Spain: strong recovery at stake
- The Spanish economy is growing fast but temporary growth stimuli are weakening and there is more uncertainty
- We are expecting economic growth to slow down slightly in 2016 and 2017, to 2¾% and 2¼%, respectively
- Growth continues to be driven mainly by domestic demand
- There is a big risk that the Spanish government will fail to pursue a robust policy to deal properly with structural challenges
The Spanish economy currently is one of the fastest growing in the eurozone. The economy grew by 0.8% in the first quarter of 2016 (figure 1). But despite strong growth in recent quarters, the economy has still not recovered from the crisis (figure 2). Compared with the period before the crisis, households have less money to spend (in real terms), there are far more business failures per quarter (figure 3) and unemployment remains very high. The Spanish economy still has a long way to go down the road of recovery despite the resilience it has shown recently.
Economic growth in Spain will remain strong over the next few quarters. But the growth rate will drop slightly due to the weakening of temporary stimuli such as the highly expansionary fiscal policy, falling oil prices and a depreciating euro. At the same time there are more areas of uncertainty. Looking further ahead, high long-term and youth unemployment are obstacles to a lasting, vigorous recovery. We expect growth in GDP volume to be 2¾% in 2016 and 2¼% in 2017, after 3.2% in 2015 (table 1). Growth is being driven mainly by domestic demand.
Growth in consumption remains strong, but is slowing down
Private consumption will remain the strongest engine of growth both this year and next, but growth rates will drop slightly. There are various reasons for this:
(i) Real wage growth — nominal wage growth adjusted for inflation — will remain positive but will decrease later in the year. Rising oil prices are pushing inflation up while nominal wage growth remains limited due to high unemployment (figure 4 and table 1);
(ii) Consumer sentiment is optimistic from a historical perspective, but has been worsening for several months (figure 5). This is probably due both to external factors such as the refugee crisis and to internal factors such as the current political climate, the impending elections and the weak recovery in incomes;
(iii) Fiscal policy is expansionary compared with the crisis years, but less so than in 2015. Moreover, the European Commission is demanding that Spain takes additional austerity measures in 2016 and 2017 (figure 6);
(iv) House prices are slowly starting to rise, but prices are still 30% to 40% lower than before the crisis (figure 7);
(v) The fall in the household savings ratio, and the resulting boost to consumption, seems to have come to an end.
Strong investment growth is slowing down
Investment is also continuing to grow but, as in private consumption, this growth is slowing down. There are several reasons for this:
(i) The economic climate, both in the domestic market and among key trading partners, has improved but uncertainties have increased. In the domestic market, uncertainty about the strength of the economic recovery and the current political situation plays a major role. This uncertainty is reflected in the decline in producer confidence since the start of 2016 (figure 8), which could lead to investments being postponed;
(ii) Firms’ financial position has improved but the process of deleveraging has not yet ended. And while weak growth in wages will help profit margins in the period ahead, margins are under pressure from heavily discounted consumer products and rising oil prices;
(iii) Excess capacity is limited and unfilled order levels are healthy from a historical perspective, but the former indicator has increased slightly since the start of 2016 while the latter has worsened somewhat since the end of 2015 (figure 9);
(iv) Interest rates on loans are at a historic low but are no longer decreasing much and this may weaken their positive impact;
Sustainability of the recovery from the crisis is at stake
There is a high risk that the Spanish government will fail to pursue the robust policy needed to tackle the high (structural) unemployment, encourage greater productivity growth and improve the qualitative competitive strength of Spain’s export sector. The national elections of 26 June have again resulted in a fragmented parliament. As such, coalition negotiations will likely prove laborious once more. The above-mentioned issues need to be effectively dealt with to consolidate the economic recovery as the temporary growth stimuli become weaker, as we expect.