Growth with contained inflation
The Spanish economy withstands the autumn storm. Although the recovery is progressing very slowly in most European countries, the Spanish economy continues to stand out with a growth rate that is at a clearly higher level. GDP increased by 0.5% quarter-on-quarter in Q3, the same rate as in Q2 and higher than the 0.3% recorded in Q1. The country has now enjoyed five consecutive quarters of positive growth and its year-on-year growth rate is now 1.6%. Moreover, in the coming quarters we expect the recovery to be strengthened further thanks to two sources of support: falling oil prices (see the Focus «On the impact of falling oil prices on the current balance» in this Report) and the depreciation of the euro. The European Commission also notes that some support might come from moderate fiscal relaxation. This has led us to revise upwards our growth forecast for 2015, to 1.9% (previously 1.7%). For 2016 we expect growth of 2.0%. This improvement in forecasts for the Spanish economy can also be seen among international organisations such as the OECD which, in its November report, improved its forecast for 2014 by 0.3 pps to 1.3%, and by 0.2 pps for 2015, to 1.7%.
The recovery continues, thanks to domestic demand. Domestic demand contributed 0.8 pps to quarter-on-quarter growth in GDP thanks to the increase in private consumption, whose strenght continues to surprise (0.8% quarter-on-quarter), and to the progress made by investment, especially in equipment but also in construction. The other component of domestic demand, public consumption, is still contained due to the adjustment of public accounts. In the coming quarters we expect household consumption to moderate its rate of growth and post figures more in line with the trend in its gross disposable income. In fact, some consumption indicators for Q4 are already pointing in this direction: retail sales dropped by 0.8% in October and, in November, consumer confidence fell to –11.8 points, a level similar to that of Q1. However, other indicators such as automobile sales show no signs of fatigue.
The foreign sector is showing some signs of improvement after a very weak first half of the year. Although foreign demand deducted 0.3 pps from quarter-on-quarter GDP growth, it is important to note the good performance by exports, growing by 3.5% in Q3. However, the strong growth in imports (4.7% quarter-on-quarter) meant that the current account balance continued to deteriorate: in September it posted a surplus of 1.7 billion euros (cumulative over 12 months), a figure that contrasts with the surplus of 15.8 billion euros one year ago. Nonetheless, the good performance by tourism, which continues to set all-time records, and the more favourable trend in goods exports point to a slight improvement in the current account in 2015.
Q4 supply indicators continue to improve. The PMI for services advanced by 0.1 pps in October to 55.9 points while the index for manufacturing remained at the level of 52.6 points. Both, therefore, are still above 50, the borderline between expansion and contraction. New orders are the main driving force for both sectors: although a certain slowdown can be seen in those from the euro area, this is being offset by higher growth in domestic orders. Industrial production grew by 1.1% year-on-year in September, boosted by capital goods. Moreover, the industrial confidence index posted its highest level since January 2008. These good figures for the industrial sector suggests that investment in equipment will perform well in Q4.
The labour market continues to provide good news. According to data from the National Accounts system for Q3, employment grew for the third consecutive quarter, specifically by 0.5% quarter-on-quarter (0.7% in Q2 and 0.2% in Q1). All branches of activity created jobs except for finance and insurance, still undergoing adjustment, and agriculture, a highly volatile sector. Construction, another branch severely affected by the crisis, has created jobs for two consecutive quarters, showing that its resizing process is finally coming to an end. The number of registered workers affiliated to Social Security in October suggests that the improvement in the labour market will continue in Q4.
Contained wages support improvements in competitiveness. In Q3 salaries fell by 0.5% quarter-on-quarter, helping to reduce unit labour costs (–0.5% quarter-on-quarter). Judging by the wage rises contained in collective agreements, stable at 0.6% year-on-year between January and October, wage moderation is continuing. Until there is a significant increase in productivity, wage containment is vital in order to continue making gains in competitiveness.
Energy is pushing down prices. Inflation fell by 0.3 pps to –0.4% in November. Almost all this drop can be explained by the fall in the price of energy products (both oil and electricity). Although inflation has been in negative figures for five months, we expect it to embark on a moderate upward trend supported by the recovery in domestic demand and the depreciation of the euro. Moreover, next year we predict that oil prices, which are already at a minimal level, will stop pushing down prices. We forecast –0.1% inflation for the whole of 2014, which should increase to 0.9% in 2015 and 1.5% in 2016.
The European Commission warns that Spain might not achieve its deficit target in 2015. The latest budget expenditure data for 2014 show that, for public administration as a whole, the public deficit is 3.9% (target: 5.5%). In September the autonomous communities already deviated from their annual target of 1% by 0.1 pps, while central government and Social Security still have some margin regarding their deficit target and local corporations might post a surplus again, as happened in 2013. We have placed our deficit forecast for 2014 at 5.7%. With a view to 2015 the EC, in its opinion report on the 2015 Budget, believes that the country is in danger of missing its deficit target due to uncertainty regarding the expected reduction in spending, as well as the effects of fiscal reform, and therefore suggests that more measures should be taken. The EC places its deficit forecast for 2015 at 4.6%, 0.1 pps above ours and 0.4 pps above the target.
The real estate market is showing signs of stabilising. House prices fell by 0.2% quarter-on-quarter in Q3 (0.0% in Q2), bringing the year-on-year rate to –2.6%, the lowest rate of contraction since 2008. In the coming quarters we expect prices to remain stable, perhaps with slight erratic movements upwards or downwards as befitting a moment of a change in trend but, little by little, gradually embarking on an upward trend. Nonetheless the real estate market still has a large stock of residential properties to sell and, moreover, many households are still deleveraging, factors that will limit any rise in prices. With regard to demand, the growth in house sales in September (13.7% year-on-year) points to the year ending with the number of transactions just over 300,000, a relatively optimistic note for the recovery of an activity which is currently at rock bottom. Another positive note is provided by the growth in residential investment, in Q3 increasing for the first time since 2007 Q2.
The Single Supervisory Mechanism (SSM) is starting to supervise larger Spanish banks, which account for 90%
of the sector's assets. Smaller banks are still under the supervision of the Bank of Spain, albeit guided by the ECB.
For these smaller financial institutions, on 28 November the Spanish cabinet approved a Bank Resolution bill establishing mechanisms for prompt action and definitive resolution, as well as the framework of action for the competent authorities. While progress is still being made in creating banking union, the data from the banking sector are showing signs of improvement. On the one hand, the NPL ratio, which is still at a very high level compared with its historical average, posted its biggest drop for the year to date, down to 13.0% in September. On the other hand, the rate of decrease in the credit balance slowed down compared with previous months (–7.9% in October compared with –8.1% in September).
