- BBVA Research points out that the Spanish economy continues to perform as expected and maintains its growth forecast for 2014 at 1.3%, although the deteriorating GDP in some European countries could result in GDP growth reaching 2% in 2015
- BBVA’s research service points out that Spain will continue to grow above the EMU thanks to the recovery of its fundamentals, a more expansive monetary policy and a fiscal reform that should drive domestic demand, as long as it manages to avoid scenarios of greater risk
- External and internal uncertainties and the still significant imbalances make it necessary to continue with reforms that increase the growth capacity of the Spanish economy, according to the Spain Economic Outlook report
BILBAO, 7-11-2014 — /EuropaWire/ — BBVA Research considers that economic activity in Spain is performing as expected, and therefore maintains its growth forecast for 2014 at 1.3%. However, the sluggish growth of GDP in some European countries in recent months, and the greater uncertainty registered recently on the financial markets, suggest a worse outlook for the coming quarters. Specifically, BBVA’s research service expects the Spanish economy to grow by 2% in 2015 (three pp less than the previous forecast), significantly above the figure for the eurozone.
As predicted by BBVA Research 3 months ago, in the third quarter of the year Spain’s GDP increased by 0.5% compared to the previous quarter, similar to the figure for the second quarter (up 0.6%) and the estimate for the fourth quarter, which according to the information available to date should reach 0.5%. Although exports have grown again, the main factor behind the recovery had been the increase in domestic demand and, in particular, private consumption.
However, BBVA Research cautions that the recovery is not without risks and open fronts persist, the resolution of which is essential for consolidating growth in the medium and long term. In this regard it points out that both Spain and Europe need to work on supply policies to dispel any doubts and increase the economy’s structural growth capacity.
In contrast, BBVA’s research service also highlights factors that, should they be sustained over time, could be positive, such as the declines seen currently in the price of oil, which are greater than those envisaged in BBVA Research’s baseline scenario. Should they be sustained over time and their origin be confirmed on the supply side, these downward pressures would bring relief to the productive system and, consequently, an upward pressure on the growth of the Spanish economy.
BBVA Research also emphasizes that although the biases that have materialized should entail no interruption for the recovery, there is no room for complacency. The growth of the economy remains subject, among other factors, to the structural adjustments. In this regard, the expected cyclical improvement should not slow the pace of correction of the accumulated imbalances.
BBVA’s research service also points out that in the short term the tax cut proposed by the government will boost growth in 2015 and 2016, as the reform is expected to significantly reduce the effective average rate on the personal income tax base. According to BBVA Research, this tax cut should not necessarily prevent the fulfillment of the stability targets, thanks to the cyclical improvement expected in some revenue and expenditure items, as well as the breathing room provided by an environment of interest rates lower than those budgeted for.
Spain in line with the stability target
Against this backdrop, it is expected that in 2014 the economic recovery and the lower cost of borrowing will continue to have positive effects on tax revenue, on unemployment benefit spending and on debt payments. In addition, the policies underway aimed at containing public-sector employment will continue to reduce employee remuneration spending. As a result, the public deficit will stand at around 5.5% of GDP at the end of 2014, in line with the budgetary stability target estimated by the government.
BBVA Research’s forecasts also suggest that in 2015 the deficit should be in line with the stability target (4.2% of GDP), since neither the State Budget nor the Budgetary Plan presented by the government are expected to include any relevant new developments in terms of the fiscal policy, beyond the tax cut.
The tax cut, according to BBVA’s research service, will result in a drop in the structural revenue of the public administrations that in short term would be offset by the cyclical boost to tax funds. Likewise, the economic cycle will continue to have a positive effect on the reduction of public spending, while there will continue to be a slight adjustment in the rest of the expenditure items, more intense in current expenditure than in capital expenditure.
Thus, BBVA Research expects that tax consolidation will lessen its negative contribution to growth in 2014 and that the contractionary tone of Spain’s fiscal policy will disappear in 2015, suggesting a recovery of both private consumption and investment in non-residential construction.
The stress tests should benefit Spain
As for monetary policy, BBVA’s research service points out that the ECB has acted more aggressively than expected by cutting interest rates to an all-time low (0.05%), and implementing the stock-purchase program or the longer-term refinancing operation program (LTRO).
BBVA Research’s forecast points to a long-term average cost of borrowing of around 2% in 2015, more than 100 basis points below the expectations three months ago. In addition, the stress tests undergone by the European financial system should help to further reduce the existing fragmentation, particularly benefiting countries like Spain.
In any event, there is still uncertainty in relation to the transmission of these policy measures to the cost of funding of businesses and households, and to credit growth. BBVA Research estimates that, depending on the scenario, measures such as the LTRO program could add growth to Spain’s GDP next year, between 0.2 and 0.8 percentage points.
Moreover, BBVA Research also expects an upward revision of private consumption growth of nearly two pp in 2014 to 2.1%. Downward risks for economic activity call for a 2 pp correction in 2015 to 1.8%.
As for the labor market, BBVA Research highlights that the dynamism expected in the economy and the greater efficiency of the labor market should contribute to increase employment in the private sector and reduce the unemployment rate. Thus an increase of 1% in employment is expected in 2014 and a reduction in the unemployment rate of 1.7 points to 24.4%.
In 2015, job creation will speed up to 1.8%, three pp less than expected three months ago, but the reduction of the unemployment rate (to 23.1%) will be less than forecast for 2014 given the less unfavorable trend in the active population. The figures for the second half of the year also show that the contraction in full-time employment is gaining momentum. If the trend is maintained in the coming quarters, the evolution of employment equivalent to full-time will be similar to the figure for total employment.
Given the economic growth forecast detailed above, the expected evolution of employment equivalent to full-time suggests a slowdown in the increase in the apparent productivity of the labor factor (PAFT). The PAFT is expected to increase by around 0.5% on average in 2014-2015 after increasing by 2% in 2013. Despite the improving labor market, notable imbalances persist and BBVA Research takes a positive view of the Employment Activation Strategy 2014-2016.
As for inflation, BBVA Research considers that although the inflation expectations are below the target both in Europe and in Spain, they are still in positive territory, thanks to measures taken by the ECB. It thus maintains the estimates of virtual stagnation of prices in 2014 and positive growth in 2015 (1% on average).
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