Economic growth is gradually maturing with figures that, over the next few quarters, will be slightly lower than those observed in the last year but which will support more balanced growth in economic activity. This changing pattern can already be glimpsed in the figures for 2016 Q1. According to the CaixaBank Research forecast model, the quarter-on-quarter growth rate stood at 0.7% in 2016 Q1, only 0.1 pps below the rate recorded in 2015 Q4. Domestic demand continues to dominate most of this growth, boosted by household consumption and investment although the foreign sector is also gradually coming back to the fore. Also of note is the fact that this slowdown is due to the gradual but expected disappearance of the tailwind effects that boosted growth in 2015 such as falling oil prices and the euro's depreciation. This slowdown is therefore occurring as expected in spite of the recent episode of financial turbulence at the beginning of the year and, on the domestic front, the lack of an agreement to form a government.
Business indicators consolidate at levels typical of an advanced phase in the cycle. Particularly of note are the PMI indices, both for services and manufacturing. For months now both have remained at levels clearly above 50 points, the threshold from which positive growth rates are normally seen. These indices have fallen slightly in the last two months, however, a movement that is in line with the gradual but expected slowdown in the rate of growth. This pattern can also be seen in the industrial production index, down in January to 3.2% after remaining close to 4.0% during the second half of 2015. Another indicator that reflects how, little by little, the Spanish economy is entering a more mature phase of the economic cycle is industrial capacity utilisation which stood at 77.8% in 2015 Q4, a similar figure to the average value posted between 2000 and 2008.
The real estate sector is making headway and starting to get back to normal. All indicators for the real estate sector show a markedly upward trend, both in activity and prices. Of note is the strong growth in new building permits, in December totalling almost 50,000 in cumulative terms over 12 months. Although this figure represents growth of 43% in year-on-year terms, it is worth noting that the level is still low, especially when compared with the figures achieved before the recession. Indicators for price and demand also report notable increases. Sales increased by 9.8% in January (cumulative over 12 months) and the number of mortgages on residential properties rose by 10.6% in the same month. The price index of the Spanish statistics institute (INE) advanced by 4.2% year-on-year in 2015 Q4 and the bulk of the evidence available suggests that this trend will gain traction in 2016 (see the Focus «What does the price of land tell us about the future trend in house prices?» for a more detailed analysis of the expected growth in house prices over the next few years).
Domestic demand weakens but is still growing at a high rate. The strong push provided by demand, and especially by household consumption, is the result of both greater confidence in the economy's growth capacity and also the improved labour market. With regard to the first factor, the recent trend in consumer confidence is particularly important, remaining high although falling slightly in the first two months of the year. We should also remember that the figure recorded for December was an historical high. Vehicle sales and sales by large firms are also a good indication of the dynamism currently enjoyed by household consumption. Specifically, vehicle sales grew by 15.1% year-on-year in February (the average for the last three months) while sales by large firms increased by 3.2% in January. In both cases these figures are slightly lower than those from the second half of 2015 but are still at levels compatible with a notable advance in household consumption.
The solid recovery in the labour market will continue to support domestic demand. The labour market's support for the recovery in demand is particularly due to the good rate of job creation. In the last two years almost one million jobs have been created or, put another way, the number of registered workers affiliated to Social Security has increased by 2.4% on average. In the month of February this rate stood at 3.0%, a figure that will probably fall to 2.0% over the coming months up to December but, once again, the year will still end with more than 400,000 jobs being created. This solid recovery in the labour market is partly due to wage moderation which has helped Spanish firms to gain in competitiveness. The upswing in the year-on-year growth in wage costs in 2015 Q4 might therefore come as some surprise, reaching 0.9% (0.1% in Q3). However, it is important to note that this was largely the result of the refund of 25% of civil servants' extraordinary pay and was not due to any change in the underlying trend in wages.
Household consumption is also being helped by low oil prices. The energy component has a share of 11.4% in the basket of consumer goods for Spanish households and the drop in oil prices therefore has a direct impact on their purchase capacity. Although, on the whole, the price of non-energy goods (core inflation) has been growing at a rate close to 1.0% for the last two quarters, the sharp drop in oil prices means that the general CPI has a negative year-on-year change rate. Specifically, in March it remained at -0.8%. Over the coming months the general inflation rate will remain in negative terrain as a reflection of weak oil prices, but in the second half of the year it will embark on a rapid upward trend and will go above 2% by 2017 Q1.
Expansionary fiscal policy, crucial for the growth in domestic demand in 2015, will be very difficult to maintain. At the end of 2015 the public deficit was above the target agreed with Brussels, standing 1.0 pps higher at 5.2% of GDP. It is worth noting that this deviation occurred in a year in which growth was clearly higher than expected at the time the budget was approved, unlike the deviations that occurred in the toughest years of the economic and financial crisis, which the European Commission is more than likely to bear in mind. In fact, the strong growth in economic activity in 2015 would have brought the public deficit close to the target agreed with Brussels if fiscal policy had been neutral, so we can assume that fiscal policy was clearly expansionary last year. This is a support which the Spanish economy cannot count on over the coming years if it wants its public debt to embark on a markedly downward path.
The foreign sector, a fundamental factor that has constantly supported growth. Although, in net terms, the contribution made by the foreign sector to growth was negative in 2015, exports maintained a considerable growth rate. Specifically, real exports of goods and services grew by 5.4% for the year as a whole. This figure is particularly noteworthy when we remember that world trade slowed down and the growth rate of Spain's main trading partners, European countries, was slightly lower than expected. The fundamental trends are prevailing in 2016. In particular, nominal exports of goods grew by 5.0% year-on-year in January (cumulative over three months), largely boosted by growing demand in the euro area. However, the strong growth enjoyed by imports, up by 4.7% in the same month, means that the foreign sector's contribution in net terms is still small.
The improvement in the economic cycle can also be seen in the trend in credit, as shown by the decrease in the NPL ratio recorded during the last year, namely 2.4 pps, falling to 10.1%. This is particularly due to the considerable reduction in NPLs to developers, of 8.7 pps, and to construction, of 2.6 pps, although this downward trend has been widespread. Improved economic activity, together with low interest rates, will help the NPL ratio to continue falling over the coming months, a key factor for the growth in credit to consolidate.
