The Spanish economy in 2019: deceleration with more prominent risksVíctor Echevarría Icaza
The world's leading economies have had a long period of growth since the global financial crisis: while the US has grown uninterruptedly since 2009, the Euro area has been growing for seven years and the Spanish economy has been in expansion since 2013. Nevertheless, it has recently suffered an increase in risks in the growth scenario both globally and in Spain, generating doubts about the evolution of economic activity in the future.
These risks are present in different areas. On one hand, there have been announcements of increases in tariffs by the main economies of the world, such as the US, China and the EU. Although the goods affected by the measures announced thus far represent a limited percentage of total trade, these announcements could have negatively affected trade: a substantial deceleration of international trade has been observed since the end of 2017.
Additionally, the increase in protectionist rhetoric can affect economic activity in indirect ways. In particular, the confidence of economic agents may deteriorate in the expectation of a less-cooperative political environment at international level. A lower confidence on the part of the agents would cause a delay in the decisions of consumption and in investment, affecting growth negatively. Secondly, the increased uncertainty may cause investors to prefer to reduce the riskier positions in their portfolios. The consequence of this could be a worse performance of risk assets in financial markets, causing a hardening of financial conditions, which in turn would cause lower economic growth.
To the negative effect of protectionism we have to add the pockets of risk observed from the point of view of political cooperation at the global level. the In the European case, among these, the eventual exit of the UK from the European Union has a particular impact.
If a disorderly departure happens, without an agreement between the EU and the UK, a disruptive effect on economic activity is to be expected in both the UK and the EU.
Recent events suggest that a disorderly exit has not been ruled out. Consequently, the course taken by the negotiations between the parties has a great impact on the outlook, maintaining the risk of an unagreed exit, which would have a negative impact on growth.
In addition, the increase in global risks stems from the deterioration in the economic outlook in some of the major economies. In particular, there are signs of a slowdown that could become more intense than expected in China. The growing importance of this economy at the global level implies that this deceleration poses a risk for all countries.
Also, the latest data point to a slowdown in the Euro area in 2019. This slowdown would occur after a recovery in which the highest Euro area growth was 2.5% in 2017, a modest rate when compared with that achieved before the crisis. The persistent low growth of the region in recent years suggests that the potential growth of the European economy is low.
The absence of significant reforms that increase potential growth makes it difficult to achieve higher growth rates.
In addition to risk factors at the international level, some specific ones at a Spanish level should be taken into account.
First, some features of our labour market could have a pernicious effect on the growth continuing. In this sense, it highlights the low growth of productivity throughout the recovery. Although in the early stages of the recovery the growth of productivity and wages were similarly low, a decoupling of these two variables has been seen in 2018: wages have accelerated while productivity has remained stagnant. This decoupling means that the value of production per employee increases less than their salary, and can reduce incentives to hire.
Secondly, Spain has to continue their process of fiscal consolidation. Since 2015, there has been little improvement in the structural fiscal deficit, which stands at around 3%. The high structural deficit makes it difficult to reduce public debt, which stands at 97% of GDP and is a vulnerability to the eventual deterioration of the international situation. Given the benevolent economic conditions in recent years and the low financing costs of sovereign debt, the absence of a reduction in the structural deficit during this period represents a missed opportunity to improve the sustainability of Spanish debt.
The absence of sustained growth in productivity and the unfavourable population dynamics make it difficult for the long-term growth of the economy to gather speed.
In the absence of reforms that boost the long-term growth of the economy, everything points to the fact that Spain's recovery has, to a large extent, had a cyclical element, without laying the foundations for further growth in a structural manner. In this way, the economy is vulnerable to the increase in risks around global growth and has little room to deal with them.
Nevertheless, the scenario for the Spanish economy is deceleration rather than recession. In the short term, the indicators that were well known at the end of 2018 and the beginning of 2019 suggest that the economy is evolving favourably. For example, for 2019, BBVA's growth forecasts are 2.4% for Spain and 2% in 2020. This growth rate contrasts with that predicted for the Euro area, where growth of 1.4% is expected in both 2019 and in 2020. This positive growth differential has occurred since 2015 and the uderlying data points to this not being reduced in the short term.
Additionally, despite the difficulties in maintaining current growth rates, some features of Spain's growth are more positive than what was observed in the pre-crisis growth phase.
Despite Spain's positive growth differential vis-à-vis our European members, a current account surplus is being maintained.
Although this surplus is benefited by factors such as the low price of oil, the positive behaviour of Spanish exports since 2013 in the slow growth environment of our trading members is in any case a favourable feature of this recovery.
Secondly, the comparison between the growth pattern of Spain and the Euro area suggests that on this occasion, no particular imbalances are being generated in Spain. In contrasting to what was observed in the phase prior to the crisis, neither a substantial inflation differential nor a particularly high credit expansion has been detected in Spain's case. This suggests that this time a specific shock to Spain within the monetary union is less likely to occur. To the extent that the deceleration affects the union as a whole, we expect that the economic policy mix of the countries in our area will be more appropriate for the Spanish case.
In view of this, the scenario for Spain is one of a continued deceleration towards growth rates more consistent with the potential growth of the economy. If anything has changed in recent months, it is that, although keeping broadly within this scenario, downside risks are now more prominent and deserve close monitoring. Given the limited fiscal and monetary policy room for manoeuvre, the materialization of any of these risks would have a negative impact on the Spanish economy. This is why reforms aimed at increasing the economy's long-term growth would be particularly necessary in the current environment.