RaboResearch - Economic Research

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Spain: Strong economic recovery, partly due to temporary factors

Economic Update

  • We expect the Spanish economy to grow by 3¼% in 2015 and 2½% in 2016
  • Domestic demand is the main driver of growth, but will lose some strength next year as temporary factors fade
  • After the national elections, Spain may have to implement new austerity measures in order to comply with European budgetary rules

Strong growth in GDP volume will slow slightly next year

We expect the Spanish economy to grow strongly this and next year, although economic growth will be slightly weaker in 2016. In our forecasts, GDP volumes will grow by 3¼% in 2015 and 2½% in 2016 (Table 1). In both years, the growth will come mainly from higher domestic demand, although growth in exports will also contribute. The net trade contribution will still be negative this year, as a result of high import growth due to the strong domestic demand. Domestic demand will lose some of its strength next year, while export growth will increase further. The level of GDP is not expected to exceed its pre-crisis level until 2017.

Table 1: Key figures Spain
Table 1: Key figures SpainSource: Macrobond, Rabobank
Figure 1: Strong recovery in domestic demand
Figure 1: Strong recovery in domestic demandSource: Macrobond

The economic recovery is broad-based, both this year and next. Domestic demand is boosted by low inflation, moderate growth in employment and wages, lower costs of credit, stronger balance sheets and order books at businesses, waning overcapacity and generous budgetary policy after years of strict austerity. Exports are benefiting mainly from a stronger competitive position, rising demand from major trading partners and the low euro. The effect of slower growth – and indeed a contraction this year – in emerging markets is having only a slight negative effect on export growth as a result of Spain’s limited trading relations with the countries concerned. If, however, the downturn in the emerging world continues to last longer than we currently expect, this could result in a more hesitant development of global trade in general. This, consequently, implies that Spanish exports could be affected more severely. 

Temporary factors boosting consumption will weaken

Figure 2: Wage growth in real terms due to deflation
Figure 2: Wage growth in real terms due to deflationSource: Macrobond

Growth of private consumption will be somewhat lower next year as the boost from temporary positive factors wanes. This year, consumption is strong due to low oil prices and low inflation, moderate wage increases (Figure 2), a small rise in employment and higher government spending. The much-improved sentiment is also causing households to save less of their income and spend more.

Lower wage growth in real terms

Next year, private consumption will also benefit from wage growth exceeding inflation, although real wage growth will weaken somewhat. The increase in employment is not sufficient to generate strong growth in nominal wages. Unemployment will remain very high at around 20% in 2016. This percentage would actually be nearly 10 percentage points higher if the number of people working less hours than they wish is included in the unemployment figure. Furthermore, oil prices will rise or at least will fall less rapidly than they have this year. This means that there will again be inflation instead of deflation. 

Tighter budgetary policy and uncertain elections

It is also likely that the government will have to cut spending towards the end of this year and next year in order to comply with the European budgetary rules. Based on the current budget plans for this year and the next, the government will not meet the targets it has set in its ambitious deficit procedure (a budget deficit of less than 3% of GDP in 2016). After the national elections on 20 December, the government will probably have to submit a new budget in Brussels. This will put downward pressure on domestic consumption due to lower government spending, and possibly through lower private consumption as well, as this will lower real disposable household income. Lastly, we also take account of the possibility that uncertainty regarding future policy and concerns about political instability after the national elections could lead to investments being at least temporarily deferred. This may induce households to save a larger proportion of their income as a precaution. Subsequently, this will lower the growth of domestic demand and GDP.


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