Spanish Banking Association (AEB) Economic Department
Economic and Financial Report. April 2015
The Spanish economy: positive on the whole, but challenges remain
The recovery in the Spanish economy that began in mid-2013 picked up speed over the course of 2014, with six consecutive quarters of growth and strong job creation. This turning point was basically the outcome of a broad programme of actions, including competitiveness gains deriving from an internal devaluation (cut in relative unit labour costs), structural reforms (labour market), and progress on budgetary consolidation. Together, these measures have buoyed up exports and corrected the large current account deficit, stimulated job creation, and lightened the public deficit. Meanwhile, the major restructuring of the banking industry has produced a healthier, recapitalised sector trimmed of its excess capacity. The implementation of Banking Union and extension of non-conventional monetary policy measures by the ECB also played an important role, by reducing market tensions, easing access to credit, and bringing down cutting financing costs significantly.
However, the crisis is far from over, as only 30 percent of the GDP and 10 percent of the employment lost during the long recession have been recouped. Although the unemployment rate has fallen by close to 3 points from its previous peak, it is still 23.7 percent. Public and private debt levels and foreign debt remain high, requiring deleveraging and the continued accumulation of current account surpluses.
Although starting out from a much more comfortable situation and in a better position to support the recovery, the banking sector still faces some significant challenges. These include the squeeze on margins that comes with exceptionally low interest rates, and a particularly demanding regulatory framework, requiring high levels of capitalisation and provisioning. The necessary return to profitability inevitably entails rationalising structures and containing operating costs.
The outlook over the coming year is for a consolidation of the expansionary phase, with growth at close to 3 percent, supported by better domestic conditions, to which other external factors are currently added, such as cheaper energy prices, the depreciation of the euro, particularly loose monetary conditions, and better growth prospects in the Eurozone. The downside risks include, in particular, the slowing of the emerging economies, especially in Latin America, uncertainty caused by the Greek crisis, and a possible change of course in some Eurozone countries' economic policies, which could jeopardise macroeconomic stability. However, the Spanish economy rests on relatively solid foundations and meets the conditions for a phase of sustained growth and job creation.
According to recent Bank of Spain forecasts, real GDP growth in 2015 is set to rise to 2.8 percent, twice the previous year’s rate. This is the result of positive contribution of 3 percentage points from domestic demand and a negative contribution of 2 tenths of a percentage point from the external sector. The key factors in domestic demand are the recovery in private consumption, with growth of 3.3 percent, consolidation of equipment investments, at 9.1 percent, and the fact that construction investment, with an increase of 4.1 percent, has grown for the first time since the start of the crisis. Employment is expected to grow by 2.7 percent, equivalent to 450 thousand jobs, and the unemployment rate is set to drop by 2.2 points to 22.2 percent. The inflation rate, measured in terms of retail prices, is expected to drop by 0.2 percent and the GDP deflator to increase by 0.4 percent. Lastly, the national net lending position should come to 1 percent of GDP and the general government deficit is set to overshoot its target by 3 tenths to reach 4.5 percent of GDP.
In a more uncertain context, and depending on the design of economic policy, particularly in the fiscal and budgetary areas, the forecasts for 2016 see the path of recovery continuing, with growth of 2.7 percent, employment rising by 2.6 percent, the unemployment rate dropping to 20.5 percent, and inflation standing at 1.2 percent. The national net lending position should stabilise at 0.8 percent of GDP, while in the absence of new measures, despite the upturn in activity and cheaper debt servicing, the general government deficit will come to 3.9 percent of GDP compared with the target of 2.8 percent in the Stability Programme.
The progress made confirms that, with appropriate policies, it is possible to continuing accelerating the rate of growth and job creation. This suggests that the course of economic policy, focusing on adjusting the pending imbalances and making markets more flexible so as to achieve more exhaustive (employment) and efficient (productivity) use of factors of production, should be continued. Efforts to put the public accounts in order and reform public administration, applying strict austerity criteria, also need to continue. Adopting measures to bolster competition in goods, services and factors markets would enhance the allocation of resources and bring down prices, and extend exporting activity to new markets with strong growth potential. The small size of Spain's firms demands simpler and more flexible legislation to facilitate productive activity. Improvements in education and vocational training a key factor in raising productivity.
Finally, as far as the Euro area is concerned, the ECB's monetary stimulus alone is not sufficient, but needs to be backed up by other fiscal measures and structural reforms in Member States, according to their imbalances and available leeway. Looking further ahead, if full use is to be made of the advantages of Monetary Union, progress is needed on harmonising budgetary integration and a common treasury.
Madrid, 16 April 2015