Spain: Basta recesión!
Spanish GDP rose in 13Q3, after nine quarterly contractions in a row. Although positive, we do not expect a quick recovery on the labour market. Based on the Budget 2014, the fiscal effort will be slightly less than in preceding years.
GDP composition upside down
Spanish GDP rose in 13Q3 (+0.1% q-o-q), after nine quarterly contractions in a row (figure 1). The breakdown shows that the composition of growth is completely different than in previous quarters. Domestic demand contributed positively to GDP, which was the first time since end 2010, thanks to a remarkable rise in household consumption (+0.4% q-o-q) and investment (+0.1% q-o-q). Meanwhile, net exports subtracted from growth as a result of robust import growth (+2.8% q-o-q). Looking forward, we believe domestic demand will recover only very gradually in the coming quarters, as public and private sector deleveraging will act as a powerful headwind. Our view of a modest recovery is confirmed by the November readings of both the economic sentiment indicator (figure 2), which slightly improved but remains below its long term average, and the purchasing managers’ index (PMI) for the manufacturing sector (dropped to 48.6).
Labour market still depressed
Despite the modest GDP growth, employment contracted in 13Q3 (-0.4% q-o-q), albeit at a significantly slower pace than in previous quarters (figure 3). The slower pace is specifically attributed to the services sector, where employment stagnated after eight quarters of contraction. The unemployment rate (26.7% in October) more or less moved sideways in recent months because labour supply dropped further. That said, recent data from the Ministry of Employment and Social Security suggest that the gradual drop of the labour supply seen in previous years might have come to a halt, which is why we expect the unemployment rate to stay high going forward. Given the high jobless rate, the implemented labour market reforms and the very low level of inflation (0.2% in November), it is not surprising that nominal wage growth is still subdued (figure 4). Although positive for Spain’s price competitiveness, low wage growth will further weigh on household consumption.
Budget 2014: Slightly less austerity
Based on the Budget 2014, fiscal austerity will remain in place next year, but the pace of adjustment will be less sharp than in the preceding years. The planned fiscal effort will be 1¾%-GDP next year, compared to 3¼%-GDP in 2013. Based on the draft Budget, the government expects the deficit to drop from 6.5%-GDP in 2013 (excluding bank recapitalisation costs amounting to 0.3%-GDP) to 5.8%-GDP in 2014, which matches Spain’s deficit target in the Excessive Deficit Procedure. However, the government’s underlying growth assumption of 0.7% in 2014 seems optimistic. Based on a slightly more conservative growth outlook (0.5% in 2014), the European Commission (EC) expects a slightly higher deficit of 5.9%-GDP (figure 5). In their recent budgetary surveillance under the so-called ‘Two-Pack’, the EC stated that the Spanish budget is compliant with the rules of the Stability and Growth Pact, albeit with ‘risk of non-compliance’. This qualification implies that Spain is not officially obligated to come up with a new budget, but the government has already stated that they will come up with new measures. To sum up, Spain will make sure it complies with the budgetary rules, but the fiscal effort, and thereby the negative impact on growth, will be slightly less than last year.