RaboResearch - Economic Research

Country Report Spain

Country Report


Flag Spain

Despite the significantly improved short term economic outlook, the labour market situation requires further reform which is currently unfeasible with the upcoming general  elections.

Strengths (+) and weaknesses (-)

(+) Political stability at the national level

Spain has a history of relatively stable governments, which is a major advantage during potentially destabilizing periods of large economic contraction and very high unemployment. 

(+) Robust reform implementation

Spain will reap the fruits of several structural reforms (labour market, pensions, financial sector) which have been implemented in recent years by the Rajoy government.

(-) Banking sector

The capital position of the Spanish banking sector has been strengthened in anticipation of the Asset Quality Review of the ECB. Consequently, only one small bank, Liberbank, did not pass the stress test. Meanwhile, ongoing deleveraging of banks remains a drag on economic growth.

(-) Power of autonomous regions

The relatively large political autonomy of the 17 regions and regulatory differences makes it difficult to implement nationwide reforms which aim to boost competition across these regions.

Key developments

1. Competitiveness maintained as domestic demand regains strength.

Over the past year, the economic situation in Spain has improved markedly as domestic demand strengthened. Both consumption and investment growth have turned positive with strong growth rates of 2.4% and 3.4% year on year respectively. This has contributed to solid GDP growth of 1.4% in 2014 which is expected to accelerate to 2.2% in 2015. As consumption and investment take over from external demand, the current account surplus of 2013 has evaporated over 2014. 

Figure 1: GDP growth in components
Figure 1: GDP growth in componentsSource: Macrobond
Figure 2: Current account in components
Figure 2: Current account in componentsSource: Macrobond

The OECD estimates that only half of the current account improvement is structural. Imports will rise with the recovery so the question is whether Spain will prove competitive enough to raise exports pari passu. We think this will be the case for three reasons. Firstly, we see that Spanish companies have found new export markets. Since the crisis, we see that Spanish firms diversified away from France, Germany, Portugal, Italy and the UK, traditionally their largest exports markets, to countries like Algeria, Morocco, Brazil, China, South Korea, Saudi Arabia and Poland. This will leave them less sensitive to country-specific macro-economic shocks in the future. Second, the structure of the current account reveals that Spain is a large net importer of intermediate goods but a net exporter of consumer goods and (since 2011) also capital goods. This implies that Spain has strengthened its role in global value chains, testifying to its competitiveness. Third, while total domestic credit growth is still contracting, some exporting sectors see yearly credit growth at 24%, supporting exporting firms. That said, Spain still faces significant barriers to doing business and starting a firm, coupled with underinvestment in human capital. 

2. Employment growth still low and of low quality

When the crisis made landfall, wages kept rising leading to flagrant unemployment, that still stood at 24.4% in 2014. These high wage demands were the result of an institutional structure that has been changed in the 2012 Labour reform. The reform reduced the power of labour unions and preluded a period of wage moderation. Lower wages should support export-led employment growth and indeed we see employment growth return in 2014. However, this employment growth is not unambiguous. The underlying pattern of hours worked per employee shows a substantial decline since 2011, signalling a shift from full-time to part-time employment, often on temporary contracts. Although it is encouraging that there is employment growth, job creation often concerns low-productivity jobs. Moreover in these type of jobs workers often receive little training and make little company specific investment. This limits the productivity growth potential of the newly created employment. To maintain a positive external balance when internal demand strengthens, Spain needs a continuous increase in productivity. Employment growth certainly supports economic growth, but in its current form does not contribute significantly to Spain’s medium term economic strength. 

Figure 3: Employment growth by sector
Figure 3: Employment growth by sectorSource: Macrobond
Figure 4: Hours worked declined
Figure 4: Hours worked declinedSource: Macrobond

3. Political fragmentation at the national level

End of 2015 Spain will hold general elections. In the run-up to these elections, two new parties have taken the centre stage. On the left side of the spectre, Podemos has entered the national political arena after winning five seats in European Parliament in 2014. Their ascent will come at a cost of the Spanish labour party (PSOE). In the centre a regional (Catalan) party called Ciudadanos, has emerged on the national stage, that will chip away votes from the centre-right Partido Popular. Both new parties are projected to attract a significant number of votes as voters, disenchanted by the corruption scandals and clientelism, turn to these relatively untarnished newcomers. This could make an end to the post-Franco two party system and will make short- to medium-term governing difficult as Spain has no history of coalition government and seeking compromise is not intrinsic to Spanish culture. This also limits the outlook for structural reforms which are necessary to maintain competitiveness and encourage economic growth through productive employment growth in the future. 

Factsheet of Spain
Factsheet of SpainSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Between the introduction of the euro in 1999 and the start of the financial crisis in 2008, the relatively closed and services-oriented Spanish economy experienced a rapid deterioration of its current account balance. The dominant reason for this deterioration was a rise of imports, which was partly due to the build-up of the construction boom during those years. When house prices started to fall in 2008 and construction activity came to sudden halt, this had major and structural consequences for economic activity, bank’s balance sheets and public finances. Increased worries on public debt sustainability and the solvency of Spanish banks led to a large outflow of foreign capital. A robust austerity effort, private sector deleveraging and weak external demand have resulted in a long and deep contraction of economic activity, which was end 2013 around 7% below its pre-crisis peak. On a more positive note, Spain has implemented several structural reforms in recent years, which will enhance its long term growth potential. As a condition to the ESM-rescue package for Spain’s most vulnerable banks (potential help of €100bn), there has been good progress in reforming the banking sector. Although the country will eventually reap the fruits of these reforms, the short term costs of this adjustment process are very high. Partly due to high structural unemployment and a pro-cyclical labour market, the unemployment rate (around 23% early 2015) is one of the highest in Europe. Although there have been protests and strikes, the intensity of social unrest has remained fairly under control until now. Together with Spain’s history of stable governments –since the transition to democracy after the dictatorship of Franco ended in 1975- this is encouraging regarding political stability, which is crucial for public support to continue with necessary reforms to embark in the course to sustainable economic progress.

Economic indicators of Spain
Economic indicators of SpainSource: EIU
Jurriaan Kalf
RaboResearch Netherlands Rabobank KEO
+31 (0)30 21 62666

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