Eurozone EY Eurozone Forecast September 2014 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Outlook for Spain Growth is strong, but vulnerabilities remain Finland Estonia Latvia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with
Highlights Spain is continuing to grow quite strongly. Activity is rebounding, the labor market gradually recovering and demand for loans picking up. We expect GDP growth of 1.3% this year, 2% in 2015 and about 2.3% in 2016 18. However, public finances will remain a source of vulnerability and the painfully high level of unemployment poses a threat. GDP growth 2014 1. 3% GDP growth 2. 0% The recovery is also stirring businesses toward investment. The latest bank lending survey from the European Central Bank (ECB) found a sharp increase in demand for credit among Spanish firms. Initially, this seems destined for working capital to fund incoming orders, but nevertheless, we expect business investment to pick up by around 4% a year from 2015 onward. 2015 Recent data underlines the ongoing improvement in economic conditions. Exploiting substantial gains in global competitiveness, Spain has been trading its way out of recession, with exports set to grow by a little below 4% this year, accelerating to 4.4% in 2015 and then remaining close to 4% a year in 2016 18. This is stronger than in a number of core Eurozone economies, which have continued to lose competitiveness. Businesses are gradually taking on more workers, driving the unemployment rate down by one percentage point since January. But with the rate currently still over 24%, we expect wages to grow only modestly in the coming years. Nevertheless, the turnaround in labor market momentum is stimulating consumer spending, which grew 1.6% in the year to Q1 2014. We expect consumer spending to gather momentum gradually over the coming years, reaching 2.5% growth in 2018, after an expected 1.9% this year. There are still a number of risks. Foremost is the high level of unemployment. In the short term, this increases Spain s vulnerability to deflationary shocks. In the longer term, there is the risk of permanent disengagement from the labor market limiting the growth rate. This would delay the improvement in both public and household debt stocks, which are currently over 100% and 85% of GDP respectively, and will remain sources of vulnerability for some time. 2014 Unemployment 24. 5% Consumer prices 2014 0. 1% EY Eurozone Forecast September 2014 Spain 1
Growth is strong, but vulnerabilities remain A standout performer Spain has been the standout performer of the fragile Eurozone recovery thus far. GDP expanded by 0.4% and 0.6% in the first two quarters of the year, compared with 0.2% and 0.0% at the Eurozone level, and stagnation or contraction in France and Italy. Moving into Q3, it looks like much of this momentum has been sustained, with purchasing managers surveys pointing toward another quarter of solid growth. Improved export competitiveness has been a key part of Spain s success, but domestic demand and a tentative investment recovery are increasingly playing a part. We expect GDP to expand by 1.3% this year, followed by 2% in 2015, picking up to 2.4% by 2018. However, the depth of Spain s recent recession leaves the economy more vulnerable to deflationary pressures in the coming years, while fiscal space will be limited by the size of the debt stock. Trade leads the way out of recession The rapid improvement in Spain s competitiveness position with respect to other Eurozone economies continues to reap rewards. A combination of ambitious reform and stagnating wages in response to rising unemployment has yielded a 10% reduction in unit labor costs in Spain since early 2009, compared with a 6% increase in both France and Italy. In response, exports grew by almost 5% last year and are set to rise by a further 3.7% in 2014, one to two percentage points faster than in higher-cost economies. Even more encouragingly, Spanish exporters are gaining market share, not only in goods exports, but also in service sectors. Services have thus far been slower to respond to the gains in competitiveness, but grew by almost 3% in Q1 this year. Anecdotal evidence suggests that Spanish infrastructure and construction firms in particular are increasingly deploying their expertise internationally. We expect this to support ongoing export growth of around 4% a year through our forecast horizon. Investment is starting to revive Alongside ongoing growth in exports, we expect to see a rebound in capital spending by firms over the coming years. For now, plenty of spare capacity remains in Spain s manufacturing sector, but, given the outlook for export growth in particular, this will narrow faster than in other Eurozone economies. Table 1 Spain (annual percentage changes unless specified) 2013 2014 2015 2016 2017 2018 GDP 1.2 1.3 2.0 2.2 2.4 2.4 Private consumption 2.1 1.9 2.1 2.2 2.3 2.5 Fixed investment 5.1 1.1 2.6 2.8 3.1 3.2 Stockbuilding (% of GDP) 0.9 0.9 0.7 0.7 0.8 0.8 Government consumption 2.3 0.7 0.5 0.6 0.7 1.0 Exports of goods and services 4.9 3.7 4.4 4.0 3.7 3.6 Imports of goods and services 0.4 3.6 3.1 3.6 3.4 3.4 Consumer prices 1.5 0.1 0.4 0.9 1.0 1.1 Unemployment rate (level) 26.1 24.5 23.5 22.8 21.9 21.0 Current account balance (% of GDP) 0.8 0.6 0.9 0.9 0.8 0.7 Government budget (% of GDP) 7.1 5.6 4.4 3.3 2.4 2.0 Government debt (% of GDP) 93.9 100.3 104.2 106.6 107.8 108.4 ECB main refinancing rate (%) 0.5 0.1 0.1 0.1 0.2 0.8 Euro effective exchange rate (1995 = 100) 120.8 123.6 119.9 118.8 118.8 118.4 Exchange rate (US$ per ) 1.33 1.34 1.27 1.24 1.24 1.23 2 EY Eurozone Forecast September 2014 Spain
Meanwhile, although demand for loans has remained weak for several quarters, the latest ECB bank lending survey suggested a sharp uptick in demand for credit from Spanish firms. For the time being, it looks like this credit will be used as working capital, but even so it marks an improvement in firms willingness to take on credit and aim for balance sheet growth. Alongside this, Spain has become a more attractive destination for international investors. EY s attractiveness survey: Europe 2014, found that Spain (alongside other reform-minded European economies) has turned the recent crisis into an opportunity to attract inward investment. Figures from the Organisation for Economic Cooperation and Development (OECD) show that Spain attracted almost 40b in foreign direct investment in 2013, compared with 27b in Germany and just 5b in France. Overall, we expect business investment to grow by around 4% a year over the forecast period, with the composition of this spend gradually shifting from sectors serving external markets to those serving recovering domestic demand. The labor market should continue to recover As a result, the steady improvement in the labor market should continue. The unemployment rate has fallen by one percentage point since the start of the year and almost two percentage points since its peak in early 2013. Nevertheless, at over 24% of the workforce and still well over half of all under-25s, unemployment remains painfully high. Steady job creation will help the unemployment rate to fall to 21% by 2018, but more could be done to accelerate this process. A recent OECD evaluation of Spain s 2013 labor market reforms found a powerful impact on employers willingness to create jobs, but noted that interaction between firms and jobseekers could be improved. As it is, the high rates of unemployment will limit wage growth to just about the rate of inflation for the rest of this decade helping to sustain competitiveness, but undermining households ability to spend. Figure 1 Contributions to GDP growth Figure 2 Unemployment rate and consumer spending % year 8 6 4 Domestic demand GDP Forecast % 30 26 22 18 Forecast 2 14 Unemployment rate 0 10 2 4 Net exports 6 2 2 6 6 Consumer spending (%) 8 2000 2003 2006 2009 2012 2015 2018 10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Table 2 Forecast for Spain by sector (annual percentage changes in gross added value) 2013 2014 2015 2016 2017 2018 GDP 1.2 1.3 2.0 2.2 2.4 2.4 Manufacturing 0.9 0.4 3.7 3.8 3.8 3.3 Agriculture 1.1 0.8 1.6 1.4 1.4 1.5 Construction 7.7 0.5 2.7 2.3 2.1 2.0 Utilities 2.6 1.1 2.2 2.5 2.4 2.4 Trade 0.2 0.5 2.1 1.9 2.3 2.3 Financial and business services 0.8 0.1 2.9 2.8 2.7 2.6 Communications 0.3 0.3 3.0 3.0 3.0 3.1 Non-market services 0.7 0.7 0.1 0.9 1.0 1.2 EY Eurozone Forecast September 2014 Spain 3
Growth is strong, but vulnerabilities remain Although consumer spending should grow by almost 2% in 2014, picking up to 2.5% by 2018, this is largely a result of employment growth rather than wage growth. Furthermore, even by the end of 2018, Spanish households will still be spending less in priceadjusted terms than they were a decade earlier. More to do to ensure fiscal sustainability Moreover, although much has been done both to restore competitiveness and improve public finances, there is still some way to go to ensure the latter endures. Although the budget deficit has fallen from 10.6% of GDP in 2012 to an expected 5.6% this year, further work is needed to get below the 3% of GDP reference value under the European Commission s excessive deficit procedure. As a result, we expect government spending to shrink by 0.7% in 2014, and a further 0.5% next year, before growing by less than 1% a year in 2016 18. Additionally, at almost 100% of GDP, Spain s public debt is among the highest in the Eurozone. Although borrowing costs have trended down alongside other Eurozone sovereign debts in recent months, Spain will remain vulnerable to an increase in interest rates. We estimate a 1% increase in Spanish borrowing costs would result in an additional 1b a year in interest payments by 2017. and the deflationary threat cannot yet be discounted Finally, as with other severely hit Eurozone economies, we remain concerned about the weakness of price growth in Spain. Inflation in the year to July was 0.3%, down from modest growth in previous months, and survey measures of price expectations among households and firms remain uniformly negative. The moderate depreciation of the euro expected through the second half of 2014 and modest increases in fuel costs will provide some spur to prices, but even so, inflation for the year as a whole is likely to be negligible. Moving into 2015 and beyond, inflation will pick up only very gradually, reflecting the weak bargaining power of workers against a backdrop of stubbornly high unemployment. Barring a faster depreciation of the euro, or a stronger recovery in Eurozone demand, it will be 2017 before inflation reaches 1%. As such, Spain is likely to remain at risk of a cycle of deflation and deleveraging for some time yet. Figure 3 Wage costs Figure 4 Government balance and debt Index 2008 = 100 125 Forecast % of GDP 4 Forecast % of GDP 120 120 115 Germany Italy 2 0 Government budget balance (left-hand side) 100 110 2 80 105 100 France 4 60 95 90 85 Spain 6 8 10 Government debt (right-hand side) 40 20 80 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 12 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0 4 EY Eurozone Forecast September 2014 Spain
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