The recovery looks like continuing

The Spanish economy is still growing, albeit at a somewhat slower rate. After sharp GDP growth in Q2 of 0.6% quarter-
on-quarter, the latest figures suggest a slight slowdown. The economic activity index of "la Caixa" Research points to quarter-on-quarter growth in GDP of around 0.5% in 2014 Q3. Our forecast of 0.4% is within the lower band of the  acceptable probability interval and is due to two factors. Firstly, the Spanish economy may have been affected by the recent slowdown in European activity and this would be seen in the figures for Q3, which are not available at the time of writing. Secondly, part of the sharp upswing in activity in 2014 Q2 was boosted by temporary factors such as decisions being taken to consume or invest that had been postponed during the crisis. In any case, the bulk of the evidence available suggests that the growth rate will continue to be significant, given the determining factors currently affecting the Spanish economy.

Supply indicators are showing signs of stabilising at positive figures. In general, the various leading indicators for activity point to a somewhat more moderate growth scenario in 2014 Q3. One sign of this is the slight slowdown in corporate turnover while new industrial orders have also lost some steam (2.4% year-on-year in July compared with 4.2% in June). The PMIs for services and manufacturing also suggest the situation is stabilising, albeit remaining in the zone of  expansion. For the time being Spain's figures are better than the data arriving from the main countries in the euro area although the Old Continent's slowdown in activity is a risk that must be borne in mind. As the euro area starts to grow at a more vigorous rate again, Spain's economic recovery will gradually consolidate.

The labour market's rate of improvement is also moderating. After a period in which the year-on-year growth in  employment was rising month by month, this remained stable in August at 2.0%. We do not expect the progress seen in the labour market to stop but the rate of job creation does appear to be reaching its medium-term level. The fact that the number of workers registered with Social Security in industry and construction has stopped falling compared with the previous year and that the recovery is not focused exclusively on the services sector gives us reason to believe that it will continue. Undoubtedly the new jobs created over the last few months have played a key role in reviving  consumption. Judging by the main series, consumption will continue to pick up although less energetically, in line with the indicators for activity and the labour market. Consumer confidence, for example, fell in Q3 (–7.9 points compared with –6.1 points in Q2) but is still at a historically high level. Retail sales also suggest a slowdown in consumption. While they rose by 0.6% year-on-year in Q2, in the months of August and September the average increase was just 0.1%.

Slight recovery in inflation. As expected, the flash figure given by the Spanish Statistics Institute (INE) placed the inflation rate at –0.2% in September (–0.5% in August). This suggests that inflation may have bottomed out and will therefore start to rise again. In spite of economic growth, inflation has remained in negative terrain since July, pushed down by the drop in price for lubricants and fuels and other volatile components such as fresh foods. This can be seen by the fact that core inflation has not fallen below 0% and is not expected to decrease over the coming months, since the recovery in consumption and the euro's depreciation should help to push up prices again. However, inflation will be very slow to recover due to two factors. Firstly, although GDP has grown for four consecutive quarters, industrial capacity utilisation is still at a very low level. Secondly, wages remain contained, as shown by the data in the Quarterly Labour Cost Survey. In 2014 Q2 wage costs rose by 0.4% quarter-on-quarter (0.0% in Q1), far below the average between 2000 and 2007, namely 1.0%. The moderate wage increase established in July's labour agreements, namely 0.6% annually, points to contained wage growth for the rest of the year, so there will not be any inflationary pressure from this quarter.

Signs of stabilisation in the real estate market. House prices stopped falling in 2014 Q2. This has been shown both by the data from the INE, with a 1.8% rise quarter-on-quarter, and also by the Ministry of Public Works, with a rate of  0.0%, marking the end of a decline that, since 2008, had gone beyond 30% in nominal terms. This incipient  stabilisation in house prices is being accompanied by an upswing in demand. In July purchases of residential properties grew by 10.7% year-on-year (6.4% in Q2). Demand for apartments was boosted by easier monetary conditions, leading to extremely low interest rates in the Spanish economy. July's interest rate for new loans to households to purchase residential property stood at 2.9% compared with 5.7% in 2008. The data also show a recovery, albeit very gradual, in the number of new loans being granted, increasing from the minimum level posted in September 2013. All this suggests that the correction in the real estate sector might be coming to an end.

Exports are showing signs of improvement. Exports of goods grew by 8.7% year-on-year in July, moving away from the weakness shown in the first half of the year and posting 0.5%. However, although exports seem to have picked up recently, the characteristic fluctuations in this series mean we must be cautious when evaluating this upswing.  Undoubtedly the euro area's recovery will need to get stronger before the upward trend in exports can consolidate. On the other hand imports are still dynamic as the Spanish economy is growing thanks to domestic demand. The outcome is that the balance of goods has been deteriorating since the start of the year, reaching nearly –17.2 billion euros in June, in cumulative terms over 12 months (–10.78 billion euros in January 2014).

Foreign tourism is growing at a record-breaking rate. The number of visitors arriving in Spain speeded up in August (8.8% year-on-year) and raised the total number of tourists visiting the country this year so far to 45.4 million (compared with 42.3 million in 2013). The good economic situation enjoyed by the outbound markets (except Russia) means that we can remain optimistic in the short term. Foreign tourism's excellent performance over the last few months has been accompanied by a significant increase in income from this component. In June, revenue rose by 4.6% year-on-year, an upswing that is still not enough to offset the deterioration in the balance of goods and the income balance. In June the current balance was once again in negative terrain (–1 billion euros in cumulative terms over 12 months).

The government has presented the state budget for 2015 with a plausible macroeconomic scenario. On the whole, the growth forecasts used to set the targets for the main items on the public balance sheet are in line with the consensus of economists. Specifically, the budget is based on 1.3% growth in activity in 2014 and 2.0% growth in 2015. According to the Independent Fiscal Responsibility Agency (AIReF), which has evaluated the macroeconomic situation for the first time, the figures proposed are plausible although it notes that developments in the euro area could be somewhat worse
than predicted. The proposed state budget assumes growth in activity and consumption that will increase tax revenue
by 5.4% annually in 2015, even taking into account the impact of the fiscal reform. On the other hand expenditure will decrease by 3.2% as a result of the fall in interest payments and smaller contribution to Social Security and to the State Employment Service. All this will help to carry out a fiscal adjustment of 0.6 p.p. to 2.9% of GDP. However, it should be noted that a large part of the adjustment in the fiscal deficit budgeted, both via revenue and expenditure,
depends on the growth forecasts being met; i.e. it depends on cyclical factors.

For the moment, compliance of the fiscal target for 2014 seems feasible. In August the government deficit stood at  3.3%, 0.2 p.p. above the target for this year and it does not seem complicated to reduce the deficit by this amount over the last four months of the year. Moreover, it should be noted that the recent revision of GDP, following the new  European accounting regulations, has increased nominal GDP for 2013 by 2.6%, reducing the deficit for that year by 0.3 p.p., down to 6.3%. As a result, the fiscal adjustment required to meet the target deficit for 2014 for the public sector as a whole, namely 5.5% of GDP, has shrunk to 0.8 p.p., obviously making it easier to achieve.