlikely To Pose Significant Risks
Spain will struggle to pull away from deflationary territory in 2015, due to declining energy and food prices. ECB monetary expansion
and a gradual recovery in domestic demand will do just enough to prevent deflation persisting over the long term.
table: Monetary Policy
Banking Sector Outlook
Bank Profits To Remain Under Pressure
The worst is over for the Spanish banking sector, with healthy capital provisioning meaning the sector is now better prepared for any
potential credit shocks.
Regional Economic Outlook
ECB QE: Whatever It Takes, For However Long It Takes
The European Central Bank (ECB) has unveiled a quantitative easing programme under which it will purchase a minimum of EUR1.1trn
in sovereign bonds and other securities. While the programme has exceeded our expectations, we still believe it will have only a limited
effect in boosting eurozone economic activity and inflation.
Chapter 3: 10-Year Forecast
The Spanish Economy To 2024
Slow, But Steady Growth Ahead
In order to correct for the massive imbalances built up during Spain's decade-long economic boom, the economy is now in the first
stages of rebalancing that will result in a lower long-run growth potential. Household spending in particular, which was the primary driver
of growth since adoption of the euro, is set to temper significantly amid an environment of tighter credit conditions and deleveraging.
While an internal devaluation will help restore some of Spain's competitiveness over the long run, the process will be long and painful.
Ultimately, compared with the levels of growth enjoyed since euro adoption, the next 10 years are likely to be a lost decade for Spain.
Table: Long-Term Macroeconomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
tABLE: Developed States - Labour Market Risk
Table: Developed States - Logistics Risk
Table: Developed States - Crime And Security Risk
table: Developed States - Trade And Investment Risk
Chapter 5: Key Sectors
Automotives
Table: Autos Total Market - Historical Data And Forecasts
Food & Drink
Table: Food Consumption Indicators - Historical Data & Forecasts
Other Key Sectors
Table: Oil and Gas Sector Key Indicators
Table: Pharma Sector Key Indicators
Table: Infrastructure Sector Key Indicators
Table: Telecoms Sector Key Indicators
Table: Defence and Security Sector Key Indicators
Table: Freight Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
Weaker EMs To Weigh On Growth
Table: Global Assumptions
Table: Developed States, Real GDP GrowtH, %
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table: Emerging Markets, Real GDP Growth, %

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