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Economic analysis 26 Sep 2016

BBVA Research: “The economy will still grow at cruise speed in Q3, but risks persist”

BBVA Research confirmed that the Spanish economy was still growing in the early weeks of the second half of 2016, estimates that Q3 2016 could become the fifth consecutive quarter of growth at a quarterly rate of about 0.8%. Jorge Sicilia, Chief Economist of BBVA Group and Director of BBVA Research and Rafael Doménech, Head of Economic Analysis of BBVA Research shared these findings during the presentation of the Spain Economic Outlook report.

BBVA’s research service upheld the growth forecasts it revealed in August – 3.1% for 2016 and 2.3% for 2017. With respect to the report released in May, growth prospects for the current year have improved, as a result of the impact of the tailwinds that are driving the Spanish economy, including an expansive monetary policy, low oil prices, a higher-than-expected fiscal push and uncertainty affecting the markets that compete with Spain’s tourism sector.

Looking forward, the materialization of some risk events (brexit), a foreseeably not so favorable fiscal policy and the impact of uncertainty over the economic policy that will be implemented in coming years will contribute to somewhat cool off growth prospects. However, as a result of the expected growth about eight hundred thousand new jobs will be created, driving the unemployment rate down to about 18.2% by the end of 2017.

Job creation rates will slow down during the third quarter

According to BBVA Research, despite the disappointing increase in the number of Social Security affiliates posted in August, slowdown in employment generation rates should be mild if the previous month’s trend is recovered. On the other hand, unemployment continued declining at similar rates in August.

Household consumption continues boosting growth

Household spending was the key economic driver during the second quarter of 2016, despite the existing uncertainty. Also, this element is expected to continue being just as influential in the coming quarters. “As a result, private consumption will grow about 3.3% in 2016, six tenths under what we expected in May.” On the other hand, growth in domestic expenditure in 2017 is expected to be four tenths lower than predicted in May (2.3%) as a result of a worsening economic scenario, high uncertainty surrounding the economic policy and the brexit. This situation may also be conditioning the rollout of a number of investment projects.

Export growth moderates in 2017

Despite the sharp decline in the global trade of goods in recent quarters, the contribution of external demand to growth during the second quarter was the highest since the last period of 2012. According to available data, sales of goods and services abroad – the latter driven by foreign tourism – are showing positive signs. However, the grim international economic outlook for coming quarters has forced us to revise downwards our growth estimate of total exports in 2017. The brexit will have a detrimental effect over the Spanish economy – detracting about four tenths of the GDP – due to both the importance of exports to the UK and the indirect exposure resulting from global demand.

Oil prices, higher than expected

According to BBVA Research’s forecasts, oil prices will jump 11% and 8% (in average every year) in 2016 and 2017 respectively, higher than estimated in early 2016.

Changes in fiscal policy to meet budgetary objectives

Public Administrations are still applying a slightly expansive fiscal policy, and therefore the 2016 deficit will only drop by 0.6 percentage points to 4.4% of GDP, a percentage that is under our stability objective (4.6%), despite high GDP growth. Public accounts are expected to improve in 2017, but in a scenario without changes in the fiscal policy, the deficit would be reduced just to 3.6% of GDP, exceeding the budgetary goal established at 3.1%.

During the next two years, fiscal policy measures will be conditioned by the resolution of the European Commission regarding the sanctioning procedure due to the country’s failure to meet the 2015 goals.

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