RaboResearch - Economic Research

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Spain: a government at last, ready to rumble?

Economic Update

  • The Spanish economy continues to grow strongly
  • It is positive that the political impasse is over, but growth will slow nevertheless. We expect the economy to grow by 2.2 percent in 2017, after 3.2 percent in 2016
  • Weaker growth will affect businesses that have a trading relationship with Spain. That said, domestic demand in Spain will remain relatively strong
  • The new administration will not tackle the reforms that are needed

The Spanish economy is still hurtling ahead, growing by an average of 0.8 percent in the first three quarters of 2016, double the eurozone average (figure 1). And that without a government. After ten months and two elections, a new administration finally took office at the end of October. Will this mean that the economy will grow even faster in the next few quarters? And what will be the effect of the growth outlook for companies doing business in or exporting to Spain? I shall attempt to answer these questions in this publication.

Briefly, the end of the political impasse is positive for economic growth, but we still expect the Spanish economy to grow slower next year than it has done in 2016. This will affect businesses that have a trading relationship with Spain. However, with economic growth forecast to reach 2.2 percent, the outlook for 2017 is still relatively favourable.

Figure 1: Spain’s strong recovery continues in 2016
Figure 1: Spain’s strong recovery continues in 2016Source: Macrobond
Table 1: Forecast table Spain
Table 1: Forecast table SpainSource: Rabobank, Macrobond, Nigem

Formation of a government cannot prevent weaker growth

Consumer and producer confidence have both risen since the new government took office, after months of declines. This will probably boost consumer spending and investment (figures 2 and 3). The continuing economic recovery is supported by steady employment growth, good levels of capacity utilisation and healthy order books. There are, however, a number of factors that will ensure that growth will be slower next year at 2.2 percent, compared to 3.2 percent in 2016 (table 1, see also Spain: strong recovery at stake).

Figure 2: Producers regain confidence
Figure 2: Producers regain confidenceSource: Macrobond
Figure 3: Consumers also welcome the end of the impasse
Figure 3: Consumers also welcome the end of the impasseSource: Macrobond

The main reasons for the deceleration are:

(i)      Tightening fiscal policy (figure 4), mainly due to tax increases;

(ii)    Inflation is rising faster than wages. Higher prices will be driven mainly by higher oil prices, while the still high level of unemployment is hampers wage growth (figure 5);

(iii)   There is less pent-up business investment demand and only a moderate prospect of a recovery in the housing market;

(iv)  Lower economic growth at major trading partners such as France, Germany and the United Kingdom.

Figure 4: Government to tighten its belt again
Figure 4: Government to tighten its belt againSource: Macrobond, European Commission
Figure 5: Unemployment still well above the pre-crisis low
Figure 5: Unemployment still well above the pre-crisis lowSource: Macrobond

Another factor, which also has long-term effects, is that in the last two years progress on economic reforms has been meagre. While the boost to growth that came from structural reforms in previous years is waning.

We also expect the still rather unstable political landscape to overshadow the positive effect of the government formation.

Spanish government has to get used to fragmented politics

The minority government of incumbent Prime Minister Rajoy, needs the support of both Ciudadanos and the Socialists to implement policy. This entails very difficult negotiations and will probably lead to policy that lacks decisiveness. Spain has little experience of coalition governments and no experience at all of a ‘grand coalition’. Moreover, the ideological positions of the conservative centre-right PP of Rajoy, the liberal centre-right Ciudadanos and the centre-left Socialists (PSOE) are very different. The unrest in Catalonia will also continue to demand attention. In time, there will probably be an agreement to grant more autonomy to certain regions over time. Yet, this would entail a change to the constitution that will take at least a full year, if not several years, to achieve.

Meanwhile, it is positive that the government has succeeded in getting its austerity agenda through parliament. Although it had to increase the minimum wage to secure the support of the PSOE. Whether the positive effect on consumption or the negative effect on exports as a result of weaker international competitiveness will gain the upper hand remains to be seen.

The upshot is, that the details of Rajoy’s plans are not known, but a powerful policy agenda to tackle the high level of long-term unemployment, encourage faster productivity growth and improve the (qualitative) competitive position of the Spanish export sector is unlikely. This will put a brake on future economic growth.

Limited impact for businesses trading in Spain

Figure 6: Spanish economy will continue to perform in 2017
Figure 6: Spanish economy will continue to perform in 2017Source: Macrobond, Rabobank, Nigem

In practical terms, the impact of slower economic growth for businesses exporting to or doing business in Spain will be that the demand for consumer goods, semi-finished products and capital goods will on average increase less than it did in 2016. This does, however, not mean that the outlook is negative, and certainly not that demand will contract. The Spanish economy will still grow significantly faster than that of the eurozone as a whole next year (figure 6). The rate of growth expected is actually almost four times the growth forecast in Italy (see Italy: All bets are off and Italy: politics and the banking sector threaten the fragile economic recovery) and twice that of its neighbour Portugal.


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