RaboResearch - Economic Research

Spain: investment is back, consumption is up

Economic Update

  • The Spanish economy grew by 0.49% q-o-q in the third quarter.
  • Private consumption remained the main driver of growth, but was accompanied by investment driven growth, which is a new phenomenon since the start of the crisis
  • External rebalancing is on track as both the net service and goods net exports remained positive.
  • Public borrowing has declined this year as the improved economic climate increases revenues and necessitates less unemployment benefits.

Sunshine and rainbows, but not entirely

The Spanish economy posted a strong GDP growth rate of 0.49% q-o-q in the third quarter. For the fifth quarter in a row, this was driven by the recovery of private consumption, now. A revision of the figures of previous quarters led to some changes in the components. The positive contribution of investment to growth that started in the second quarter was not visible earlier. Up to the beginning of 2013, investment made a negative contribution to growth, but lately it has been on the rise. Government consumption growth has been insignificant in the last two quarters, an encouraging sign as it suggests that public finances are under control. The negative contribution of net exports in the last months is a downer, but not problematic as we will explain below.

Looking at the output components of GDP, we see that the services sector has made the strongest contribution to growth. Employment growth in the service sector has however slowed in the second quarter, contrary to our expectations. All in all, the third quarter data reinforces our view that the Spanish economy is recovering robustly and is having a very positive outlook. We expect the current levels of GDP growth to persist, pushing up the forecast to 1¾% y-o-y for 2015. However, GDP is still 6% below the peak in 2008. Meanwhile, unemployment (24% in October) is declining as a result of economic growth, but the level remains high and poses the biggest political risk in the wake of next year’s election.

Figure 1: Breakdown of GDP growth q-o-q
Figure 1: Breakdown of GDP growth q-o-qBron: Macrobond, Rabobank
Table 1: Forecast table Spain
Table 1: Forecast table SpainBron: Rabobank

Exports and imports growth… the hare and the tortoise

The only concern in the third quarter GDP growth figures could be the negative contribution of net exports, which might suggest a problem in competitiveness. Figure 2 shows that imports have been growing faster than exports for about a year now. Now that the domestic recovery has been gaining momentum, will the external balancing go off track? At present there is little cause to believe that it will. While net exports contributed negatively to growth, the effect on balance of payments is largely mitigated by an improvement of the terms of trade, as export prices have risen faster than import prices.

Looking at underlying trends there seems not yet cause for concern about competitiveness.  Whereas the period before the crisis was marked by a negative balance in consumer goods as a result of high consumption and credit growth, this deficit has been transformed into a surplus which still persists. The capital goods account has also been positive since the onset of the crisis. Apart from price changes, the negative contribution of net exports in the last two quarters can also be explained partly by the intermediate goods balance becoming more negative and the slight decrease of the consumer goods balance. In part these higher intermediate goods imports are driven by the composition of sectors in the Spanish economy. Excluding energy refining, car manufacturing, air and space and the chemical industry all rely for more than 50% of their inputs on imports (in 2012). This is on average 20%-point higher than for the same industries in Germany, Italy and France. The combination of an increase of the intermediate goods deficit and surpluses on the consumer and capital goods balances that have held up well suggests that Spain is finishing more manufacturing products, which might in fact point at greater competitiveness.

Figure 2: Import and export growth y-o-y (3mma, constant prices)
Figure 2: Import and export growth y-o-y (3mma, constant prices)Bron: Macrobond, Rabobank
Figure 3: Goods and service balances in components (last four quarters, current prices)
 Figure 3: Goods and service balances in components (last four quarter, current prices)Bron: Macrobond

Public finances look on track for now

The recovery of the Spanish economy also has had an impact on the government finances. On the spending side, the improved economic situation necessitates lower contributions to autonomous regions than in the previous years. Also, the reduction in unemployment lowers the cost of unemployment benefits. This has positively impacted the net borrowing position of the central government. On the revenue side, there has been an income increase in every tax category. Together, these developments make it more likely that Spain will meet its deficit target (3.7% of GDP for the central government) this year.

Dark clouds have gathered in Brussels however, as the EC has recommended[1] that Spain should increase its budgetary efforts for 2015 as it runs a risk of violating the deficit reduction targets under the Excessive Deficit Procedure (EDP). The EC concludes that the underlying budget assumptions are not prudent enough and that there is significant implementation risk of deficit reducing legislation. It forecasts a deficit of -4.6% of GDP. However, the proposed targets of a budget deficit of -4.2% of GDP for the general government (including regional governments) and -2.9% for the central government are not in actual violation of the EDP. It is likely that Spanish authorities will defer action until after next year’s national election. With these elections scheduled for the 20th of December of 2015, it might be politically difficult to take remedial actions in the event that the deficit reduction of next year goes off track.

Figure 4: Yearly pattern in central government net lending/borrowing
Figure 4: Yearly pattern in central government net lending/borrowingBron: Macrobond, Rabobank


[1] Commission Opinion of 28.11.2014 on the Draft Budgetary Plan of Spain

Jurriaan Kalf
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 88 726 7864

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