In its latest Spain Economic Outlook report - presented today by Jorge Sicilia, Director of BBVA Research and Chief Economist of BBVA Group, and Rafael Doménech, Head of Economic Analysis – BBVA’s research unit upheld the scenario it forecasted three months ago, which envisages a slowdown in Spain’s domestic GDP growth rate to 1.6% in 2020 from the 1.9% rate measured at 2019 year end. For 2021, a slightly more favorable international environment could result in a slight uptick in growth, with rates reverting to the 1.9% range. According to BBVA Research, this scenario would drive the creation of 600,000 jobs over the 2020-2021 timeframe, driving the unemployment rate down to around 12.5 percent, in average, in 2021.
The latest Spain Economic Outlook report confirms BBVA Research’s GDP growth forecasts for 2019. Last year’s annual growth rate dropped to 1.9 percent, after declining 0.5 percentage points since 2018, as a result of dwindling tailwinds and the rise in internal and external uncertainty. The economy is expected to continue cooling off a further 0.3 percentage points throughout 2020, to close at 1.6 percent, in line with the growth observed since the second quarter of 2019. However, it could start gaining traction again in 2021, to end the year at 1.9 percent, driven by improvements in private consumption, investment and exports.
According to information available regarding the fourth quarter of 2019, there has been a slight improvement in private and public consumption. The possible deterioration of investment between October and December would have been offset by this increase in consumption, thus allowing domestic demand to contribute to GDP growth in the fourth quarter. Going forward, most components of domestic demand will grow, although at a slower pace than in recent years, and will continue driving most of GDP growth, with a contribution that will stand at 1.9 percentage points in average for the 2020-21 timeframe.
As regards external demand, following the stagnation recorded between July and September of last year, exports of goods and services gained some traction during the fourth quarter of 2019 - 0.6 in quarter-on-quarter terms (qoq), and 2.7 year on year (yoy), to close the year at 2.0 percent, slightly below the rate recorded in 2018 (2.2 percent). Imports also picked up during the fourth quarter of the year (0.4 qoq and 7.7 yoy). As result, the contribution of external demand to Spain’s economic growth was positive.
On the other hand, certain sectors are still struggling under the negative impact from certain regulatory changes. This impact is particularly significant in car sales, real-estate related indicators and employment growth in regions, businesses or groups more exposed to the increase of the domestic minimum wage approved last year. However, the repercussion this increase remains limited in terms of employment in aggregate terms, in line with our estimates. Additionally, the weakness observed in the Sun & Sea Tourism sector seems to exceed what should be expected judging from the slowdown in external demand. Despite this, the risk of contagion from these sectors to the rest of the economy remains contained.
Uncertainty linked to the international environment decreases, but remains high in Spain
Foreign uncertainty declines thanks to the increased clarity in certain aspects of trade. On the one hand, the UK election result seems to have curtailed the possibility of a hard Brexit in early 2020. On the other hand, tension affecting some of the world’s major trading areas seems to be easing, as shown by the draft deal that the U.S. and China seem to have concluded. The positive impact of these two events has been further amplified by the stabilization in global trade and industrial production – the main culprit of the slowdown since mid-2018 -, as well as the resilience of the services sector and the improved sentiment in financial markets, where asset prices are reflecting a higher risk for appetite.
The expectation of a somewhat more expansive fiscal policy in the EMU, especially in Germany, also seems to be solidifying. Even though the increase still does not seem to be strong enough to drive inflation significantly across the Eurozone, it will allow the ECB to keep interest rates at current levels, without having to adopt additional measures. At any rate, it will be important to keep an eye on any developments concerning a potential conflict between the U.S. and Iran and their impact on oil prices, which are particularly pivotal for an energy-dependent economy such as Spain’s.
In this context, according to BBVA Research estimates, after growing 3.2 percent in 2019, the global economy will expand by 3.2 percent in 2020 and 3.3 percent in 2021, which are below the last decade’s average growth of 3.8 percent.
In the case of Spain, the speed of recovery will depend on the policies implemented by the new government in the coming months. The uncertainty surrounding the country’s economic policy remains high, given the apparent lack of consensus on some key issues. The general strike and the events that took place in Catalonia in October seem to have taken a toll on the region’s economic activity, but the impact has been limited compared to that of the events that took place two years ago. Given the changes that the new Government is expected to make in some key areas, such as the labor market or pensions, and before reverting the reforms implemented in previous years, it would be advisable to review the different assessments that have been made to gauge the impact of these measures and keep those that have yielded positive results. This public policy assessment spirit should be extended to encompass all fields of activity. In this regard, future action should take into account a detailed analysis of the costs and benefits of the recent changes promoted to regulate the housing market or raise the minimum wage.
Also, reducing the imbalance in public accounts should continue being a priority goal, minimizing the impact of fiscal consolidation over growth. In this sense, the new Government’s commitment to fiscal responsibility and to using resources more efficiently by implementing public policy assessment systems should be considered a positive sign.
The challenges facing the Spanish economy remain
Lowering unemployment and the use of temporary contracts, which remain structurally high, are two of the biggest challenges facing the Spanish economy. Also, the ageing of the population is eroding the sustainability of the pension system in a context in which productivity is showing worrying signs of stagnation. These factors seem to indicate that, in the mid-term, failure to adopt reforms to drive the economy’s growth potential, could lead the Spanish economy to perform at more moderate rates than in recent years.
Avoiding this will require adopting economic policies that increase potential growth, creating an environment that promotes investment, innovation and employment to tackle the digital transformation and energy transition processes, while reducing public deficit, unemployment and inequality.