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Economic analysis Act. 19 Oct 2018

BBVA Research lowers growth forecasts for Spain to 2.6 percent in 2018 and 2.4 percent in 2019

Rafael Doménech, Jorge Sicilia y Miguel Cardoso

BBVA Research lowered growth expectations for Spain’s GDP to 2.6 percent in 2018 and 2.4 percent in 2019 (representing a drop of 0.3 and  0.1 percentage points, respectively, from the forecast of three months ago). The downward revision is primarily due to a more modest performance in the first half of the year. Lower growth of both exports and private consumption are two important factors contributing to the revised projections. This was the view detailed in the most recent report on the Spanish Economic Outlook, presented today by Jorge Sicilia, chief economist at BBVA Group and director of BBVA Research; Rafael Doménech, head of Macroeconomic analysis at BBVA Research; and Miguel Cardoso, BBVA Research's chief economist for Spain and Portugal.

The report on Spain's Economic Outlook confirms that GDP growth in the first half of 2018 registered a poorer performance than had been estimated. The recent revision to the national accounts by Spain's National Statistics Institute revealed first quarter GDP performance to be off initial estimates by 0.1 pp (0.6 percent vs.  0.7 percent). In addition, despite strong employment growth, the increase in GDP in the second quarter of 2018 stood at two percentage points below BBVA Research projections (0.6 percent compared to 0.8 percent), which explains the downward revision —from 2.9 percent to 2.6 percent— in for the year’s expected average growth. This reduction results from lower than anticipated levels of private consumption, exports of goods, and tourism.

Projections for lower growth in the Spanish economy compared to previous years were thus established. Specifically, the environment has seen a moderation in private consumption, due to an apparent depletion in held back demand, in addition to the fact that during the last two years household consumer spending has consistently outpaced the recovery of variables such as disposable income and wealth.

Nonetheless, the BBVA Research report emphasizes that there are various factors that could contribute to continued relatively high levels of growth, more than than a half point higher than projections for the EMU. For example, exports of goods could see a boost given the continued recovery of Spain's main trading partners, the recent depreciation of the euro against the dollar, expectations of a partial reversal of the trend in the price of oil, and the absence of domestic inflationary pressures.  In addition, investment in both construction, machinery, and equipment shows relatively high growth.

Jorge Sicilia, chief economist at BBVA Group and director of BBVA Research

Uncertainty remains high

According to BBVA Research research services, uncertainty about the pace of growth is on the rise, both in Spain and on a global level. An increase in trade disputes between some of the world’s major economies threatens wealth generation that has been borne out of globalization and could already be having a negative impact on investment and growth. Among these is the increased likelihood that the United Kingdom and the EU fail to reach a Brexit agreement and that the Federal Reserve will continue to increase the base interest rate for the U.S. dollar.

With regard to Spain, BBVA Research emphasizes that, although contagion effects related to trade are nominal, uncertainty must still be reduced – specifically uncertainty about measures to be implemented over the next few years, given the slowdown in the economy, persistent elevated imbalances, and an increasingly vulnerable external environment. While the approval of the 2018 General State Budget helped reduce uncertainty about short term policy, there is still concern about both the approval of the 2019 budget and the political situation in Catalonia.

Rafael Doménech, head of Macroeconomic analysis at BBVA Research

The forecasts are not sufficient to meet the deficit objective

Using budget execution data available through July 2018, BBVA Research anticipates that the economic recovery’s contribution to tax revenues will be more moderate than had been expected at the beginning of the year. For its part, public spending has risen moderately, driven by expansionary measures approved in the 2018 budget, mainly related to employee compensation, public services, and investment spending.

In a context where growth is more moderate than it was expected three months ago, the cyclical correction for the tax imbalance will stand near 0.4 pp of the 2018 GDP. However, discretionary measures approved this year will offset a large portion of this cyclical improvement, and as a result the public sector deficit will drop by only 0.2 pp, to 2.8 percent of the GDP. For 2019, assuming tax policy goes unchanged, a new cyclical correction of public accounts to 2.2 percent of GDP is expected.

If the 2018 scenario described by BBVA Research materializes, additional tax measures totaling to 0.4 pp of the GDP will be needed to reduce the deficit to around 1.8 percent of the GDP next year. Therefore, the recommended course of action to reduce the imbalance in the public accounts is to identify and eliminate inefficient spending. If an increase in the tax burden is required, efficiency criteria should be followed to limit the negative impact on the economy, specifically on employment.

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