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Economic analysis 07 Nov 2017

BBVA Research says recovery will continue in 2018, but at a slower pace

According to BBVA Research’s latest Spain Outlook report, 2017 will cap off Spain’s three-year run of GDP growth at rates above three percent. Recovery will continue in 2018, but at a slower pace, in an environment marked by rising uncertainties. 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. Considering this scenario, BBVA Research has downgraded its GDP growth forecasts for 2017 and 2018 to 3.1 and 2.5%, from 3.3% and 2.8% in July.

Key factors supporting growth include the recent series of positive activity and employment data, a favorable international climate, which should help sustain export growth levels, and an expansive monetary policy. BBVA Research has revised its growth forecasts for the Euro area slightly upwards to about 2% in average for 2017 and 2018. However, if the growing uncertainty resulting from political tension surrounding Catalonia persists over time, future investment or service export trends could be compromised.

According to the Spanish economic outlook report, on a quarter-on-quarter basis, Spain’s GDP grew by 0.9% and 0.8% during the second and third quarters of the year, respectively slightly under BBVA Research’s July forecasts (1.0% and 0.9%).<0}This slower growth is the result of unexpectedly weak exports and machinery and equipment investments, together with lower-than-expected household consumption rates.

BBVA Research estimates that, if the trend observed through October in activity data remains unchanged, GDP should grow somewhere between 0.8% and 1.0% during the fourth quarter, remaining at levels consistent with the recent year trends. Despite uncertainty being the biggest threat to economic activity, the fourth quarter has started with acceleration in Social Security affiliations. Going forward, BBVA Research has revised down its growth forecasts for 2017 and 2018 to 3.1% and 2.5% due to slightly disappointing Q2 and Q3 performance levels and increasing uncertainty.

Rafael Doménech, Jorge Sicilia, Miguel Cardoso and Esther Jiménez

Uncertainty in Catalonia

Catalonia’s political environment is causing volatility to increase in some financial variables. The indicators measuring economic policy uncertainty are now above 2016 levels. Thus, there is a risk that, in the future, this growing tension will end up having a negative impact on expenditure and investment decisions by consumers and companies. Due to the different nature of this uncertainty – compared to that of past scenarios – estimating the effect of the current political climate in Catalonia in terms of GDP growth is a particularly daunting task, further complicated by the existence of channels of contagion to other regions.

The toll on the Spanish economy will ultimately depend on how much this uncertainty increases, for how long and whether it spreads to other parts of Spain. Particularly, according to preliminary estimates, if the year concludes with uncertainty at October levels, GDP in 2018 will grow between 0.2% to 1.1% less than in a tension-free scenario. Despite the breadth of this potential impact bracket, based on the information available on the date of publication of the report, uncertainty will most likely have a limited effect, with GDP growing at an average rate of 2.5% in 2018.

950,000 jobs at the end of the biennium

In line with the forecast revisions for 2017 and 2018 compared to those released three months ago, the expected job creation rate is also more conservative. BBVA Research expects participation rate to increase, in average, by 2.7% this year – the same level as in 2016 – and 2.3% in 2018. This more likely scenario will translate into about 950,000 new jobs over the biennium.

Although the job market will continue recovering throughout the two-year period, unemployment and participation levels will remain far from pre-crisis levels. As of the end of 2018, the participation rate will still be 6% lower than that of early 2008, while the unemployment rate will be almost 6% higher.

Inflation could fall under 2%

General inflation has remained relatively stable during Q3 as the drop in energy and food prices has been offset by the increase of about one tenth of underlying inflation (to 1.3%). Due to the impact of the euro’s recent appreciation on import prices, BBVA Research has lowered its inflation forecasts by about one tenth for 2017, to 1.5%, and two tenths for 2018, to 1.2%.

Spain will meet its fiscal deficit target by 2018

In a scenario without changes in tax policy, public deficit should drop to 3.1% of GDP in 2017 and 2.4% in 2018, in line with stability objectives. The fiscal deficit targets included in the Budgetary Plan for 2018 are achievable, despite the unlikelihood of public revenue reaching target levels. According to the estimates by BBVA’s analysis service, if this scenario crystalizes, Spain will exit the excess deficit procedure in 2018.

Some external risks persist

Although economic prospects for the biennium continue to improve, albeit at a slower pace, some international risks persist that could hinder growth. Uncertainty surrounding global trade remains, mainly due to potential shifts in U.S. trade policies and Brexit.

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