Spain
2nd Quarter 2013
Spain The end of the beginning The easing of the austerity policy could enable growth to level off in H2 2013. We nevertheless expect GDP to contract by 1.6% in 2013. The continued deleveraging of private agents and the rebalancing of the economy towards exporting sectors could lead to a surplus in the current account. The long-term improvement in borrowing conditions for the Treasury implies that the prospect of a request for European financial aid is more remote even though the continued risks to the recovery as well as to the fiscal consolidation mean it cannot be entirely ruled out.
■ Relative improvement
1- Spain
Growth contracted 0.8% q/q in Q4 2012, its steepest decline since Q2 2009. In 2012, GDP fell 1.4%, mainly because of austerity measures, but this was cushioned to a large extent by the positive contribution from external trade at 2.5 points of GDP.
Contributions to activity █ Domestic demand █ External trade
We expect the recession to be milder this year even though the pronounced drop in activity in Q4 2012 will likely be reflected by a more significant decline at an annual average: we forecast a 1.6% contraction in GDP, with the economy set to stabilise, in quarter-on-quarter terms, in H2 2013. This forecast is in line with the easing of austerity measures now taking place in Southern Europe. We expect that the European Commission will give Spain one, or even two, additional years to lower its fiscal deficit to below 3% of GDP, thus postponing the target to 2016. A degree of relaxation in the fiscal constraint should see domestic demand suffering less even though the need to deleverage for private agents, the reduction in bank credit and the rise in unemployment will continue to drive it downwards.
Source: INE
These trends helped a significant correction in the currentaccount deficit, down from 10% of GDP in 2007 to 1.9% of GDP in late 2012, which also reflected the deleveraging under way in the private sector: non-financial corporate debt shrank from its peak of 243% of GDP in Q2 2009 to 210% of GDP in Q3 2012. At the same time, that of households dropped from 85% to 80% of GDP. Spain could post a current-account surplus as early as 2013: in aggregate, the country would be self-financing.
■ Rebalancing of the economy
As has been the case since 2008, external trade will probably be the sole positive contributor to growth. Between 2008 and 2012, it added 9.5 percentage points to growth while GDP dropped 5%. The support provided by external trade has come more from a contraction in imports, contributing 6.7 percentage points, than from growth in exports, which contributed 2.8 percentage points. If we focus on the period 2011-2012, however, during which the Spanish government began to consolidate public finances and implemented measures in favour of competitiveness, export growth was a bigger contributor, with 3 percentage points, than the decline in imports, which added 1.8 percentage points. 2012 was the first year since 1997 in which the share of exports in GDP outweighed that of imports.
The improvement in the trade balance is mainly the result of the efforts made to restore competitiveness. On average, unit labour costs have fallen by an estimated 7.6% since 2009. In addition to the internal devaluation due to the austerity programme and the rise in unemployment, reforms of the labour as well as goods and services markets have also boosted exports. They are now 11% higher than their precrisis peak in volume terms. The improvement is structural and is part of a broader strategy of reallocating production resources from sheltered sectors of activity (real estate for instance) into exporting sectors. Even though the rebalancing of the Spanish economy is under way, its export base, at 32% of GDP, remains too small to offset the drop in domestic demand. A recovery will begin only when confidence and investment make a comeback and
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Spain
consumption flattens out, and these developments are expected in 2014. In the medium term, Spanish potential growth remains curtailed by the high level of structural unemployment, related to the bursting of the property bubble, and the substantial burden of public and private debt. Provided national reforms are successful, but also that the eurozone demonstrates its political capacity to overcome its institutional weaknesses, the Spanish economy could grow by 1.5-2% per year in the medium term.
2nd Quarter 2013
While the fact that foreign investors had moved back into Spanish government bonds following the announcement of the OMT could initially be deemed conditional on an imminent request for European aid by Spain, it now seems that the existence of the OMT was enough to restore confidence in Spanish debt. It is also true that monetary conditions in the eurozone are particularly favourable. Even after the early LTRO repayments, excess liquidity in the Eurosystem remains higher than EUR 200 bn. Furthermore, the historically low levels of interest rates in the world enhance the attractiveness of Spanish government bonds that benefit from a liquid market, high yields and now the ECB as buyer in last resort.
■ Relaxed targets ahead
According to initial estimates, Spain’s fiscal deficit climbed to 10.2% of GDP in 2012, driving the public debt ratio above 88% of GDP. When the costs related to the recapitalisation of the banking sector, totalling 3.2% of GDP, are stripped out, the fiscal deficit came in close to 7% of GDP. This is a small overrun in terms of the objective of 6.3% of GDP. However, the final figure will not be released until April and an upward revision of the fiscal deficit, as in 2010 and 2011, cannot be ruled out.
Nonetheless, while the announcement of the OMT bondbuying scheme significantly lowered uncertainty, risks continue to weigh on Spain. The corruption scandal within the Popular Party could restrict the room for manoeuvre available to a government which is also involved in a fight with regional authorities over reducing public expenditure. The relentless rise in the unemployment rate — we forecast it will climb to 27% in 2013 — is fuelling already widespread social unrest. Lastly, an overrun in public finances this year could lead to a downgrading of Spain’s credit rating into the speculative category by one of the rating agencies. This would nearly automatically force the government to request European financial aid.
The current fiscal deficit objective set for 2013, at 4.5% of GDP, looks out of reach in view of the macroeconomic situation. The wage deflation policy, which has to be implemented to restore cost competitiveness, has led to a contraction in domestic demand and fiscal revenues. While the current account deficit has been slashed, the deficit remains substantial with a structural component at 5.9% in 2012: the bursting of the property bubble has given rise to a shortfall in revenues for the government that the rebalancing of the economy in favour of exports cannot offset.
Thibault Mercier
[email protected]
Summary
The Spanish government will likely soon be granted an extension of the timetable it has set to cut deficits, benefiting from the current debate in Europe about the need to soften fiscal policies. All-out austerity, promoted at the beginning of the sovereign debt crisis as a silver bullet, is floundering because it is rejected by public opinion and has been a relative failure in terms of reducing fiscal deficits. Spain could be allowed to postpone the objective of trimming its fiscal deficit to 3% of GDP until 2015, or even 2016. It will have to, however, immediately reform its pension system, overhaul its labour market more radically and open its business service sector to competition.
Components of Growth y /y , v ol, %
2012 2013 e 2014 e
GDP
-1.4
-1.6
0.5
Priv ate Consumption
-2.2
-4.9
-0.5
Public Spending
-3.7
-4.2
-1.5
Fix ed Inv estment
-9.1
-6.4
1.8
Net ex ports (contribution)
2.5
3.1
0.8
Inflation & Labour y /y , %
■ The prospect of an ESM programme is fading
While a European Stabilisation Mechanism (ESM) financing programme in 2013 seemed the most likely outcome until a short while ago, the lasting improvement in the Spanish Treasury’s borrowing conditions has led to this prospect looking far less probable. Since the announcement of the Outright Monetary Transaction (OMT) programme in September, Spanish yields have eased at all maturities, and were not even affected by the results of the recent elections in Italy.
2012 2013 e 2014 e
Consumer Prices
2.4
1.9
Consumer Prices (ex . F & E)
1.3
1.3
0.6
25.4
26.9
27.5
Unemploy ment Rate, %
1.0
External & public accounts % GDP
2012 2013 e 2014 e
Current account General Gov ernment Budget
-0.8
1.0
2.5
-10.2
-6.0
-5.0
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Debt ratio e:: BNP Paribas Estimates & Forecasts; vol : volumes
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