RaboResearch - Economic Research

Spain: Growing while rebalancing

Economic Update


Recent data show that the gradual recovery of the Spanish economy will continue going forward. In addition, ongoing export growth and muted wage pressure indicate that the much needed rebalancing process is still on track.

Encouraging GDP breakdown

Spanish GDP volume rose in 13Q4 by 0.2% q-o-q, after +0.1% in 13Q3 (figure 1). The breakdown shows that the macroeconomic rebalancing process of the Spanish economy continued, as net exports were the most important growth driver with a contribution of +0.4%-point. This was on the back of higher exports (+0.8% q-o-q), while imports contracted by 0.6% q-o-q. Although domestic demand contributed negatively to GDP, the breakdown shows an encouraging picture as well. The contraction was driven by significantly lower government consumption (-3.9% q-o-q), while both private consumption (+0.5% q-o-q) and investments (+0.9% q-o-q) showed mild growth. However, note that private consumption might have been boosted temporarily by the extension of the government car scrappage scheme, which can result in a negative rebound in 14Q1. On balance, we expect the gradual recovery to continue in the coming quarters, although we believe the government’s GDP growth forecast of 1% this year is too optimistic. Given the ongoing private sector deleveraging and the requirement by the European Commission to improve the structural budget balance by 0.9%-GDP on average until 2016, we believe GDP growth of 0.5% this year and 1% next year is more realistic (table 1).

Figure 1: Modest GDP growth continues
Figure 1: Modest GDP growth continuesSource: Reuters EcoWin
Table 1: Forecast table
Table 1: Forecast tableSource: Reuters EcoWin

Labour market finally shows improvement

After 22 quarterly contractions in a row, employment finally grew in the last quarter of 2013 (+0.6% q-o-q, figure 2). Unemployment dropped to 25.8% in January, from a peak of 26.5% last August, but this decline was also helped by a further drop in the labour force. As current employment growth seems almost completely dependent on the services sector, the strong reading of the services PMI in January (54.9) is promising. Besides that, the relatively modest growth of negotiated wages –which came down in line with inflation- is good news for the attractiveness of hiring new employees, although it comes at the cost of purchasing power (figure 3). Looking forward, we stress that a further quick decline of the unemployment rate this and next year seems unrealistic. Firstly, the gradual drop of the labour force since 2012 cannot continue forever, especially as the retirement age is rising gradually towards the age of 67 in the coming years and we cannot rule out that ‘discouraged’ workers will return to the labour market when the outlook improves. Secondly, the decline in construction activity has created a mismatch between supply and demand in the labor market, which might result in long term unemployment among construction workers.

Figure 2: Employment grew again
Figure 2: Employment grew againSource: Reuters EcoWin
Figure 3: Downward wage adjustment
Figure 3: Downward wage adjustmentSource: Reuters EcoWin

Housing market remains drag on investment

Since 13Q3 total investment contributed positively to growth again, albeit marginally. However, this rise was mainly driven by robust growth of machinery investment (+2.0% q-o-q) while e.g. housing investment still contracted (-1.4% q-o-q, figure 4). Going forward, we expect this sharp distinction between the dynamics in several sectors of the Spanish economy to continue. Several indicators point to an ongoing moderate recovery of the industrial sector. The PMI manufacturing of January (52.2) was on its highest level since April 2010, while a survey among manufacturing entrepreneurs shows that the capacity utilisation rate is expected to increase further in 14Q1. This bodes well for future machinery investment. In contrast, the outlook for future housing and real estate investment remains depressed. The monthly price index of valuation agency Tinsa shows that the recovery of the housing market is clearly lagging other sectors. The downward price trend continued in January, prices are now almost 40% below the pre-crisis peak of end 2007 (figure 5).

Figure 4: Strong machinery investment
Figure 4: Strong machinery investmentSource: Reuters EcoWin
Figure 5: Housing market remains depressed
Figure 5: Housing market remains depressedSource: Tinsa, Rabobank

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