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Quarterly Report Perspectives Spanish and Global Economy Q3-2020

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Economic situation summary

The uncertainty surrounding the spread of Covid 19 is significantly conditioning economic agents’ expectations for the coming years In this context, most international organizations (the IMF, OECD, World Bank and European Commission) project a contraction of GDP above 3 yearly for 2020 and warn of risks such as rising unemployment and a possible spike in inflation above 2 in some economies, and a future increase of debt as a result of the fiscal and monetary stimulus packages That said, these organizations also point out that without these expansionary measures, the economic recession would have been a lot worse.

In developed countries the gradual reactivation of the economy began in May with the easing of movement restrictions to contain the spread of the virus In the US the Fed improved its growth forecasts, envisioning a smaller decrease in GDP 3 4 yearly vs 6 5 previously), and revised its monetary policy goals with a more direct monitoring on the job creation objective In the Eurozone economic sentiment improved as the ECB continued its monetary stimulus plan, and the European Commission finalized details of a European recovery fund of 750 000 million.

In most emerging markets the spread of the virus continues to lower the expectations of economic agents, in some cases intensifying the structural risks to these economies (debt sustainability, unemployment In India and Brazil two of the countries most affected by the pandemic, GDP is forecast to contract in 2020 by 10 2 and 6 5 yearly and respectively In China the curve representing new cases seems to be under control, and economic activity has rebounded strongly in the second half of 2020 creating a V shaped recovery.

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Quarterly Report Perspectives Spanish and Global Economy Q3-2020

  1. 1. Global and Spanish economic perspectives Q3- 2020 October 2020 QUARTERLY REPORT
  2. 2. GLOBAL
  3. 3. The uncertainty surrounding the spread of Covid-19 is significantly conditioning economic agents’ expectations for the coming years. In this context, most international organizations (the IMF, OECD, World Bank and European Commission) project a contraction of GDP above 3% yearly for 2020, and warn of risks such as rising unemployment and a possible spike in inflation above 2% in some economies, and a future increase of debt as a result of the fiscal and monetary stimulus packages. That said, these organizations also point out that without these expansionary measures, the economic recession would have been a lot worse. In developed countries, the gradual reactivation of the economy began in May, with the easing of movement restrictions to contain the spread of the virus. In the US, the Fed improved its growth forecasts, envisioning a smaller decrease in GDP (-3.4% yearly vs. -6.5% previously), and revised its monetary policy goals with a more direct monitoring on the job creation objective. In the Eurozone, economic sentiment improved as the ECB continued its monetary stimulus plan, and the European Commission finalized details of a European recovery fund of €750,000 million. In most emerging markets, the spread of the virus continues to lower the expectations of economic agents, in some cases intensifying the structural risks to these economies (debt sustainability, unemployment…). In India and Brazil, two of the countries most affected by the pandemic, GDP is forecast to contract in 2020 by 10.2% and 6.5% yearly and respectively. In China, the curve representing new cases seems to be under control, and economic activity has rebounded strongly in the second half of 2020, creating a V-shaped recovery. Economic situation summary 3 Source: Círculo de Empresarios, 2020.
  4. 4. Covid-19 continues its spread on a global scale Source: Círculo de Empresarios based on ONS, 2020. 4 Evolution of coronavirus cases Millions of people Global coronavirus incidence From September 28th Coronavirus is spreading rapidly on a global scale. In some areas, certain mobility and activity restrictions are lifted, while they are reimposed in others. In October, there were more than 35 million cases of Coronavirus in the world (0.4% of the world population). In accumulated terms, US is the country with the most cases, followed by India. 0 1 2 3 4 5 6 7 31-Dec 31-Jan 29-Feb 31-Mar 30-Apr 31-May 30-Jun 31-Jul 31-Aug South America US China Europe India Rest US India Brazil Russia Spain Mexico France 21,495 618.5 cases/million 109.5 new cases/million deaths/million 4,402 59.5 69.2 22,263 67.4 666.8 7,890 15,324 5,664 8,251 47 233.5 185.6 668 36.2 592.8 486.1139.3
  5. 5. Global economic recession Source: Círculo de Empresarios based on OECD, 2020. 5 OECD growth forecasts, September 2020 YoY change (%) A slight improvement for the world economic recovery scenario in the second half of 2020. World growth perspectives YoY change (%) and contributions to growth Nov 2019 scenario Jun 2020 scenario Sep 2020 scenario Single impact of Covid-19 Double impact of Covid-19 -11.5 -2.9 -7.3 -10.2 -6.5 -10.2 1.8 -1 -4.1 -10.1 -5.8 -3.8 -10.5 -9.5 -5.4 -7.9 -4.5 2020 1.4 3.9 5 3 3.6 8 3.1 2.5 7.6 1.5 4 5.4 5.8 4.6 5.1 5 2021 10.7 0.1 0.9 1.4 -0.3 1.1 4.2 6.1 2 1.8 1.5 0.7 2.2 0.3 1.5 0.6 1.3 2.6 South Africa Turkey Russia Mexico Brazil India China South Korea Australia UK Japan US Italy France Germany Eurozone World 2019 86 91 96 101 106 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
  6. 6. World demand is showing signs of recovery Source: Círculo de Empresarios based on OECD and CPB the Netherlands Bureau for Economic Policy Analysis, 2020. 6 Household consumption is reactivated as movement restrictions to stop the spread of the virus are lifted. Evolution of world trade (%) Household consumption Change with respect to January 2020 (%) In Q3, according to the World Trade Monitor, the volume of world trade returned to positive registers after decreasing by more than 17% year-on-year in May. -35 -30 -25 -20 -15 -10 -5 0 5 10 China SouthKorea Germany Japan Brazil US UK Mexico Turkey Canada France Italy April June July -25 -20 -15 -10 -5 0 5 10 15 20 25 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 YoY change QoQ change
  7. 7. Industrial and service sectors Source: Círculo de Empresarios based on Oxford Economics, 2020. 7 Industrial production on a global scale started to pick up at the end of Q2 2020, although it is expected to remain below 2019 levels until 2021. Industrial and service sectors evolution in previous recessions Change with respect to the period prior to the recession (%) Industrial production evolution Q4 2019 index = 100 The Covid-19 crisis has led to a decline in the industrial and service sectors above those of other crises, although it is expected that this one will not last as long. 60 70 80 90 100 110 120 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 US China India Japan Germany -10 -8 -6 -4 -2 0 2 Covid-19 crisis (Q42019- Q22020) Financial crisis (2008/09) Dot-Com crisis (US 2000/01) Industrial production Services sector GDP
  8. 8. Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Germany 41.7 42.1 44.1 43.7 45.3 48 45.4 34.5 36.6 45.2 51 52.2 56.4 France 50.1 50.7 51.7 50.4 51.1 49.8 43.2 31.5 40.6 52.3 52.4 49.8 51.2 Italy 47.8 47.7 47.6 46.2 48.9 48.7 40.3 31.1 45.4 47.5 51.9 53.1 53.2 US 51.1 51.3 52.6 52.4 51.9 50.7 48.5 36.1 39.8 49.8 50.9 53.1 53.2 Spain 47.7 46.8 47.5 47.4 48.5 50.4 45.7 30.8 38.3 49 53.5 49.9 50.8 UK 48.3 49.6 48.9 47.5 50 51.7 47.8 32.6 40.7 50.1 53.3 55.2 54.1 Japan 48.9 48.4 48.9 48.4 48.8 47.8 44.8 41.9 38.4 40.1 45.2 47.2 47.7 China 49.8 49.3 50.2 50.2 50 35.7 52 50.8 50.6 50.9 51.1 51 51.5 India 51.4 50.6 51.2 52.7 55.3 54.5 51.8 27.4 30.8 47.2 46 52 56.8 Brazil 53.4 52.2 52.9 50.2 51 52.3 48.4 36 38.3 51.6 58.2 64.7 64.9 World 49.7 49.8 50.3 50.1 52.2 47.1 47.3 39.6 42.4 47.9 50.6 51.8 50.6 Manufacturing PMIs in an expansionary phase Source: Círculo de Empresarios based on Markit, 2020. 8 In Q3, manufacturing sentiment showed slight signs of improvement after the slump in the previous quarter as new orders start to pick up. Manufacturing PMI 50=threshold (values>50 indicate expansion) Note: in order to calculate the global data, the JP Morgan Global Manufacturing PMI has been used. 67%ofworldGDP
  9. 9. Expansion of the monetary policy Source: Círculo de Empresarios based on Bloomberg, 2020. 9 In the current context of uncertainty around containment of the pandemic and global economic recovery, central banks are expected to adopt an ultra expansionary monetary policy that will remain in place for the next few years. Monetary policy measures by the main central banks Forward guidance: breaking news reports on medium-term monetary policy decisions. Asset backed securities Yield Control "Forward guidance" Negative Rate Govt Bonds Corp Bonds US Near Zero Rates Canada China Eurozone India Japan Mexico Norway Russia Saudi Arabia Australia Brazil South Korea Sweden UK Financial crisis 2008-10 NowYes No
  10. 10. China: V-shaped economic recovery Source: Círculo de Empresarios based on Oxford Economics, National Bureau Statistics of China, 2020. 10 OECD GDP forecasts, September YoY change (%) In Q2 2020, China’s GDP increased 11.5% quarterly compensating for the 10% fall in Q1 2020. In year-on-year terms, the economy reached a 3.2% growth rate that confirms its V-shaped recovery. Economic activity YoY change (%) V-shaped GDP recovery Quarterly change (%) and index 100=Q4 2019 6.1 1.8 8 2019 2020 2021 The breakdown of figures reveals an uneven economic advance. While the supply side is showing positive signs through industrial production, internal demand remains at a standstill. 1,3 -10 11,5 70 80 90 100 110 120 130 -12 -8 -4 0 4 8 12 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 QoQ change Index 100=Q4 19 -30 -20 -10 0 10 20 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Industrial production Retail
  11. 11. China: solid expectations while investment weakens Source: Círculo de Empresarios based on Oxford Economics, General Customs Administration of China, Rhodium Group and Bloomberg, 2020. 11 Goods exports Billions $ Direct foreign investment flows % of GDP In August, total exports grew 9.5% year-on-year, to $235.3 billion. The trend has improved as international demand recovers. In accumulated terms for the year, exports have grown 2.3%, which is below 2019 levels. Chinese investment flows in the USA fell 31% in the first six months of 2020 compared to the same period in 2019, reaching $4,1billion (0.03% of GDP). 100 120 140 160 180 200 220 240 260 15 20 25 30 35 40 45 50 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Exports to US Exports to Asia Exports to EU Total exports (right axis) 0 5 10 15 20 25 30 35 40 45 50 2013 2014 2015 2016 2017 2018 2019 Jan-Jun 2020 FDI from China in US FDI from US in China
  12. 12. 57.2 159.1 58.2 0 50 100 150 200 250 300 Q12006 Q12007 Q12008 Q12009 Q12010 Q12011 Q12012 Q12013 Q12014 Q12015 Q12016 Q12017 Q12018 Q12019 Q12020 Household debt Business debt Public debt China: deficit and debt worsens Source: Círculo de Empresarios based on Oxford Economics, 2020. 12 … which will put pressure on economic agent debt which is already at record levels. Government balance sheet % of GDP Economic stimulus packages by the Chinese government could put the public deficit at 3.6% of GDP in 2020 … Non-financial sector debt % of GDP -5 -4 -3 -2 -1 0 1 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
  13. 13. India: no grip on the pandemic and a collapse of GDP Source: Círculo de Empresarios based on Oxford Economics and the Google Mobility Report, 2020. 13 In Q2 2020, India’s GDP fell 23.9% year-on-year mainly due to the economic standstill in light of the tough restrictive measures imposed by the state authorities to contain the spread of the virus. This situation and the high state of uncertainty has been a deterrent to investment (-47% year-on-year) and household consumption (-26% year-on-year). Population mobility in retail Change with respect to the base year (%)(average 7 days) GDP evolution and the main demand components YoY change (%) Currently, India is the second country in the world with the most accumulated cases after the US, and the one with the highest number of reported cases per day. 8.2 7.1 6.7 6.1 4.2 -10.2 -30 -20 -10 0 10 20 30 40 50 -100 -80 -60 -40 -20 0 20 40 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q32018 Q42018 Q12019 Q22019 Q32019 Q42019 Q12020 Q22020 Q32020 Q42020 GDP growth (right axis) Exports Household consumption Investment Annual GDP -100 -80 -60 -40 -20 0 20 4-Mar 4-Apr 4-May 4-Jun 4-Jul 4-Aug 4-Sep India Hong Kong New Zealand Brazil Switzerland US
  14. 14. Source: Círculo de Empresarios based on Oxford Economics, 2020. US: historic fall of GDP in Q2 GDP and demand side components YoY change (%) 14 The Covid-19 crisis has caused the most drastic American economic quarterly fall. GDP registered -9.5% quarterly in Q2 2020 (-1.3% in Q1). This figure places the economy in a technical recession. GDP evolution and forecasts YoY and QoQ change (%) By components on the demand side, the fall in private consumption of -10.5% stands out, as well as exports with a decrease above 20% year-on-year. -9.5 -12 -8 -4 0 4 8 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017 Q3 2017 Q1 2018 Q3 2018 Q1 2019 Q3 2019 Q1 2020 Q3 2020 QoQ change YoY change -25 -20 -15 -10 -5 0 5 10 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017 Q3 2017 Q1 2018 Q3 2018 Q1 2019 Q3 2019 Q1 2020 Q3 2020 Private consumption Exports Imports Investment
  15. 15. Source: Círculo de Empresarios based on Oxford Economics, the U.S. Census Bureau and Markit, 2020. 15 US: economic reactivation PMIs Points Activity indicators show a recovery of the American economy as the lockdown measures are eased, although this is gradual. Macro indicators Index 2012 = 100 In July, increased industrial production moderated to 3% month-on-month (vs. 5.7% in June) and retail trade to 1.2% (vs. 8.4% in June). 90 100 110 120 130 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19 May-20 Retail Industrial production 20 30 40 50 60 70 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Manufacturing PMI Services PMI Non manufacturing PMI (ISM)
  16. 16. Source: Círculo de Empresarios based on Oxford Economics y U.S. Census Bureau, 2020. 16 US: small business expectations American small business survey: “How long will it take before business returns to last year’s level of operations? % In August, the weekly survey by the U.S. Census Bureau showed mixed signs in the recovery of small business activity after the re-opening of the economy. - Almost 10% of small businesses do not expect a return to normality or have closed permanently. - Almost 50% do not expect a return to normality in the next 6 months. - Around 25% were only slightly affected or have returned to normality. 8.510.6 12.4 12.7 15.6 16.1 15.2 51.8 45.9 36.5 37 30.3 19.8 31.4 35.2 41.2 38.3 43.9 47.6 6.2 6.5 9.6 9.1 9.7 7.5 1.5 0 25 50 75 100 2-May 9-May 16-May 23-May 30-May 6-Jun 13-Jun 20-Jun 27-Jun 15-Aug Return to normal < 1 month 2-6 months >6 months Never Closed
  17. 17. Source: Círculo de Empresarios from the US Bureau of Labor Statistics, 2020. 17 US: employment levels start to recover Monthly evolution of employment % of the workforce and job positions in millions In August, the return to work was slow with the creation of 1.4 million jobs, reducing the unemployment rate to 8.4%, the lowest recorded since the start of the crisis. For its part, claims for unemployment benefits continued increasing above the weekly 800,000 requests. Unemployment benefit claims Millions 125 130 135 140 145 150 155 0 2 4 6 8 10 12 14 16 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Millares Unemployment rate Number of employees (right axis) 0 1 2 3 4 5 6 7 8 7-Mar 21-Mar 4-Apr 18-Apr 2-May 16-May 30-May 13-Jun 27-Jun 11-Jul 25-Jul 8-Aug 22-Aug 5-Sep
  18. 18. 18 US: the Fed’s strategic revision (I) Source: Círculo de Empresarios based on Bloomberg and the Fed, 2020. The structural changes that have motivated the readjustment in the Fed’s monetary policy strategy are mainly: • A decrease in GDP growth potential (a fall in productivity and an aging population). • The continual decrease in interest rates (reduced room for maneuver to lower interest rates in times of recession). • Reduced inflationary sensitivity to the dynamism of the labour market and activity (flattening of the Phillips Curve). At the end of August, Jerome Powell announced the Fed’s new objectives in his Jackson Hole speech, ending its monetary policy strategy carried out since November 2018. The Fed pursued a long-term inflation objective of 2%, prioritizing in large measure the creation of employment. Potential GDP estimate and neutral interest rate* % *Neutral interest rate: interest rate with which the job and goods market is balanced. 0 1 2 3 4 5 6 7 Dec-61 Feb-66 Apr-70 Jun-74 Aug-78 Oct-82 Dec-86 Feb-91 Apr-95 Jun-99 Aug-03 Oct-07 Dec-11 Feb-16 Apr-20 Neutral interest rate Potencial GDP
  19. 19. US: the Fed’s strategic revision (II) Source: Círculo de Empresarios based on the Fed, 2020. 19 In its September meeting, the Fed decided to maintain its monetary policy without change, with interest rates in a range of between 0% and 0.25%, which is expected to remain until 2023. The Fed’s balance sheet Trillions $ The Fed’s growth forecasts, September FOMC* members, September meeting 2020 Official interest rate (%) 0 1 2 3 2020 2021 2022 2023 Long term *Federal Open Market Committe 0 1 2 3 4 5 6 7 8 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19 Aug-20 Recession Recession 2020 2021 2022 2023 Long term GDP growth -3.7 4.0 3.0 2.5 1.9 June forecasts -6.5 5.0 4.6 1.8 Unemployment rate 7.6 5.5 4.6 4.0 4.1 June forecasts 9.3 6.5 5.5 4.1 PCE inflation 1.2 1.7 1.8 2.0 2.0 June forecasts 0.8 1.6 1.7 2.0 PCE underlying inflation 1.5 1.7 1.8 2.0 June forecasts 1.0 1.5 1.7
  20. 20. US: the Fed’s strategic revision (III): risks Source: Círculo de Empresarios based on Bloomberg and BIS, 2020. 20 The setting of interest rates between 0.25% and 0% in the long term, and a greater preference by agents for safe assets could increase pressure on the sustainability of future debt. Public debt yields % These days, public and business debt is at historic levels. Evolution of the non-financial debt % of GDP 0 1 2 3 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Bond 2 years Bond 10 years 40 50 60 70 80 90 100 110 120 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 US Government debt Corporate debt Household debt
  21. 21. -50 -40 -30 -20 -10 0 10 20 Q2 2013 Q4 2013 Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q4 2017 Q2 2018 Q4 2018 Q2 2019 Q4 2019 Q2 2020 Unit labour costs Hours worked Labour productivity US: inflation Source: Círculo de Empresarios based on the U.S. Census Bureau, 2020. 21 Inflation indicators YoY change (%) In July, underlying inflation bounced back to 1.6% and labour costs increased above 9% year-on-year for the second consecutive quarter. Labor costs and productivity YoY change (%) With the Fed’s new inflation target, prices could withstand annual growth rates above 2% yearly in the short and medium terms. -1 0 1 2 3 4 5 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 CPI Food Underlying inflation
  22. 22. Latin America: economic forecasts For 2020, growth forecasts for countries in Latin America have worsened due to the increase in Covid-19 cases, and the impact of the measures adopted to stop its spread. Development of GDP Annual change (%) Source: Círculo de Empresarios based on Oxford Economics, 2020. 22 -0.3 -7.5 5.6 2019 2020 2021 Latin America 1.1 -5.5 5.1 -14 -10 -6 -2 2 6 10 14 2019 2020 2021 Brazil -0.3 -7.2 4.7 2019 2020 2021 Mexico 3.3 -6.6 4.8 2019 2020 2021 Colombia 2.2 -12.5 13.6 -14 -10 -6 -2 2 6 10 14 2019 2020 2021 Peru 1.0 -5.3 5.7 2019 2020 2021 Chile -2.1 -10.4 9.1 2019 2020 2021 Argentina Closed data Forecasts
  23. 23. Latin America: the impact of economic measures Fiscal expenditure in 2020 % of GDP Source: Círculo de Empresarios based on Oxford Economics, 2020. Brazil and Peru are the countries in the region that have granted the most aid to mitigate the economic effects of the health crisis. This has included lowering official interest rates and increasing the public debt. Official interest rates % Public debt % of GDP 0 2 4 6 8 Mexico Argentina Colombia Chile Peru Brazil 23 0 10 20 30 40 50 60 70 80 90 0 2 4 6 8 10 12 14 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Brazil Colombia Peru Chile Mexico Argentina (right axis) 0 20 40 60 80 100 120 2013 2014 2015 2016 2017 2018 2019 2020 Argentina Brazil Chile Colombia Mexico Peru
  24. 24. 75000 80000 85000 90000 95000 100000 0 5 10 15 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Working population (right axis) Unemployment rate Brazil: the country with the most Covid-19 cases in Latin America In June, Brazil’s economy showed signs of improvement due to the lifting of lockdown measures and the “corona vouchers”. However, GDP in Q2 2020 fell 11.4% year-on-year (-0.3% Q1 2020), taking Brazil into a technical recession. Quarterly development of GDP YoY change (%) Workforce and unemployment level Thousands of people and % of workforce Source: Círculo de Empresarios based on Banco Central do Brasil and IBGE, 2020. Manufacturing PMI, services PMI and EAI Points and MoM change (%) 24 -11.4 -12 -8 -4 0 4 8 12 Q22008 Q42008 Q22009 Q42009 Q22010 Q42010 Q22011 Q42011 Q22012 Q42012 Q22013 Q42013 Q22014 Q42014 Q22015 Q42015 Q22016 Q42016 Q22017 Q42017 Q22018 Q42018 Q22019 Q42019 Q22020 COVID-19 Economic recession 2014 Financial crisis 2008 -10 -8 -6 -4 -2 0 2 4 6 20 40 60 80 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Brazil Manufacturing PMI Brazil Services PMI EAI (right axis) QoQ change -9.6%
  25. 25. Mexico: slight economic recovery Source: Círculo de Empresarios based on Oxford Economics and INEGI, 2020. Economic activity index (IGAE) Index 2013=100 25 In July, the global index of economic activity (IGAE) continued to show signs of recovery for the second consecutive month, boosted mostly by industrial production after the historic fall registered in April. For its part, it is expected that the uncertainty and the low level of activity will continue into the second half of the year, placing its rate of unemployment above 4.5% for the whole of 2020. Unemployment rate % of the workforce 40 50 60 70 80 90 100 110 120 130 Jan-93 Apr-94 Jul-95 Oct-96 Jan-98 Apr-99 Jul-00 Oct-01 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14 Jul-15 Oct-16 Jan-18 Apr-19 Jul-20 Total index Industry Services sector 3 4 5 6 Nov-05 Jul-06 Mar-07 Nov-07 Jul-08 Mar-09 Nov-09 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 Mar-17 Nov-17 Jul-18 Mar-19 Nov-19
  26. 26. Peru: significant decrease in the forecasts for Q2 In Q2 2020, Peru’s GDP fell 22.8% due to social isolation, uncertainty and the shrinking of global demand. It is the second Latin American country with the most Covid-19 cases. Source: Círculo de Empresarios based on INEI and Oxford Economics, 2020. Evolution of GDP Quarterly and YoY change(%) GDP components YoY change(%) Evolution of retail trade and the leisure industry Change of number of visitors 7-day average (%) 26 -12.5 3.6 -30 -25 -20 -15 -10 -5 0 5 10 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q32018 Q42018 Q12019 Q22019 Q32019 Q42019 Q12020 Q22020 Q32020 Q42020 QoQ change Current forecasts Pre-Covid-19 scenario Q2 2017 Q2 2018 Q2 2019 Q2 2020 Domestic demand 0.7 5.7 1.9 -27.7 Privateconsumption 2.9 5 2.6 -22.1 Public consumption 0.9 2.6 4.6 -3.2 Investment -5.4 9.4 -1.5 -57 Foreign demand -243.9 -15.5 -83.8 -1,784.5 Exports 15.9 5.9 -1.5 -40.3 Imports 8 6.7 1.1 -31.3 -90 -60 -30 0 17-Feb 17-Mar 17-Apr 17-May 17-Jun 17-Jul 17-Aug Argentina Brazil Chile Colombia Mexico Peru
  27. 27. Eurozone: GDP collapse 27 In Q2 2020, Eurozone GDP registered an unprecedented contraction as a result of the economic standstill due to the lockdown measures. Spain heads the quarterly fall with a GDP decrease of 17.8%. Economic growth Quarterly change (%) -17.8-20 -16 -12 -8 -4 0 4 2013 2014 2015 2016 2017 2018 2019 2T 2020 Spain -13.8 -20 -16 -12 -8 -4 0 4 2013 2014 2015 2016 2017 2018 2019 2T 2020 France -9.7 -20 -16 -12 -8 -4 0 4 2013 2014 2015 2016 2017 2018 2019 2T 2020 Germany -12.8 -20 -16 -12 -8 -4 0 4 2013 2014 2015 2016 2017 2018 2019 2T 2020 Italy -11.8 -20 -16 -12 -8 -4 0 4 2013 2014 2015 2016 2017 2018 2019 2T 2020 Eurozone -8.5 -20 -16 -12 -8 -4 0 4 2013 2014 2015 2016 2017 2018 2019 2T 2020 Netherlands Q2 Q2 Q2 Q2 Q2 Q2 Source: Círculo de Empresarios based on Eurostat, 2020.
  28. 28. Eurozone: the second wave of cases Source: Círculo de Empresarios based on the WHO and Google Mobility Trends, 2020. 28 After stabilizing the curve representing new cases at the end of May, the appearance of further cases has obliged authorities to reimpose exceptional measures in order to stop the spread of the virus, which has conditioned the reactivation of the economy. Evolution of daily Covid-19 cases Number of new cases per million inhabitants Population mobility in retail businesses % change with respect to the base level (7-day average) 0 50 100 150 200 250 24-Feb 24-Mar 24-Apr 24-May 24-Jun 24-Jul 24-Aug 24-Sep Spain Germany Italy Netherlands France -100 -80 -60 -40 -20 0 20 17-Feb 2-Mar 16-Mar 30-Mar 13-Apr 27-Apr 11-May 25-May 8-Jun 22-Jun 6-Jul 20-Jul 3-Aug 17-Aug Germany Netherlands France Italy Spain
  29. 29. Eurozone: the impact on unemployment and prices Source: Círculo de Empresarios based on European Commission, 2020. The decrease in activity has caused a significant increase in unemployment. For its part, inflation in August fell, registering -0.2%, which places it at the low levels of 2016. Inflation Unemployment rate increase 2019-20 (pp) Unemployment rate % of the workforce 0 5 10 15 20 25 30 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 Feb-19 Sep-19 Apr-20 Eurozone Germany Spain France Italy Netherlands -20 -15 -10 -5 0 5 10 15 -1 0 1 2 3 4 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 CPI Underlying inflation Energy (right axis) 29
  30. 30. Germany: slight industrial recovery Source: Círculo de Empresarios based on Eurostat, 2020. 30 In the first half of 2020, Germany’s GDP contracted by around 14%, conditioned principally by the fall in private consumption and exports. First quarter growth 2020 QoQ change (%) Industrial production Change compared to January 2020 (%)and contributions by activity (pp) After the lockdown, Germany’s industry began to recover, although it remains far from the levels prior to January. -30 -25 -20 -15 -10 -5 0 5 GDP Private consumption Public expenditure Investment Exports Imports Q1 2020 Q2 2020 1st Semester 2020 -30 -25 -20 -15 -10 -5 0 5 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Construction (pp.) Rest (pp.) Pharmaceutical sector (pp.) Automotive sector (pp.) Industrial production (%)
  31. 31. The ECB continues with its monetary stimulus packages Source: Círculo de Empresarios based on the European Commission, 2020. 31 The ECB has maintained with no changes its reference interest rates for its refinancing operations at 0%, and the deposit facility rate at -0.5%. It is expected that these rates will remain or decrease until the perspectives for inflation converge solidly with the target level. ECB forecasts for the Eurozone, September 2020 YoY change (%) European Commission forecasts YoY change (%) At the same time, the organization will maintain its assets purchasing program to deal with the pandemic (PEPP), whose total volume is €1.35 trillion. -1 0 1 2 3 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Deposit facility rate Deposit interest rate 2020 2021 2022 GDP growth -8 5 3.2 CPI 0.3 1 1.3 Public deficit (% of GDP) 8.8 4.9 3.6
  32. 32. M3 creation within the Eurosystem intensifies 32Source: Círculo de Empresarios based on ECB, 2020. Private sector credit and net purchases of government securities by the Eurosystem within the framework of the ECB’s Asset Purchase Programme and the Pandemic Emergency Purchase Programme (PEPP) are the main reasons for the M3 increase. ECB balance sheet YoY change (%) M3 evolution by components YoY change (%) and contributions to growth (pp) 0 2 4 6 8 10 12 14 16 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 M1 M3 -6 -4 -2 0 2 4 6 8 10 12 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Credit to the private sector Inflows from longer.term financial liabilities Credit to general government from MFIs excluding the Eurosystem General government debt securities Net external monetary flows M3
  33. 33. 33 Fiscal response to the Covid-19 crisis Source: Círculo de Empresarios based on CaixaBank Research, Bruegel and the European Commission, 2020. The Eurozone economies have responded decisively to the recession, implementing fiscal stimulus packages to stimulate activity. Public deficit, changes according to origin % of GDP At the same time, the impact of these measures on future budget stability will be conditioned by the spending structure. Economies with more generous unemployment programs will be more limited because they will see a greater increase on their automatic stabilizers. Fiscal measures announced by the main Eurozone countries. % of GDP Direct fiscal measures Tax deferrals Guarantees and endorsements Spain 3.8 4.3 13.3 Germany 8.3 7.3 24.3 France 4.4 8.7 14.2 Italy 3.4 13.2 32.1 -10 -8 -6 -4 -2 0 Germany Spain France Italy Discretionary Automatic stabilizers
  34. 34. Oil: the price of crude oil recovers Source: Círculo de Empresarios based on EIA, 2020. 34 The price of a barrel of Brent increased 120% from April, boosted by the policy of output cuts by OPEC and its allies in August (from 9.7 million barrels a day to 7.7), to around 45 dollars. Upward pressures 2 1 Reactivation of the economy and world demand for oil. 2 OPEC’s policy of output cuts. 1 Evolution of the price of a barrel of Brent $ per barrel Downward pressures Factors involved in the evolution of the price of oil in the short and medium-term. Possible resumption of the trade war between the US and China. The future result of the US elections.3 A new worldwide wave of Covid-19 cases. 0 10 20 30 40 50 60 70 80 Oct-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20
  35. 35. 1000 1200 1400 1600 1800 2000 2200 2400 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Stock markets (I): slight recovery of prices in the summer… World markets index (MSCI WORLD) Points Source: Círculo de Empresarios based on Bloomberg and CaixaBank Research, 2020. +43.9% Evolution of financial variables June 30th – August 31st 2020 change (%) (b.p.) The recovery of activity and economic policy support has boosted the positive evolution of the stock markets and the reduction in risk premiums. 35 -20 -15 -10 -5 0 5 10 15 -20 -15 -10 -5 0 5 10 15 VIX Index S&P 500 Eurostoxx 50 Emerging MSCI Japanese Yen Emerging currencies Interest rate US (10 years) Interest rate Germany (10 years) risk premium Spain, It, Por
  36. 36. Stock markets (II): …followed by an adjustment in September Evolution of the Nasdaq Points Source: Círculo de Empresarios based on Bloomberg, 2020. Main stock market indexes January 2020=100 36 60 65 70 75 80 85 90 95 100 105 110 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Ibex 35 S&P 500 PSI20 MSCI Emerging markets Eurostoxx 50 2000 4000 6000 8000 10000 12000 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20
  37. 37. Stock markets (III): volatility is reduced compared to March, but without reaching pre-Covil-19 levels VIX Volatility index Points Source: Círculo de Empresarios based on Bloomberg, 2020. -64.6% 37 0 10 20 30 40 50 60 70 80 90 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20
  38. 38. Fixed rent: risk premiums remain stable due to the ECB stimulus packages Risk premium evolution German bond yield difference (pb) Source: Círculo de Empresarios based on Bloomberg, 2020. 38 0 50 100 150 200 250 300 350 400 450 Sep-19 Sep-19 Oct-19 Nov-19 Nov-19 Dec-19 Jan-20 Jan-20 Feb-20 Mar-20 Mar-20 Apr-20 May-20 Jun-20 Jun-20 Jul-20 Aug-20 Aug-20 Sep-20 Spain Greece Portugal France Italy Ireland Risk premium, Sept-20 German bond yield difference (pb) 106 France 26.9Portugal 77.1 Spain 74.3 Italy 137.5 Belgium 23.0 Netherlands 11.3 Austria 16.0 Greece 152.1 Ireland 35.0
  39. 39. 39
  40. 40. 40 Executive summary In Q2 2020, economic activity in Spain registered a sharp fall as a result of the impact of the exceptional lockdown and hibernation measures adopted in order to stop the spread of Covid-19. In the second half of the quarter, with the gradual easing of the lockdown measures, there was a gradual resumption of activity. Since August, this has come to a halt due to the increasing number of cases. According to the main national and international organizations, Spanish GDP will fall between 10.5% and 14.4% yearly in 2020. In 2021, a recovery of between 4.1% and 7.5% yearly is expected. Regarding these forecasts, there remains a high degree of uncertainty, and the final figures will be conditioned by the development of the pandemic and the duration and intensity of the lockdown measures adopted to control it. The Spanish economy is one of the most affected in the region, and it is expected that recovery will be slower, primarily due to: - The severity of the health crisis and the restrictive measures adopted to contain it. - The weight of tourism, the hospitality industry and trade in the economy – the sectors most affected by the crisis. - The reduced average size of companies (37% of GDP), which are more vulnerable to the economic impact. - The high number of temporary contracts in the labour market (27% of the total). - Reduced opportunities for teleworking during the lockdown due to the type of work (68% of workers unable to do this). On top of this, it is necessary to include the more vulnerable fiscal starting position, and the consequential decreased capacity for indebtedness for applying stimulus policies. The worsening of the already high levels of unemployment are also concerning, especially among the young.
  41. 41. Inequalities compounded by Covid-19 41 • An increase in unemployment, especially among those under the age of 25. • Uncertainty on the future evolution of the economy on a national and international level. • Limited room for maneuver for European monetary policy and Spanish fiscal policy. • The decrease of international trade and disruption of global supply chains. • The deterioration of the public accounts with a sharp increase in the deficit and debt. • The sustainability of the Welfare State is brought into question. • Reduced increases in productivity.
  42. 42. 42 * Forecast Source: Círculo de Empresarios based on the Bank of Spain, European Commission, IMF, FUNCAS and OECD, 2020. Recession in 2020 and gradual recovery 2% 2021* 4.1%/7.5% Forecasts by the main national and international organizations (September/October 2020) YoY change (%) -10.5%/-14.4% 2020*2019 An uncertain scenario with forecasts conditioned by the intensity and duration of the second wave of Covid-19, and by the efficiency of the economic policy measures to mitigate the effects on activity and employment. 2020 2021 OECD -11.1/-14.4 7.5/5 IMF -12.8 7.2 Bank of Spain -10.5/-12.6 7.3/4.1 FUNCAS Consensus -12 7.3 Government -11.2 7.2 European Commission -10.9 7.1
  43. 43. 2.5 3.2 2.8 3 2.8 2.3 2.2 2.1 2.2 2.1 1.8 1.7 -4.2 -21.7 2.2 2.7 3 3.1 2.5 2.2 1.5 1.1 1.5 1.2 1.4 1.7 -3.2 -14.7 -24 -22 -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q32018 Q42018 Q12019 Q22019 Q32019 Q42019 Q12020 Q22020 National demand Spain Foreign demand Spain GDP Spain GDP Eurozone *Available since 1970. Source: Círculo de Empresarios based on INE, Eurostat and Bank of Spain, 2020. 43 GDP and contribution to national and foreign demand YoY change (%) and pp In Q2 2020 GDP fell 21.5% year-on-year (-4.2% Q1) and 17.8% quarter-on-quarter (-5.2 Q1). It is the worst year-on- year record since Q2 2009 (-4.4%), and the worst quarter-on-quarter figure since reporting began*. In terms of national demand, private consumption fell 25.2% year-on-year and investment by 25.8%. On the other hand, public spending rose 3.1%. In the foreign sector, exports of goods and services fell 38.1% year-on-year (against -5.6% Q1) and imports by 33.5% (against -5.4% Q1). Historic falls in economic activity greater than those in the region For Q3, the Bank of Spain forecasts a decline of between 9.5% and 12.3% year- on-year, and a rebound of between 13% and 16.6% quarter-on-quarter. The year-on-year fall has exceeded the average decrease in the Eurozone by 6.8 pp.
  44. 44. New service sector PMI contraction in light of the strength and number of new outbreaks 44Source: Círculo de Empresarios based on Markit and CIS, 2020. Spanish PMIs, September 50=threshold (values > 50 indicate expansion) Consumer confidence also fell to 49.5 points from 49.9 reached in August and remained at 36.2 points below that registered in February (85.7). Index of Spanish consumer confidence, September 100=threshold (values > 100 positive consumer outlook) New outbreaks put a stop to the service sector PMI recovery. In September, it was at 42.4 points, 5.3 points less than in August. The manufacturing PMI increased to 50.8 points (49.9 in August). 37.6 85.7 49.9 49.5 30 40 50 60 70 80 90 100 110 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 30.8 50.8 7.1 42.4 5 10 15 20 25 30 35 40 45 50 55 60 65 70 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Manufacturing PMI Service sector PMI
  45. 45. The fall in industrial production moderates 45Source: Círculo de Empresarios based on INE, 2020. Industrial production registered -5.7% year-on-year in August, the smallest fall in six months. By sectors, the most affected were capital goods (-9.9%). Monthly index of Industrial Production YoY change (%) In July, in the Eurozone the fall was 7.7% year-on-year. Industrial Production index by sectors, August YoY change (%) -5.7 -6.9 4.4 -6.5 -9.9 -2.4 -4.8 -12 -10 -8 -6 -4 -2 0 2 4 6 General index Consumer goods Consumer durables Non-durable goods Capital goods Intermediate goods Energy -2.9 -2.1 -14.1 -34.1 -24.7 -14.4 -6.2 -5.7 -36 -34 -32 -30 -28 -26 -24 -22 -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Spain Eurozone
  46. 46. -5.9 -8 -9.1 -8.3 -6.1 -3.8 22.6 2.2 3.2 3 3.5 2.9 2.4 -2.3 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 0 2000000 4000000 6000000 8000000 10000000 12000000 14000000 16000000 18000000 20000000 2014 2015 2016 2017 2018 2019 2020 Unemployment (left axis) Affiliates (left axis) Unemployment change (right axis) Affiliation change (right axis) Persons % 46 * Registered as affiliates but without making any contributions. Source: Círculo de Empresarios based on the Ministry of Labour, Migration and Social Security, 2020. Registered unemployment and affiliation, September Number of people and YoY change Sep-Sep (%) Impact of the pandemic on employment The number of affiliates registered with the Social Security rose 0.45% compared to August (84.013 people), to 18,876,389 affiliates. Compared to the same month in 2019, there were 447,062 fewer affiliates (-2.3%). 728,909 people included in the furlough scheme*, 83.1% through obligation (605,861 and 80.3% fewer with respect to the maximum number on April 30). In September, registered unemployment fell 0.7% compared to August (-26.329), to 3,776,485 unemployed people, 22.6% more than in the same period in 2019. Monthly variation in the number of affiliates and unemployed people People -600000 -400000 -200000 0 200000 400000 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Affiliates Unemployment
  47. 47. 47 Change in the number of those registered by sectors Change (%) Fall in the number of affiliates by sectors and Autonomous Community Change in the number of affiliates by Autonomous Community Change (%) Andalusia Murcia Valencia Balearic I. Extremadura Castile-La Mancha Madrid Castile Leon La Rioja Asturias Galicia Cantabria Basque C. Aragon Catalonia Navarra Canary I. -4.2/2.6 -3.9/3.4 -4/2.3 -4/3.6 -3/0.3 -2.7/1.2 -3.7/-1 -3.7/-0.5 -4.3/0.7 -4,8/1 -3.3/2 -4,6/3.7 -6/1.2 -2.7/-1.5 -6.1/2.5 5/0.3 -7.9/2 Source: Círculo de Empresarios based on the Ministry of Labour, Migration and Social Security, 2020. After the serious impact of Covid-19 on employment in March and April, the number of those registered with the social security system gradually recovered between May and September, mainly in construction. The new outbreaks registered since July have put a stop to the recovery of the service sector, in particular tourism. % change Feb-Apr/ % change May-Sep 1.5 -4.2 -10.2 -5 -2.2 2.2 9.3 2.3 -15 -10 -5 0 5 10 15 Agriculture Industry Construction Services 12 March - 30 April 1 May - 30 September
  48. 48. 19 -6.1 4.3 0 5 10 15 20 25 30 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 Q12013 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q32018 Q42018 Q12019 Q22019 Q32019 Q42019 Q12020 Q22020 2020* Unemployment rate (right axis) Employment change Unemployment change 48 * Stability Program forecasts 2020-2021. Source: Círculo de Empresarios based on the Treasury Department, Eurostat, the European Commission, FUNCAS and INE, 2020. Labour market deterioration in Q2 Employed, unemployed and rate of unemployment (Q2 Labour Force Survey) YoY change (%) and % active population The government, in its 2020-21 Stability Program, forecasts a rate of unemployment of 17.1% in 2020, and 16.9% in 2021. Forecasts by the European Commission are in line with this (18.9% and 17%, respectively), while those of FUNCAS Consensus are 17.8% in both 2020 and 2021. For its part, the Bank of Spain expects between 17.1% and 18.6% in 2020 and between 19.4% and 22.1% in 2021. In Q2 2020, the trend was bucked in the labour market: • Employment was destroyed (-6.1% year-on-year) for the first time since Q1 2014. • Unemployment rose (4.3% year- on-year) after 26 quarters of reductions. • This development places the Q2 2020 rate of unemployment at 15.3%.
  49. 49. 49 Source: Círculo de Empresarios based on Eurostat, 2020. Rate of unemployment for those under 25, August 2020 % of workforce < 25 years old Sharp increase of youth unemployment In August, the rate of unemployment was at 16.2%, double the Eurozone average. Youth unemployment rose to 43.9%, and was 11.1 pp more than one year ago, exceeding the Eurozone average of 25.8 pp. Rate of unemployment in Europe, August 2020 % of workforce 18.3 16.2 9.7 9.2 8.1 8.1 7.5 7.4 4.6 4.4 3.9 0 2 4 6 8 10 12 14 16 18 20 Greece Spain Italy Sweden Eurozone Portugal France EU Netherlands Germany UK Aug-19 Aug-20 43.9 39.3 32.1 28.4 26.3 19.8 18.1 17.6 12.9 11.3 5.8 0 5 10 15 20 25 30 35 40 45 50 Spain Greece Italy Sweden Portugal France Eurozone EU UK Netherlands Germany Aug-19 Aug-20
  50. 50. 50 Unprecedented deterioration of the public accounts Source: Círculo de Empresarios based on the Treasury Department, 2020. Budget balance sheet PPAA, January-June 2020 % of GDP Government deficit, Jan-Aug 2020 Millions € and % of GDP In the first half of 2020, the consolidated deficit of Public Administrations reached 6.45% of GDP, tripling that registered in the same period of the previous year. Between January and August 2020, the government accumulated a deficit of €60.3 billion (5.4% del PIB), against €15.3 billion between January and August 2019. This development is explained by the 18.9% increase in expenditure and the 13.9% reduction in income (▼Tax revenue16.1%. For example: ▼VAT 15.6%, ▼ Corporate Tax 7.1%, ▼ Personal Income Tax 27.4%). The Bank of Spain forecast a deficit for the whole of the year of between 10.8% and 12.1% of GDP, with this lowering to between 7% and 9.9% in 2021. -0.85 -4.37 -0.69 -0.67 -0.04 -0.26 -0.55 -1.15 -2,12 -6.45 -7 -6 -5 -4 -3 -2 -1 0 -7 -6 -5 -4 -3 -2 -1 0 Jan-Jun 19 Jan-Jun 20 Central Administration Autonomous Communities Local Authorities Social Security Public Administrations 128,364 10.31 %GDP 110,480 9.87 %GDP -143,680 11.54 %GDP -170,775 15.26 %GDP -15,316 -1.23 %GDP -60,295 -5.39 %GDP -200.000 -150.000 -100.000 -50.000 0 50.000 100.000 150.000 Jan-Jun 19 Jan-Jun 20 Non-financial revenues Non-financial expenditure Balance
  51. 51. 0.8 0.4 2 1.3 21.2 7.4 8.2 1.8 7.4 25.1 0 2 4 6 8 10 12 14 16 18 20 22 24 26 Total Central Administration Autonomous Communities Local authorities Social Security Change Feb 19 - Jul 19 Change Feb 20 - Jul 20 1160000 1180000 1200000 1220000 1240000 1260000 1280000 1300000 Ene19 Feb19 Mar19 Abr19 May19 Jun19 Jul19 Ago19 Sep19 Oct19 Nov19 Dic19 Ene20 Feb20 Mar20 Abr20 May20 Jun20 Jul20 51 Escalation of the public debt Source: Círculo de Empresarios based on the Bank of Spain , 2020. Public debt Millions € Debt by administration levels Change Feb-Jul (%) Between February and July, public debt increased €89.5 billion as a result of the crisis, and was above 110% of GDP, compared to 95% before the pandemic. The rise in Social Security debt (25.1%) stands out, followed by that of the Central Administration (8.2%) and Local Authorities (7.4%). According to predictions by the Bank of Spain, public debt could reach between 116% and 120.6% of GDP in 2020, and between 115.4% and 125.6% in 2021. +7.4%
  52. 52. Increased spending on pensions weakens the viability of the pensions system Source: Círculo de Empresarios based on the Ministry of Inclusivity, Social Security and Migration, 2020. 52 Monthly pensions payment amount Billions € Current pensions Nº Since 2010, the monthly pensions payment has increased 44.3%. This increase is explained by the pension revaluation and annual increase, the higher amount for the new retirement benefits (€1,517 /month vs. €1,393 /month in 2010) and the increase in the number of current pensions (12.1%), which will be exacerbated by the aging population and “baby boomer” retirement. The biggest costs in the system are not covered by increased income. The impact of the current health system crisis in the economy, and the perspectives point to a fall in the number of contributors to the system due to a loss of employment and those contributing to the system. In the first half of 2020, social security contributions fell 3.8%, against an increase of 3% in pension expenditure. 8200000 8400000 8600000 8800000 9000000 9200000 9400000 9600000 9800000 10000000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sep-20 +12.1% Impact Covid-19 -0.4% 6,867,948 7,883,828 8,881,028 9,759,800 9,911,425 6500000 7000000 7500000 8000000 8500000 9000000 9500000 10000000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 sep-20 +44.3% Sep-20
  53. 53. In the case of households, the granting of consumer credit fell the most (28.1%). Accumulated credit for the acquisition of a home fell 7.6% year-on-year. Financing for non-financial corporations accumulated €258.8 billion between March and August, with over 51.1% being for credit amounts above €1 million with these increasing by 18.4% year-on-year. Business financing increases and household financing decreases Source: Círculo de Empresarios based on the Bank of Spain, 2020. The accumulated new credit grant for households between March and August 2020 fell 11.1% year-on-year. On the other hand, credit for non-financial corporations increased 15% year-on-year. New non-financial private sector credit operations, March-August 2020 Millions € 53 0 50000 100000 150000 200000 250000 300000 350000 400000 0 10000 20000 30000 40000 50000 60000 70000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Consumer credit Households total credit Non-financial corporations credit (right axis)
  54. 54. -0.5 -0.4 0.4 -0.2 -0.3 -1 0 1 2 3 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Spain CPI Spain Core CPI* Eurozone CPI *Ex energy and unprocessed food 54 Source: Círculo de Empresarios based on INE y Eurostat, 2020. CPI fall moderates Prices development YoY change (%) In August, prices of “Covid-19 goods”1 increased 1.7%, while “Covid-19 services”2 fell 2.1% year-on-year, 8 tenths less than in July, mainly as a result of the increase in electricity prices compared to a fall registered in 2019. In August, the CPI decreased 0.5% year-on-year, against the increase of 2.2% in the same month the previous year. In the Eurozone, prices fell 0.2% year-on-year. 1 Food, drink, tobacco and cleaning products, as well as non-durable household products, pharmaceutical products, animal feed and personal care products. 2 Housing and garage rental, water distribution, sewerage and garbage collection services, as well as community charges, electricity, gas and heating oil, and telephone, music and TV streaming, insurance, bank commissions and funeral services. The annual Harmonised CPI rate was –0.6%, one tenth above that of July. In September, the CPI flash estimated registers a decrease of 0.4% in Spain and of 0.3% in the Eurozone.
  55. 55. 55 Trade balance, January-July 2020 Change with respect to the same period the previous year Source: Círculo de Empresarios based on the Ministry of Industry, Commerce and Tourism, 2020. Downturn in the international trade of goods Importaciones Capital goods Chemicals Food, drink and tobacco Exports ▼ 14.6% €147,489.9 M Imports ▼ 18.2% €155,366.5 M DEFICIT ▼ 54.2% €-7,876.6 M Energy deficit ▼ 35.4% Imports of energy goods fell 36.7% Sector distribution, January-July 2020 % of the total Exports Food, drink and tobacco Capital goods Chemicals 20.5 19.2 16.4 22.1 18.9 12.7 Goods trade evolution, January-July 2020 YoY change (%) The fall in international trade and disruption in the global value and supply chains has had a negative effect on goods exports and imports. Geographic distribution, January-July 2020 % of the total -80 -60 -40 -20 0 20 40 60 80 100 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Deficit (right axis) Exports Imports Exports Imports Europe 73 60.2 EU 60.6 50.9 Germany 11.5 12.3 France 16 10.2 Italy 7.7 6.3 UK 7.5 3.8 America 10.1 11 Asia 9.4 21.3 China 2.9 10.6 Africa 5.9 7.2 Other 1.6 0.3
  56. 56. The fall in direct investment flows persists 56Source: Círculo de Empresarios based on Datainvex, 2020. In the first half of 2020, FDI in Spain fell 37.1% compared to the same period in 2019. For its part, Spanish foreign investments registered -28.9%. All this has occurred within an international context marked by the Covid-19 pandemic, in which the UNCTAD forecasts a fall of direct investment flows of 40% yearly for 2020. Evolution of FDI flows, January-June 2020 Millions € -30000 -20000 -10000 0 10000 20000 30000 Jan-Jun2008 Jan-Jun2009 Jan-Jun2010 Jan-Jun2011 Jan-Jun2012 Jan-Jun2013 Jan-Jun2014 Jan-Jun2015 Jan-Jun2016 Jan-Jun2017 Jan-Jun2018 Jan-Jun2019 Jan-Jun2020 FDI inflows FDI outflows -28.9% annual -37.1% annual
  57. 57. 0 2000000 4000000 6000000 8000000 10000000 12000000 January February March April May June July August 2019 2020 57 The recovery of tourism is crippled by the outbreaks Source: Círculo de Empresarios based on INE, Frontur, Familitur and Egatur, 2020. Tourist visits Number of people and YoY change (%) Total tourism spending August and March-August accumulated Millions € and YoY change (%) The average spend per tourist was €1,006, 13.1% less than a year ago, and the average duration of the trip was 8.7 days, 0.8 days more than in August 2019. In August, Spain received 2.4 million international tourists, 75.9% fewer than in 2019. Spending, which fell 79% year-on-year, was at €2.4 billion. It was hoped that domestic tourism would compensate in part for the loss of international visitors, although in Q2 2020, trips by residents fell 82.1% year-on-year as a result of measures related to the restriction of movement. Total tourism spending fell 89% year-on-year. 49543962 7130689 2019 2020 Accumulated March-August ▼85.6% annual 0 10000 20000 30000 40000 50000 60000 March-August August 2019 2020 ▼86.7% ▼79%
  58. 58. Business formation stagnates 58 Source: Círculo de Empresarios based on INE, 2020. Business formation YoY and monthly change (%)and number of companies Between March and August, business formation fell 27% on average year-on-year. The biggest falls were in April (-73.4%) and May (-55.9%). In August, business formation fell 24.7% compared to the previous month, although in year-on-year terms increased 7.1%. By Autonomous Community, the year- on-year decreases in Navarra (-23.6%) and Extremadura (-21.9%), stand out. However, business formation was significant in Balearic I. (+66.4%), and Cantabria (+45.2%). -3.8 -9.2 -28.3 -73.4 -55.9 -9.4 -2.4 7.1 -9000 -7000 -5000 -3000 -1000 1000 3000 5000 7000 9000 -100 -80 -60 -40 -20 0 20 40 60 80 100 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 % annual change % monthly change New companies (right axis)
  59. 59. Pressure on the risk premium 59Source: Círculo de Empresarios based on Reuters and Bloomberg, 2020 The risk premium remains stable at around 75 bps after reaching 150 bps in the last week of April due to ECB public debt purchasing policy. Spanish, Portuguese and Italian risk premiums compared to the German 10-year bond bps The main rating firms maintain their rating for Spain but have identified specific risks in our economy. Among them, the high levels of public debt, the delay in the adoption of structural measures, and the lack of agreement to approve the 2021 national budget stand out, as well as the increase in the dependency rate. Rating España 2010 - August 2019 50 100 150 200 250 300 350 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Spain Italy Portugal Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Moody´s S&P Fitch Aaa AAA AA+ AA AA- Aa1 Aa2 Aa3 A+ A A- A1 A2 A3 BBB+ BBB BBB- Baa1 Baa2 Baa3 Rating
  60. 60. 60Source: Círculo de Empresarios based on Reuters, 2020 Continued uncertainty in financial markets Stock market evolution January 2018=100 The Ibex 35 is showing no signs of recovery, while European stock exchanges do so gradually. For its part, S&P 500 has recovered its pre-Covid-19 levels. 50 60 70 80 90 100 110 120 130 140 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 S&P 500 Eurostoxx 500 Ibex 35
  61. 61. www.circulodeempresarios.org The Quarterly Reportis a publication by the 'Círculo de Empresarios produced by its Department of Economics, which contains information and opinions from reliable sources. The 'Circulo de Empresarios' does not guaranteeits accuracy or take any responsibilityfor any errors or omissions contained therein. This document is intended for informational purposes only. Therefore, under no circumstances shall the 'Círculo de Empresarios’ be responsible for any uses made of the publication. The opinions and forecasts of the Department may be subject to change without prior notice.

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