Market Report, "Spain Business Forecast Report Q3 2013", published

We expect Spain's economic recovery to remain bleak over the next few quarters, and forecast below consensus growth of -1.7% in 2013, expecting weak private consumption and stretched government expenditures to weigh on headline growth figures. However, we believe Spain's economic contraction is now bottoming out, with the country's increasingly competitive labour market likely to moderately boost export growth and the outlook for investment spending over a medium-term time horizon.

The rebalancing of Spain's current account will continue over the next few quarters, with recently released data from the Bank of Spain showing that Spain's current account deficit came in at EUR1.3bn in February 2013, a 77.8% year-on-year (y-o-y) contraction. We believe bleak domestic demand will be the main driver of this trend, supported by the steady recovery of the tourism sector and a moderate improvement in the competitiveness of goods exports.

Full Report Details at
- http://www.fastmr.com/prod/616978_spain_business_forecast_report_q3_2013.aspx?afid=303

With headline inflation growing in April at its lowest rate since March 2010 in April, we reiterate our view that price pressures will continue easing through H213. Subdued domestic demand and sliding consumer spending will be the main drivers of this trend over the next few quarters, supported by falling energy prices and moderating supply-side pressures on the external front.

We expect to see an uptick in political risk in 2013, as the embattled government of Prime Minister Mariano Rajoy faces increasing criticism over its handling of the economy and its continued commitment to fiscal austerity. With fiscal austerity unlikely to ease significantly, unemployment set to continue rising and a lost decade ahead for the domestic economy, we believe the People's Party will find it very difficult to arrest its decline in popularity.

Major Forecast Changes

We have revised our current account deficit forecasts to 0.4% of GDP in 2013 and 0.8% in 2014, from -0.9% and -0.3% previously, expecting bleak domestic demand to be the main driver of this trend, aided moderately by improving labour competitiveness and strong tourism receipts.

Key Risks To Outlook

While we have factored weak external demand into our growth forecasts, a significant deterioration in the eurozone sovereign debt crisis would undoubtedly weigh on export demand over the next few quarters. In such a scenario, we would not rule out the country's return to positive real GDP growth being delayed until 2015.

We believe the government's commitment to fiscal austerity could present its own downside risks over the next few quarters, as the country could be forced to introduce even greater spending cuts and tax hikes over the next few years if it decides to agree a bailout with the EU. In this scenario, the government's fiscal position would be weakened even further, having already been hit by low tax revenues and increased social security payments over the past few years.

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