RaboResearch - Economic Research

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Spain’s economy keeps going strong

Economic Update

  • Spain’s economy has started the year on a strong footing with 0.7 percent quarterly growth
  • The uncertainty brought about by the Catalan crisis and trade tensions seem to have barely undermined the optimistic sentiment and economic momentum
  • We expect the economy to again outperform the Eurozone this and next year, although we expect economic growth to slow from 3.1 percent in 2017 to 2.8 percent in 2018 and 2.2 percent in 2019
  • The Catalan crisis could have a negative long-term economic impact as the Central government needs to divert agenda time from economic and fiscal policy to crisis resolution
  • The labour market recovery has come a long way, but still has a lengthy recovery phase ahead
  • Despite the strong employment outlook, especially this year, some indicators suggest that not all currently unemployed should expect to find a job without re-schooling

Economy withstands Catalan and international uncertainty

The Spanish economy has started the year on a strong footing. In the first quarter, the economy grew by 0.7 percent compared to the previous quarter, the same as in the final quarter of last year and above the 0.3 percent growth figure of the Eurozone. In previous notes, we have already mentioned that the uncertainty brought about by the Catalan crisis seems to have barely undermined the optimistic sentiment and economic momentum. Unlike most other Eurozone member states, Spain saw economic sentiment on average improve during the first quarter of 2018, with only manufacturers a bit less optimistic than they were in the final quarter of 2017. Strong employment growth and increased real wage growth (see the next page) also boost the economy. In the first quarter, real wages grew for the first time in a year on the back of higher nominal wage growth and lower inflation. Other factors that support private consumption and investment are the ongoing recovery in the housing market, decreased debt service ratios and low financing costs. Capacity utilisation rates in both the manufacturing and service sector, and strong, though weakening, (export) order books in the manufacturing sector also benefit investments.

Figure 1: The economy stands its ground
Figure 1: The economy stands its groundSource: Macrobond, Rabobank calculations
Figure 2: Real wage growth improves
Figure 2: Real wage growth improvesSource: Macrobond, Rabobank

Strong but slightly weakening momentum

Looking forward, we expect the economy to keep posting strong figures. Yet we do expect economic growth to slow from 3.1 percent in 2017 to 2.8 percent in 2018 and 2.2 percent in 2019. Consumption growth is set to slow mainly due to moderating pent-up demand and lower employment growth. At the same time, historically low household saving rates suggest that households might be less induced to use their remaining savings for consumption than last year. We also expect investment growth to slow slightly on the back of lower export growth, less pent-up demand in most sectors except for construction, and a smaller boost from low financing costs.

As far as exports are concerned, we believe the tourism sector will boost economic growth less than last year, though it is still likely to perform really well. While tourists in Spain are said to have a high retention rate, not as many additional tourists should be expected as in last year. This is in part a result of declining unrest in some of Spain’s competing tourist destinations, but also because several Spanish destinations are coping with insufficient personnel and facilities to accommodate more tourists. The most important downward risks to the still strong export outlook are higher US trade tariffs, especially when these affect cars (or car parts), and a significant depreciation of the pound as a result of Brexit-related uncertainty, due to the high share of British tourists.

Catalan crisis mainly impacts economy in the long term

Catalan tensions will not fade anytime soon, but in our view the impact on short-term growth will be limited. We believe Catalonia will remain a part of Spain, and at least in the short term, tensions are unlikely to reach the highs we saw in the final months of 2017. Besides, households and firms have not really lowered spending due to the standoff. Still, the risk of a re-escalation and economic impact at a later stage cannot be fully ignored. We don’t expect the next Catalan government will declare independence again, but we don’t know exactly how radical the region’s new government and president will be. Catalonia is still without a president after December’s election. Mr. Puigdemont, the Catalan parliament’s preferred choice, is still in self-imposed exile (and wanted by Spain’s public prosecutor) and as such ineligible, while some other prominent figures are disqualified because they are in jail. Still we think the Catalan parliament will reach a compromise before the 20 May deadline to prevent a return to the polls.

Even though we expect the short-term economic impact to be limited, the long-term impact could well be substantial. Every day the central government spends on resolving the crisis is a day less to spend on necessary policy measures to increase the rather limited growth potential of the economy or to improve public finances. This is especially important given the high government debt ratio (98 percent of GDP) and the large general and structural budget deficit (both 3.1 percent of GDP).

Labour market on the mend, long recovery phase ahead

In the first quarter of 2018, the unemployment rate dropped to 16.1 percent, down from 20.4 percent in early-2017 and 26.2 percent at the peak. Strong employment growth has been the main driver and the employment outlook remains bright, although it is expected to slow a touch. Employment growth boosts economic growth, but the fact that most new jobs are temporary has limited the positive impact. At the same time, the share of part-time, less paid jobs has risen. On the upside, the decline in the share of permanent hires has slowed lately.

Figure 3: Despite decline unemployment is high
Figure 3: Despite decline unemployment is highSource: Macrobond, Rabobank calculations
Figure 4: But where are the unemployed hiding?!
Figure 4: But where are the unemployed hiding?! Source: Macrobond, Business Survey DG ECFIN, Rabobank

A decline of the labour force due to discouraged workers and an ageing population has also lowered unemployment. This is a concern for the longer term, as it would imply a lower potential growth rate if the lower number of workers is not compensated by higher productivity growth.

The sharp decline in the unemployment rate in the past years has slowly lifted nominal wage growth. In the first quarter, annual nominal wage growth was 1.5 percent. While not bewildering in a historical perspective, it does mean that nominal wages rose faster than inflation (1.1 percent) for the first time in a year. Looking forward, wage growth is expected to remain muted due to the still very high unemployment rate. That said, in some sectors, like tourism and manufacturing with a high technology content, employers state that they have trouble finding qualified personnel. In fact, according to surveys, labour shortage has not been as much of an issue since 1986 (when the series started) as it is now. To be fair, labour shortage is much less of an issue in Spain than in some Eurozone peers and some shortage could likely be resolved by raising wages. But it still suggests that not all currently unemployed should expect to find a job without re-schooling.


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