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BBVA Research sligthly upgrades Spain’s growth forecasts

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 service slightly upgrades its domestic GDP growth forecast for 2019 to 2.3% (vs. 2.2% three months ago), and keeps its 2020 forecast unchanged at 1.9%. The economy is expected to continue expanding in the coming months, driven by the progressive recovery of the global environment, a more accommodative monetary policy and declining oil prices. Under this scenario, BBVA Research expects 810,000 new jobs to be created over the coming two-year period, driving the unemployment rate down to around 12.2% by the end of 2020.

According to Spain Economic Outlook, Spain’s GDP grew by 0.7 percent quarter-on-quarter during the first and second quarters of 2019, an improvement compared to the rates observed during the second half of 2018 (0.5% quarter-on-quarter). However, since the start of 2019, the composition of this growth has been atypical, with lower dynamism in both domestic demand and exports. The drop in internal spending has been largely driven by imports, thus limiting its impact on growth.

Negative surprises were particularly relevant in private consumption, with household spending failing to pick up despite GDP growth. Gross disposable income grew less than expected considering the increase in minimum wages (SMI), pensions or public employee remuneration. In addition, the report also indicates that household confidence might have been undermined by the rising uncertainty surrounding economic policy.

As for tax policy, it was somewhat less expensive than expected due to general, regional and local elections. This resulted in lower than expected growth in public spending, particularly in public investment, compared to BBVA Research’s forecasts form three months ago.

On the other hand, in its latest report, BBVA Research notes that dynamism in international flows of goods was also lower than expected. Exports reached a turning point after a year of steady decline, although the rebound was not as intense as expected, due to regulatory issues and the threat of protectionism. According to BBVA Research estimates, exports of goods and services grew by 1.4% in the second quarter of the year (1.3% year-on-year).

On the contrary, foreign tourism performed surprisingly well, relieved of the negative impacts of some of last year’s headwinds. In addition, the sector managed to revert the decline of its competitiveness indicators, partly as a result of the shift in focus towards higher-value tourism.

On the investment side, several of its components grew at a remarkable pace during the first half of the year. Spending in machinery and equipment grew at particularly strong rates, especially considering the high-uncertainty environment, which advances market share gains at global level in the coming quarters. At the same time, housing investment will continue growing faster than expected for the GDP in 2019 and 2020, although at more moderate rates than predicted a few months back, given the regulatory uncertainty surrounding the sector.

Labor market continued recovering, albeit at a slower pace

According to BBVA Research’s latest report, even though the economy and the labor market performance during the first half of the year was better than expected three months ago; job creation is losing traction in 2019. In line with the slowdown in growth, occupation levels will increase 2.4% this year, three percentage points less than in 2018. This will cause the unemployment rate to drop by 1.5 points to 13.7% in 2019, according to BBVA Research estimates. In this context, the minimum wage rise that came into force on January 2019 is having a limited impact.

Considering the foregoing, and under BBVA Research’s GDP growth estimates for the next two years, activity growth will translate into the creation of 810,000 new jobs, driving the country’s unemployment rate down to 12.2 percent by the end of 2020.

Uncertainty remains high, both inside and outside Spain

Although BBVA Research’s scenario considers a slight activity increase in 2019, the economy’s remains highly vulnerable. Abroad, uncertainty surrounding world trade remained high. The slowdown of the Chinese and American economies, combined with the EMU’s lack of dynamism, hint at a progressive exhaustion of the developed economies. On top of this, a number of looming international conflicts are contributing to the rising uncertainty levels even. Commercial tensions between the US, China and the EMU and the threat of a hard brexit are the biggest threats to Spain’s economy.

Risks also remain high in Spain. Growth continued depending heavily on domestic demand. Additionally, uncertainty surrounding the economic policy remained high and was one of the main sources of instability. At present, the recent general, regional and local elections have increased political fragmentation, a negative outcome as it makes it harder to reach agreements on the necessary measures to underpin the recovery and long-term functioning of the economy.

Also, the lack of consensus could become especially relevant given the potential exhaustion of the monetary policy. So far, the European Central Bank’s expansive policies have contributed to spiking growth in domestic demand, in a context of atypically low interest rates. However, the institution’s approach may be coming close to petering out, which is why, according to BBVA Research, other types of policies may start becoming increasingly necessary, such as those aimed to drive, first and foremost, investment spending. As for Spain, given its limited capacity to use public accounts, the way to spur economic growth would be through measures aimed at boosting competitiveness or making the labor market’s functioning more efficient.

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