BBVA Research, the research services arm of BBVA, has released its most recent edition of the “Spain Economic Outlook” where it forecasts a slight slowdown in growth. The report was presented today by BBVA Research Director and BBVA Group Chief Economist, Jorge Sicilia, and Rafael Doménech, Head of Economic Analysis at BBVA Research. The forecast lowers first quarter expectations to 2.2 percent in 2019 and 1.9 percent in 2020 (from 2.4 percent and 2 percent, respectively). Even so, the report signals that an improvement in economic activity could be underpinned by the global economy’s gradual recovery, an increasingly expansionary stance on monetary policy, continued low oil prices, and the positive conclusion to uncertainty stemming from different sources. Consequences of such a scenario would see a salary increase exceeding the inflation rate, an up to 12 percent reduction in unemployment in 2020, and the creation of close to 630,000 jobs over the next two years.
The “Spain Economic Outlook” suggests that 2019 Q1 GDP growth (+0.6 percent quarterly average) remained stable thanks to the strong performance in private consumption and public spending. Looking forward, continued recovery is expected, despite the less optimistic growth forecast owing to the short term tapering off of certain growth drivers.
On one hand, household spending would benefit from the rise in disposable income resulting from both expansionary policies and the job market performance, where there are indicators of wage acceleration. Furthermore, consumer financing continues its double-digit growth, while savings remains at historically low levels. On the other hand, public sector recruitment continues to add to Spain's employment growth, while investment in non-residential construction could benefit from a fiscal stimulus. Be that as it may, these driving factors could reverse course during the year.
The report also signals growth in Spain’s economic activity, despite the weak and irregular performance of private investment and exports. It calculates that in the first part of the year, there was a recovery in both the spending on machinery and equipment and the export of goods. Nonetheless, uncertainty around global trade, the slowdown in growth in the Economic and Monetary Union (EMU), regulatory changes in the automotive industry, and uncertainty about economic policy are negative factors that hang over the future performance of these sources of demand.
Moreover, housing investment might not be as high as expected due to regulatory changes affecting the sector. In addition, a possible slowdown in consumption may occur as demand that had been pent up during the crisis is depleted.
Finally, demand in sectors that are key to the Spanish economy (automotive, tourism) has fallen, which could limit future employment growth capacity.
Thus, according to BBVA Research, the composition of Spain’s growth (dependent on private consumption and public sector spending) and the increase of economic policy uncertainty put the recovery in a more vulnerable position given the risks that are at play.
The negative impact of the national minimum wage and 630,000 jobs
Consequences of such a scenario would see a salary increase exceeding the inflation rate, an up to 12 percent reduction in unemployment in 2020, and the possible creation of close to 630,000 jobs over the next two years.
BBVA Research forecasts indicates that salaries are beginning to rise faster than productivity, which could be symptomatic of a lack of qualified human capital, a factor that could be impacting specific businesses and regions. The rise in salaries, together with the slowdown in apparent labor productivity, could stall job creation and increase income inequality.
In this context, it is still too early to assess the impact of Spain’s minimum wage increase. Although the employment trends have not benefited the most vulnerable groups as much as the rest of the population – there is still insufficient data – the poor employment figures for these groups could be the result of other events or policies. All in all, BBVA Research estimates suggest that 2019 could see between 0.1 percentage points (pp) and 0.4 pp less employment growth than if there had not been a minimum wage increase, depending on whether businesses absorb the increase or pass it on in their prices.
Uncertainty remains high
Looking externally, there are still numerous risks that seem increasingly likely to transpire, factors that justify a downward slant to the growth projections. BBVA's research service indicates that a thawing in international trade tensions is a highly likely scenario. Nevertheless, uncertainty remains high with regard to how the negotiations between the U.S. and China on the one hand, and with Europe on the other, will pan out, most especially the impact they will have on the automotive industry.
The report also stresses the importance of the United Kingdom's final withdrawal agreement with the EU, which could impact investment and the growth outlook for some regions, sectors, and businesses in Spain. The likelihood of a disorderly departure has risen, which could have a negative impact on the financial markets and on economic activity. Added to all the above, the recent slowdown in growth observed in the EMU (from 1.8 percent in 2018 to 1.0 percent in 2019) has caused concern, despite the monetary stimulus backed by the Fed and the European Central Bank (which has tried to influence expectations about interest rates and announced a new round of long term refinancing operations). According to BBVA Research, there would appear to be a risk if part of the weakening uncovered obvious structural factors, tied to a lack of consensus around reforms that could catalyze European integration and bring greater growth to the landscape.
Uncertainty is also on the rise in Spain due to the potential impact of economic measures implemented at the beginning of the year. One example is the increase to Spain’s minimum wage; another relates to changes made to the regulation of property rental contracts. Within this context, the Spanish election cycle introduces more uncertainty with respect to measures that could be implemented in the coming years.