RaboResearch - Economic Research

Spain: Adios recesión?

Economic Update

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A better than expected GDP figure for 13Q2 and rising sentiment levels suggest that economic conditions are improving. That said, a quick housing market and labour market recovery is not on the cards yet.

Still diving, but less deep

Spanish GDP contracted in 13Q2 for the 9th quarter in a row, but the pace of contraction (-0.1% q-o-q) was much smaller than before (figure 1). This was mainly due to a lower decline of household consumption (-0.1% q-o-q) and strong growth of government consumption (+0.9% q-o-q). Both exports (+6.0% q-o-q) and imports (+5.9% q-o-q) –which are usually volatile on a quarterly basis– have rebounded from their steep contraction in 13Q1, but in the end the contribution of net exports was limited in 13Q2 (+0.2%-point). Fixed investment decreased due to a significant drop in construction investment. Meanwhile, business investment managed to grow at a faster pace than in 13Q1. More generally, GDP figures in recent quarters show that domestic demand is contracting at a slower pace than before, while the contribution of net exports is becoming less positive. While the recession may continue in 13Q3, we note that several leading indicators point to a return to growth in 13Q4.

Figure 1. Another quarterly GDP contraction
Figure 1. Another quarterly GDP contractionSource: Reuters EcoWin
Table 1. Forecast table
Table 1. Forecast tableSource: Reuters EcoWin, Rabobank

Sentiment improving quickly

Sentiment indicators improved considerably in recent months. The purchasing managers’ index (PMI) for the manufacturing sector rose in August to 51.1; above the neutral level of 50 for the first time in 28 months. Especially the sub index of new orders rose substantially. Also the Economic Sentiment Indicator (ESI) increased in August for the fifth month in a row, with sentiment only falling in the construction sector (figure 2). This is consistent with our view that the economic recovery is slowly gaining momentum, but that the recovery of the housing market is clearly lagging. Based on the monthly price index of valuation agency Tinsa, the downward price trend continued in August (figure 3). It is important to note that lower house prices will act as a drag on growth through multiple channels, e.g. negative wealth effect, deteriorating bank balance sheets, rising uncertainty and lower construction activity.

Figure 2. Improving sentiment
Figure 2. Improving sentimentSource: Reuters EcoWin
Figure 3. House prices still heading south
Figure 3. Housing prices still heading southSource: Tinsa, Rabobank

Recovery in the labour market is lagging too

The unemployment rate dropped marginally in recent months, to 26.3% in July (figure 4). However, we note that this development was mainly owing to a decline in the labour force and not a result of stronger employment growth. In fact, employment continued to contract, albeit at a slower pace than in previous quarters (figure 5). Looking forward, we do not expect the unemployment rate to come down quickly because the labour market usually recovers with a long lag. Note that the employment sub index of the manufacturing PMI is still below 50. An important factor that can keep the jobless rate high is that the Spanish labour force might increase in the coming years. This may be because discouraged workers start looking for jobs and older workers stay longer in employment due to the 2011 pension reform. What’s more, the large number of unemployed construction workers will have trouble relocating to other productive sectors due to a skills mismatch. The result will be a high unemployment rate for an extended period. 

Figure 4. Unemployment rate remains high
Figure 4. Rise of unemployment to an endSource: Reuters EcoWin
Figure 5. Employment remains contracting
Figure 5. Employment remains contractingSource: Reuters EcoWin, Rabobank
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