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Central banks 16 Jan 2018

BBVA Research affirms positive outlook for Spanish economy in 2018-2019

BBVA Research maintains its forecasts for Spain’s GDP growth in 2017 and 2018 at 3.1% and 2.5%, respectively. In addition, it expects that the economic recovery will continue in 2019  (with a 2.3% increase in GDP) and that the improvement in the economy will translate into wage growth. BBVA Research’s latest Spain Economic Outlook was presented today by Jorge Sicilia, Chief Economist of the BBVA Group and Director of BBVA Research; Rafael Doménech, Head of Macroeconomic Analysis at BBVA Research; and Miguel Cardoso, Chief Economist for Spain and Portugal.  If these forecasts prove to be correct, Spain´s unemployment rate could drop to 13.4% by end of 2019, which would imply the creation of 860,000 jobs over the next two years.

The Spain Economic Outlook report confirms that, despite the uncertainty surrounding economic policy, GDP growth could have reached 0.8% in fourth quarter 2017, driven by the positive behavior of public and private consumption and sustained recovery in the remaining components of demand. Thus, it is worth noting the rebound in investments in machinery and equipment, the increase in residential investments in the closing months of the year and the recovery of exports of goods compared to services, which remain week due in part to political tensions in Catalonia.

For the first quarter of 2018, BBVA Research expects GDP to continue growing, although at a more moderate pace of 0.6 – 0.7% in the quarter. In this regard, BBVA Research believes that, despite decreasing from record levels in October, economic uncertainty will continue to affect economic activity during the first half of the year. Furthermore, if it fails to decline sufficiently or even increases, this uncertainty could have an even more significant impact on the decisions of key economic agents. All in all, and based on available data, GDP growth is expected to continue going forward, with 2.5% increase in 2018, and a slight moderation to 2.3% in 2019.

Jorge Sicilia, Chief Economist of the BBVA Group and Director of BBVA Research

The fundamentals of the Spanish economy continue to drive the country’s recovery

BBVA Research stressed that the international scenario remains favorable for the Spanish economy. The improvement in the growth prospects, both at a global and, especially at European level, will further fuel growth in Spain, thanks to the country’s export diversification; oil prices remain low – despite recent increases – and the risk premium also remains relatively low.

Internally, fiscal policy will maintain a virtually neutral tone. However, the cyclical recovery will help drive the public deficit down. This would have been sufficient to meet the 2017 target, and to reduce the imbalance in public sector accounts to about 2.3% of GDP during 2018. This should lead the EU Council to end the Excessive Deficit Procedure for Spain.

Uncertainty remains high

Despite the recent decline from the record-high level reached in October, uncertainty surrounding the economic policy remains high due to the situation in Catalonia, and this continues to affect some elements of the Spanish economy. Despite the relatively positive tone in the indicators for employment, production and confidence, uncertainty is already taking its toll on the financial indicators. The impact on the aggregate growth of the real economy could become more evident during the first half of 2018. This impact, although limited in the short term, is likely to be more detrimental for Catalonia, and is, in fact, already affecting the region’s consumer spending and tourism figures. In this context, the formation of the regional government will be key. However, for the time being, the impact seems limited and in line with forecasts of several months ago.

Rafael Doménech, Head of Macroeconomic Analysis at BBVA Research

The unemployment rate will fall by more than three percentage points between 2018 and 2019

BBVA Research estimates suggest that the unemployment rate could decline by more than 3 points between 2018 and 2109, to about 13.4% by the end of 2019. The 4% increase in the minimum wage (SMI – Minimum Interprofessional Salary) that will take effect in 2018 is not expected to have a noticeable impact on the labor market, or across the pay scale, given the small percentage of minimum wage workers. This increase could, however, affect the employment prospects of certain social groups. Also, due to job generation capacity constraints in some sectors and the lack of skilled labor, the possibility of stagnation in job creation cannot be ruled out. The absorption of cyclical unemployment could lead to a slowdown in employment recovery, partially offset by an increase in wages. The above could increase the inequality gap between those who have a job and those who do not.

Recovery favors the fulfillment of deficit targets

Throughout 2018-19, the deficit will continue to decline as a result of the economic cycle, both due to effect of automatic stabilizers and the decrease in unemployment benefits, combined with a lower debt interest burden. In absence of further announcements regarding adjustment policies, the public deficit will decline exclusively as a result of the economic cycle, to about 2.4% of GDP in 2018 and 1.7% in 2019, slightly above the stability objectives set by the European Commission.

External and internal risks persist

Although the scenario envisaged by the report does not significantly differ from the one issued three months ago, it is still subject to external and internal risks that could limit growth.

Externally, the uncertainty over global trade remains, fueled by the unpredictability of the United States’ trade policy and the UK’s departure from the European Union. In addition, German Chancellor Angela Merkel’s inability to form a coalition government in Germany and the outcome of the upcoming elections in Italy further complicate the external situation.

Domestic uncertainty over economic policy is still significant after the elections in Catalonia, despite the slight decline from all-time high reached in early October. This source of uncertainty could subtract between 0.1 to 0.3 points from GDP growth in both 2018 and 2019. If the uncertainty is not resolved favorably, or if it increases, this could have an even greater impact on the economic decisions of companies and families.

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