Although the uncertainty surrounding Catalonia’s economic policy hasn’t had the expected negative impact, the favorable global environment seems to have offset the its negative effect on production and employment. Consequently, BBVA Research has upgraded its 2018 and 2019 GDP growth forecasts for Spain to 2.9% and 2.5% from 2.5% and 2.3% respectively. 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 940,000 jobs over the two year period, causing the country’s unemployment rate to drop below 14%.
The Spain Economic Outlook Report confirms that, despite political uncertainty, economic growth might have reached 0.8% q-o-q during the first quarter of 2018, and, based on early Q2 data, it is likely to remain at similar levels through the end of the first half of the year. Both estimates are above the projections envisaged in the scenario presented three months ago. Currently, the two key drivers of the recovery are exports of goods (especially industrial goods, mostly from Catalan manufacturers) and investment in machinery and equipment, which remains solid. The foregoing is partly justified by the good behavior of the world’s economy, and especially Europe's. On the other hand, the internal demand growth and the favorable outlooks continued gaining momentum thanks to the improvement of the external perception of the Spanish economy, and the resulting decline in long-term financing costs.
A recovery supported by the global economy
BBVA Research has upgraded its growth prospects for both the global and, especially, the European economy. This positive international environment will have a positive impact on the Spanish economy. All this despite the Euro’s appreciation against the dollar or the recent spike in oil prices, which could undermine the competitiveness-price of Spanish companies.
Internally, tax policies are expected to be a bit more lax than in 2017, and will likely contribute to the overall improvement of the Spanish economy. However, this could increase the vulnerabilty of the Spanish economy to changes in global financial markets. Also, the tourist industry could recover from the decline in activity reported during the fourth quarter of 2017, and activity in the residential construction sector will remain improving, driven by the low cost of financing.
Policy uncertainty remains relevant
Internally, and as expected, uncertainty surrounding the country’s economic policy remains relevant, despite the decline from the all-time highs recorded in early October 2017. This seems to confirm that the impact of the uncertainty stirred by the political turmoil in Catalonia has been temporary and limited, both at a geographical and a sectorial level. However, according to BBVA Research’s forecasts, uncertainty could detract between 0.1% and 0.3% from GDP growth in 2018 and 2019.
Unemployment to drop by more than 3%, in average, through 2019
BBVA Research’s estimates suggest that the unemployment rate could drop by more than 3% over the two-year period, to an average 13.7% in 2019, bringing the country’s total employee headcount to 20 million by the end of 2019. However, for these job market improvement forecasts to crystalize, individual wage growth rates for the economy as a whole should remain at about 2% per year.
The recovery will not be enough to meet deficit requirements
BBVA Research expects public administrations to end 2018 with a deficit slightly above the stability objective (2.4% of GDP), after meeting their objective in 2017 (3.1% of GDP). This will, however, translate into a new adjustment of almost 0.7 the GDP. Going forward, the economic recovery will contribute to cut public deficit to 1.7% of GDP in 2019. However, the stability goal for that same year is 1.3%.
Trade and monetary policies will be key in avoiding potential risk scenarios. Although an eventual trade war between the U.S. and China has been ruled out for the moment, threats over new duties on U.S. imports, and their focus on China, elevate uncertainty and could end up undermining global trade. Also, slow progress in EU-UK talks over Brexit talks could lead to a spike in uncertainty.