BBVA Research: "The economy will grow 2.7% in 2015 and could create a million jobs in two years"
The acceleration of economic activity, the decline in oil prices and the monetary policy of the ECB are the main factors underlying the revision. This growth will allow one million jobs to be created in two years, and the unemployment rate to be reduced to around 20%.
BBVA Research has revised its growth forecast for Spain upward to 2.7% in 2015 (seven tenths more than three months ago), according to the report SpainWatch presented this Wednesday by Jorge Sicilia, the chief economist of the BBVA Group, and Rafael Doménech, the chief economist for Developed Economies of BBVA Research.
BBVA Research also indicates that the Spanish economy grew by 1.4% in 2014, one tenth more than expected in the last report, and suggests that growth in the first quarter of 2015 could reach between 0.8% and 0.9% quarterly.
Behind this strong activity lies the strength shown by domestic demand, particularly from two of its components: private consumption and investment in machinery and equipment. The latter, according to BBVA Research, has allowed exports of goods to perform somewhat positively during the second half of 2014, despite the stagnant activity of the EMU. The strength of sales abroad remains one of the highlights of the Spanish economy in recent years, according to the report SpainWatch.
BBVA’s research service highlights that the consolidation of the price of a barrel of oil at relatively low levels, compared to the average of 2014, can be a significant boost to the Spanish economy in 2015 and 2016. Much of the reduction in the cost of fuel has to do with supply factors and not a reduction in trade flows caused by a slowdown in global demand.
This implies that the impact, in an importing economy like the Spanish one, will be positive and significant. In this respect, BBVA’s research service indicates that the impact on GDP could reach 0.7 percentage points per year on average over the next two years.
Furthermore, BBVA Research recalls that the ECB has caused a surprise with a policy of quantitative easing that is of a higher amount than expected, and has left the date of completion of the program open (it will continue at least until September 2016). Both aspects have more than offset other factors that are not so positive, such as limited risk pooling, which is reflected in the exchange rate of the euro against the dollar that is more devalued than expected.
It is estimated that for every 10 points of devaluation of the euro against the dollar, GDP will increase by 0.5 points and this would be of most benefit to those Autonomous Communities with more open economies, make exports more likely to have a greater contribution on growth and promote a more intense import substitution process.
Recovery is not without risks
Nevertheless, BBVA’s research service warns that this scenario is not without its risks. First, uncertainty in financial markets has increased as a result of monetary policy decisions in some developed areas and geopolitical events.
In addition, while the sum of Public Administrations complied with the agreed deficit reduction in 2014, the Autonomous Communities have not reached their goal. To regain the credibility that is being lost, it will be necessary to redefine the objectives set by announcing specific policies, which are well designed and spread over time, to allow a credible deficit reduction of those Autonomous Communities that have repeatedly deviated from their goal.
The Spanish economy’s imbalances remain high. Specifically, an expected unemployment rate of over 20% during these two years, but also borrowing in certain sectors that may jeopardize recovery. Therefore, according to BBVA Research, the main goal of public policy should be to increase the capacity of growth to accelerate absorption of imbalances in a virtuous way.
BBVA’s research service also highlights that the reform of the contracting system proposed by BBVA Research and the Sagardoy Foundation would entail a decrease in the rates of temporary employment and unemployment, in addition to an increase in productivity. In particular, it is estimated that GDP could rise between 4 and 12 percentage points in the long term, and the unemployment rate could decrease between 3 and 9 percentage points.
Increase in financing
In terms of credit flows, it points out that several factors provide for a positive outlook. Firstly, the recovery of loans to companies with more than one million euros and the consolidation of the positive developments in financing transactions to families and SMEs.
Secondly, the improvement in activity and employment referred to in the macroeconomic scenario and finally, the battery of stimulation measures the ECB has implemented could have a positive effect on granting new credit and the rise of healthy demand.
An increase in new operations would be compatible with the necessary deleveraging of outstanding amounts if the outflow is greater than the inputs. According to BBVA Research forecasts, new operations could exceed depreciation and amortization from the end of 2015, which would result in an increase in the outstanding balance of lending.
Labor market prospects have been revised upward
BBVA Research highlights that the strong activity expected in the economy and the greater efficiency of the labor market will increase employment in the private sector and reduce unemployment. Consequently, an average annual increase in the number of people in work of 3.2% is expected in 2015, which is 1.4 points higher than expected in October, as well as a reduction in the unemployment rate of 2 points, to 22.5%.
In 2016 employment creation will grow by 2.9% on average annually; however, a more favorable development of the active population will result in the reduction in the unemployment rate (to 20.9%) being lower than expected up to 2015. Data from 2014 indicate that hiring workers on a full-time basis is gaining momentum. BBVA Research forecasts indicate that the ratio of jobs equivalent to full-time employment out of total jobs will reduce by just two tenths to 87.5% during the next two-year period.
As regards fiscal policy, BBVA’s research service notes that the tax cut, in force since January 2015, will produce a structural decline in revenues of the administrations that will be offset by the cyclical boost of tax revenues. Similarly, the economic cycle will continue to favor the reduction of public expenditure.
Thus, with the policies announced so far, the deficit in 2015 should be around the stability target (4.2%) provided an unwavering execution of public spending in line with that budgeted is maintained. In 2016 the economic cycle is anticipated to continue correcting the deterioration in public balances, so that in a scenario without changes in fiscal policy, the deficit will decline to 2.8% of GDP.
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