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Economic analysis 17 Jul 2018

BBVA Research maintains Spain’s growth forecast at 2.9 percent in 2018 and 2.5 percent in 2019

BBVA Research maintains its GDP growth forecasts for Spain at 2.9 percent for 2018 and 2.5 percent for 2019. The increasing likelihood that some risks might finally materialize could drive the Spanish economy to slower growth scenarios, according to the latest Spain Economic Outlook report published by BBVA’s studies unit. The report was presented today by Jorge Sicilia, Chief Economist of BBVA Group and Head of BBVA Research, Rafael Doménech, Head of Macroeconomic Analysis of BBVA Research and Miguel Cardoso, Chief Economist Spain and Portugal. Under this scenario, the country is expected to generate about 880,000 jobs over the two-year period, causing the country’s unemployment rate to drop below 14%.

The Spain Economic Outlook report confirms that, although with a somewhat less virtuous demand than in previous years, GDP growth will remain strong and could reach 0.8% q-o-q in the second and third quarters of 2018. Solid economic performance was the result, first, of sustained growth in household spending, despite the weakening of some of its recent drivers; and second, of the rising contribution of the construction sector, thanks to the gradual recovery in residential investment and the increase in public spending, which started reverting some of the losses observed during the deficit reduction period.

However, exports of goods and investments in machinery and equipment slowed down dramatically during the first half of the year. As for trade flows, several factors undermined the competitiveness of Spanish products, including a less favorable euro-to-dollar exchange rate during the second half of 2017, spiking oil prices, slower growth in some of the country’s main trading partners and certain problems affecting the supply side in specific sectors.

Despite the foregoing, service exports accelerated, although in the case of tourism price trends were less favorable than in previous years. .

Thus, in the first-half of 2018 the contribution of private consumption to the country’s GDP growth remained stable and the construction sector’s increased while the contribution of the sectors focused towards external demand decreased.

Spanish outlook presentation BBVA Research

Rafael Doménech, Jorge Sicilia, Miguel Cardoso and Esther Jiménez

In the short term, the positive impact of economic policies will offset rising headwinds

The extension of the conventional monetary policy normalization process will keep financing costs low for the Spanish economy. This will contribute to slowing down the euro’s appreciation against the dollar, which should help boost exports and GDP by about of 0.9 and 0.2 percent, respectively, throughout the year. BBVA Research’s forecasts also factor in the measures approved in the Spanish National Budget for 2018 (PGE 2018, in Spanish), which introduced an expansive bias in the fiscal policy that could add an additional 0.4 percent to the GDP.

All this, combined with the positive momentum of the Spanish economy, should offset the increasing strength perceived in some of the challenges facing the Spanish economy, including, the rise in oil prices (to about $70 per dollars) caused by potential disruptions on the supply-side. Given Spain’s energy dependency, this increase could detract up to three tenths from year’s growth rate and six tenths from that of next year.

Recovery will not be enough to meet deficit requirements

On the other hand, BBVA Research estimates suggest that the unemployment rate could drop to about 13.5% in 2019. Thus, and despite the expected less virtuous demand composition, activity growth should be enough to create about 878,000 jobs over the 2018-2019 biennium.

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