Robust job creation, easier financing conditions, enhanced confidence and low oil prices are set to keep fuelling domestic demand and economic growth in Spain. The drag of negative net exports on growth is expected to diminish over the forecast horizon as Spain’s competitiveness improves. The government deficit is expected to continue to narrow. GDP growth is projected to reach 2.8% in 2015 (up from 2.3% in February) and 2.6% in 2016 (up from 2.5% in February).
Domestic demand still driving growth After a long recession, growth in Spain resumed in 2014. Growth is set to gather further momentum, backed by improved labour market prospects, loosening financial conditions and renewed confidence, but also helped by favourable external developments and a less restrictive fiscal stance. These factors are expected to sustain growth over the forecast horizon, despite the continued drag from high levels of private and public indebtedness and deleveraging. The adjustment of Spain’s external imbalances is also expected to accelerate compared to 2014.
After having expanded by 0.6% and 0.7% q-o-q in the third and fourth quarters of 2014, economic activity is expected to have accelerated further in the first quarter of 2015. Although growth is expected to moderate in the second half of this year, GDP is now projected to expand by 2.8% in 2015 and 2.6% in 2016, mainly driven by domestic demand. The drag from the external sector observed in 2014 is expected to narrow in 2015 and turn broadly neutral in 2016.
According to hard data on economic activity and soft data from confidence indicators, private consumption has remained quite resilient in the first quarter of 2015, with consumer confidence reaching historical highs. Such resilience is expected to persist as a result of faster-thanforeseen employment growth and rising real gross disposable income, which are expected to also benefit from falling price levels throughout most of 2015 and low inflation thereafter. The household saving rate, currently at low levels, is set to increase moderately in the short term. Household leverage is set to keep falling as nominal GDP and real disposable incomes expand.
Positive demand prospects, easing financing conditions and the projected rebound in exports are expected to underpin investment in equipment, despite the ongoing balance-sheet correction of non-financial corporations. After seven years of adjustment, a modest pick-up in construction, including residential investment, is expected to gather some strength in 2015 and 2016. Public investment is set to contribute only modestly to the increase in total investment in construction.
Exports are expected to accelerate in 2015 and 2016, backed by continued improvements in price and non-price competitiveness and the projected recovery in Spain’s main export markets. At the same time, after a sharp expansion in 2014 partly due to temporary factors, imports are forecast to moderate and align with long-term final demand elasticities. The current-account surplus is set to widen to 1.2% of GDP in 2015 and then decline to 1.0% in 2016 as the impact from the decline in oil prices and the depreciation of the euro gradually fade. In turn, net external lending is expected to rise to 1.6% and 1.4% of GDP in 2015 and 2016.
Inflation is expected to remain negative in the short term at -0.6% in 2015 dragged down by falling oil prices, although this effect has been partly mitigated by the depreciation of the euro. In 2016, however, inflation is forecast to turn positive, but remain low, as the economy’s output gap remains very large.
Sustained employment growth
Job creation gathered steam in the second half of 2014, while the size of the labour force continued to contract, resulting in the unemployment rate declining to 23.7% in the fourth quarter of 2014. These positive trends are expected to intensify over the forecast horizon, helped by continued wage moderation and only modest increases in nominal unit labour costs. The labour force has started to grow again and unemployment is forecast to fall to 20.5% at the end of 2016.
Upward risks related to stronger private consumption and investment, especially in equipment, would prevail in the short term over increased volatility in financial markets and deceleration in some emerging economies.
Deficit reduction helped by recovery
Thanks to the strong economic recovery and the enhanced financing conditions, public finances continued to improve in 2014. According to Eurostat data, the general government deficit narrowed to 5.7% of GDP last year, down from 6.3% of GDP in 2013 (net of bank recapitalisations in both years). The improvement stemmed from both the revenue and the expenditure side, indirect tax revenues being boosted by stronger domestic demand and falling unemployment reining in social transfers.
Going forward, the reduction of the deficit is relying mostly on the improving macroeconomic outlook. The government deficit is expected to fall to around 4.5% in 2015 and to fall by a further percentage point in 2016, despite the impact of recently-implemented tax cuts. The reduction in the deficit is held back by subdued nominal GDP growth, which is acting as a drag on revenue developments. Risks stem from uncertainty regarding the actual impact of the tax reform on revenues, contingent liabilities in the motorway sector and implementation risks in an election year.
While pension expenditures are forecast to continue rising, falling unemployment should limit the growth of social transfers in the near future. Thanks to lower interest rates, interest expenditure should moderate over the forecast horizon.
Spain’s structural deficit is expected to widen by about ½ pp. over the forecast period, reaching 2½% of GDP in 2016. With low nominal GDP growth and a still-sizable budget deficit, the public debt ratio is expected to rise above 100% in 2015 and to reach 101.4% in 2016.
May 05, 2015
Source: Government of Spain, Ministry of Economy and Competitiveness
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Internal commerce conference, Ministry of Economy and Competitiveness, Spain
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