Spanish Banking Association (AEB) Economic Advisory Area
Economic and Financial Report December 2013
The Spanish economy: consolidating and strengthening the recovery
With GDP growth of 0.1 percent in the third quarter, the second phase of the Spanish economy's recession in the current crisis technically ended in the middle of the year. All segments of domestic demand, except construction investment, made significant contributions, in the context of a smaller contribution from the external sector. Another key feature was the performance of employment, which remained stable despite limited growth.
This long awaited improvement was underpinned by the correcting of imbalances that had previously built up (particularly as regards the external accounts and restructuring of the financial sector, although also in terms of budgetary consolidation, private-sector deleveraging, and housing market adjustment), structural reforms (labour market), the drop in relative unit labour costs (internal devaluation) and the easing of financial market tensions in the Euro zone. This has all led to improved confidence and expectations among economic agents, a reduction in the risk premium, renewed attractiveness for foreign investment, and more recently, an upward revision of the debt outlook by rating agencies. The "clean exit" from the banking sector bailout also stands out, all the commitments made in the Memorandum of Understanding (MoU) having been met using just 40 percent of the proceeds of the credit line initially made available. This places the financial sector in a comfortable position in terms of the processes of balance sheet restructuring and capitalisation.
European institutions have also adopted some significant measures, which have contributed to an easing of market tensions and ensured a more stable macroeconomic framework.
In November the ECB cut the intervention rate by a further 25 basis points, taking it to a historic low of 0.25 percent. It has also continued to ensure unlimited liquidity, extended the asset purchase programme, and confirmed its intention to keep rates low and monetary policy accommodative for some time to come.
In recent years the European authorities have been incorporating new governance mechanisms aiming to ensure macroeconomic stability, such as the Macroeconomic Imbalance Procedure, and the appraisal of national budgets prior to approval. The planned Banking Union, with a Single supervisory mechanism under the ECB, which is due to come into operation in November next year, is particularly significant. Although many of the details have yet to be hammered out, considerable progress has been made on the design of the single resolution mechanism, the single liquidation fund, and to a lesser extent, the common deposit guarantee fund. All these elements are essential to break the vicious circle between sovereign and bank debt, overcome market fragmentation, and ensure the transmission of common monetary policy. In exchange, national governments need to adjust their imbalances –particularly in their public finances– and make markets more flexible so as to boost their growth potential.
In a more favourable international context, the outlook for the Spanish economy is for progressive consolidation of growth, in combination with more sustained domestic demand, and a somewhat weaker contribution from the external sector. The competitiveness gains deriving from Spain's improvements in relative costs and prices (internal devaluation) create scope for expanding foreign sales –boosted by the larger number of exporting companies, particularly SMEs, and their entering new, faster growing markets– while encouraging substitution of imports by domestically produced goods. This will stimulate activity and productive investments, enabling employment growth, while generating income and increasing spending. A new growth cycle will get under way as multipliers come into effect, bringing real GDP growth in 2014 to close to one percent, which is sufficient to generate employment, with job creation picking up speed in subsequent years. This more vibrant activity will in turn help stabilise the public accounts, deleverage the private sector, and allow credit to flow more freely.
However, there is still a long way to go before pre-crisis levels of activity and employment are restored. Economic policy design is challenging, given the scant margin for demand stimulus measures and the high levels of public, private and external debt. To consolidate and accelerate the recovery the public accounts need to be consolidated, in line with existing commitments, and further progress made on structural reforms to boost Spain’s growth potential. Government and tax reform need to be addressed based on rigorous austerity and efficiency criteria, in order to ensure the deficit is corrected sustainably. There is also a pressing need to push ahead with the labour reform begun in 2012, and to deregulate factor markets, and markets for goods and services, so as to ensure fair competition and an efficient allocation of resources, and thus stimulate productive activity.
The improved economic climate represents a qualitative change and an opportunity to move along a lasting and sustainable growth path that is able to create jobs. This is an opportunity that should not be wasted.
Madrid, 19 December 2013