Spain: Spain Economy Profile

Strong increase in GDP volume will slow slightly next year

We expect the Spanish economy to grow strongly this and next year, although economic increase will be slightly weaker in 2016. In our forecasts, GDP volumes will grow by 3¼% in 2015 and 2½% in 2016 (Table 1). In both years, the increase will come mainly from higher domestic request, although increase in exports will as well contribute. The net trade contribution will still be negative this year, as a result of high import increase due to the strong domestic request. Domestic request will lose some of its strength next year, while export increase will increase further. The level of GDP is not expected to exceed its pre-crisis level until 2017.

The economic recovery is broad-based, both this year and next. Domestic request is boosted by low inflation, moderate increase in employment and wages, lower costs of credit, stronger balance sheets and order books at businesses, waning overcapacity and generous budgetary policy next years of strict austerity. Exports are benefiting mainly from a stronger competitive position, rising request from major trading partners and the low euro. The result of slower increase – and indeed a contraction this time– in emerging markets is having only a slight negative result on export increase as a result of Spain’s limited trading relations with the nations concerned. If, however, the downturn in the emerging world continues to last longer than we currently expect , this could result in a additional hesitant development of world trade in general. This, as a result, implies that Spanish exports could be affected additional severely.

Temporary factors boosting consumption will weaken

Increase of private consumption will be somewhat lower next year as the boost from temporary positive factors wanes. This year, consumption is strong due to low oil prices and low inflation, moderate wage increases (Figure 2), a small rise in employment and higher government spending. The much-improved sentiment is as well causing households to save less of their gain and spend additional.

Lower wage increase in real terms

Next year, private consumption will as well benefit from wage increase exceeding inflation, although real wage increase will weaken somewhat. The increase in employment is not sufficient to generate strong increase in nominal wages. Unemployment will remain very high at around 20% in 2016. This % would actually be nearly 10 % points higher if the number of people working less hours than they wish is included in the unemployment figure. Furthermore, oil prices will rise or at least will fall less rapidly than they have this year. This means that there will again be inflation instead of deflation.

Tighter budgetary policy and uncertain elections

It is as well likely that the government will have to cut spending towards the end of this year and next year in order to comply with the European budgetary rules. Based on the current budget plans for this year and the next, the government will not meet the targets it has set in its ambitious deficit procedure (a budget deficit of less than 3% of GDP in 2016). Next the national elections on 20 December, the government will probably have to submit a new budget in Brussels. This will put downward pressure on domestic consumption due to lower government spending, and possibly through lower private consumption as well, as this will lower real disposable household gain. Lastly, we as well take account of the possibility that uncertainty regarding next policy and concerns about political instability next the national elections could lead to investments being at least temporarily deferred. This may induce households to save a larger proportion of their gain as a precaution. Subsequently, this will lower the increase of domestic request and GDP.

• We expect the Spanish economy to grow by 3¼% in 2015 and 2½% in 2016
• Domestic request is the major driver of increase, but will lose some strength next year as temporary factors fade
• Next the national elections, Spain may have to implement new austerity measures in order to comply with European budgetary rules