Spain: GDP and employment growth on the rise
GDP growth remains robust, mainly owing to a rise in private consumption. We expect employment growth to pick up, especially in the services sector. The fiscal reform announced in the wake of next year’s election puts the deficit target at risk.
Private consumption on the rise
Spanish GDP volume rose further in 14Q2 by 0.6% q-o-q, up from 0.4% q-o-q in 14Q1 (figure 1). Whereas the first quarter’s growth was primarily driven by government consumption, growth in the second quarter was driven by private consumption (0.4%-point) and fixed asset investment (0.1%-point). Private consumption has been gaining ground for four consecutive quarters on the back of employment growth and real wage growth. The latter is supported by mild deflation (-0.5% in August, figure 2). Contributions from inventory formation, government consumption and net exports were negligible. Exports increased by 1.3% q-o-q, but were accompanied by a similar rise in imports (1,5% q-o-q) resulting in a negligible contribution of net exports to GDP growth. Imports are likely to rise in line with domestic demand and this will probably cause a decline of the large contribution of net exports to GDP growth that we have observed in the last years.
The steady increase of consumer confidence over the past months is flattening while its value is still negative indicating more than half of the surveyed consumers is pessimistic about Spain’s economic outlook. Producers, however, are more optimistic. The services PMI increased from 56.2 to 58.1 in August, its highest level since December 2006. The manufacturing PMI looks somewhat bleaker as it stands at 52.8 down from 53.9, signalling a positive outlook albeit losing momentum.
More jobs in services sector
In the second quarter, unemployment declined slightly and stood at 24.5% in July. The reduction in unemployment is mainly driven by employment growth in the service sector. In figure 3, the employment growth in the services sector is broken down into subsectors. We see that the trade, transport and hospitality sector, to which tourism is allocated, accounts for over half of the employment growth in the services sector.
Based on the strong positive producer sentiment in the Spanish services sector we expect employment growth in the service sector to persist. As 78% of employment is in service sector, a significant growth of employment in the service sector will put further gradual downward pressure on unemployment.
Big fiscal reform
In the wake of next year’s parliamentary election, the Spanish government has announced a fiscal reform. This will reduce the overall tax burden for the first time since the onset of the crisis. The bulk of this reform is a simplification operation and implies an across the board lowering of income tax rates, reducing the upper income tax bracket from 52% to 45% by 2017. The corporate tax rate will be reduced from 30% to 28% in 2015 and to 25% in 2016. The reform also includes cuts in social security contributions for employers which will go to a flat rate of €100 per month (from circa 40% of gross wages) for the first 24 months in case of hiring an employee on a permanent contract. The Spanish finance minister has stated that the reform will be fiscally neutral but we stress that no measures to finance this tax relief have been announced yet. As such the bill poses a risk for the improvement of the structural budget deficit (0.8%-point in 2015). Should Spain fail to meet its target, it is likely that the European Commission will request further budgetary measures. We expect potential measures to include a VAT increase as this aligns with the recommendations by the OECD on tax reform.