Spain Recovery Embassy of the Kingdom of Norway in Madrid September 2017 José Moisés Martín Red2Red Consultores
Spain RecoveryEmbassy of the Kingdom of Norway in Madrid
September 2017
José Moisés Martín
Red2Red Consultores
Index
• Evolution of main aggregates
• Fiscal Consolidation and financial position
• External Sector
• Employment
• Long term growth
• Conclusions
Evolution of main aggregates
• Since 2014, Spain has had one of the strongest recoveries in the EU.
• Three reasons for that:• Softening of fiscal and wages adjustment.
• External sector evolution
• ECB QE effects on credit costs
• Nevertheless, Spain reached the pre-crisis level of GDP in 2Q 2017: a lost decade.
GDP Evolution
• Spain lost up to 8 GDP pointssince the starting of the international financial crisis.
• There was a strong recovery since2013.
• Spain reached the pre-crisis GDP level in 2Q 2017, nine years later.
GDP Composition: a demand-driven growth
• GDP decrease was largely lead by investment declining
• Internal demand was the mainengine for recession and recovery. External demandplayed a contra-cyclical role between 2009 and 2014.
• Between 2014 and 2016, consumption –both private and public- has played a major role.
GDP and change of growth model
• According to the GDP supply-sidebreakdown, Spanish economy is quite similar to that which entered in the crisis in 2007-2008.
• Significant variations have beenhappened in Public Administration(+), Professional Services (+) and sectors related to tourism , as Commerce, transport and hospitality(+) .
• Financial Services and Industry havelost weight.
GDP evolution: conclusions
• GDP suffered a significant drop during the crisis, followed by a strongrecovery fueled by the internal demand.
• From the supply side, sectoral changes in added value do notrepresent a significant “new model of growth” for the Spanisheconomy.
Fiscal consolidation
• It is expected that Spainwill exit the ExcessiveDeficit Procedure in 2018.
• Most of the fiscal effortbetween 2011 and 2016 made by the regional and local governments.
• Despite the initialrecommendations by the European Commission, fiscal consolidation has notbeen frontloaded: since2012, the actual pace of consolidation have beenquite growth-friendly.
Fiscal challenges: structural deficit
• Despite the fiscal adjustmentand the end of the ExcessiveDeficit Procedure, structuraldeficit continues to be out of the Stability and Growth Pactlimits.
• This can be seen as a weakness in the long termsustainability of Spanishpublic finances.
Fiscal challenges: revenues
• Around half of the public sector deficitcreated between 2008-2009 wasgenerated by a drop in publicrevenues.
• New fiscal measures in 2010 and 2012 –Income tax, VAT- contributed to raisethem.
• But in 2015 and 2016, new tax cuts (in green) reduced revenues again.
• Consecuently, since 2013 most of the financial adjustment has beenproduced from the expenditure side.
Fiscal challenges: public debt
• Gross Public debt has dramatically increased between2008 and 2014.
• Since 2014, the pace of reductionis very slow, as it amounts fornear 100% of GDP.
• Interests have been presseddown by the ECB EQ, but aneventual increase in interest ratescould generate new problems
Financial position: total debt
• In spite the strong deleveraging in the private sector, the increase in public debt has led total debt to a kind of stabilization.
• We can see then that rather thantotal amount, main change has been on composition of debt
• Total debt amounts for 250% of GDP.
• Public debt amounts for 99% of GDP.
Public sector finances: conclusions.
• Before the crisis, Spain had a balanced public sector with low debt.
• Between 2008-2010, public deficit rised from both the expenditure and revenues sides.
• Public deficit management has not been frontloaded as the actual pace of consolidationhas been much slower than initially expected.
• Spain was expected to be out of the EDP in 2015: it will be out in 2018.
• Most of the fiscal consolidation is based in the expenditure of regional and local governments.
• Spain’s remaining challenges are the public revenues, the structural deficit and the publicdebt.
• Because of that, even after the exit of the EDP, Spain should pay attention to its longterm fiscal position.
• Due to the increased public debt, total liabilities remain with no significant reduction.
External sector: imports and exports
• The evolution of the external sector has been positive for the Spanisheconomy.
• Key driver for external surplus has been the evolution of imports ratherthan an increase of exports.
External sector: current account balance
• While payments suffered a disruption in 2009 due to the financial crisis, exports havekept the same long-term path.
• With these data, it is difficultto say the Spain is becomingan export nation.
• The decrease in the importsare much related with the depression of demand duringthe structural adjusment.
• There are doubts about thissituation will be sustainable in the long term.
External sector: tourism
• Tourism is the main factor of external revenues forthe Spanish Economy and the one which moves the balance into positive figures.
• It represents around 11% of GDP.
• Positive external balance by 36 billion euros (+- 3,3% GDP in 2016).
• There are some signs of “social and environmental” sustainability of suchincrease.
External sector: net external liabilities
• Spain cointnues to have a very weakposition regarding external liabilities and assets.
• Its net invesment position continuesnear the situation in 2008, with no significant improvement.
External sector: gross external debt
• Gross external debt is now in its highestpoint.
External sector: conclusions
• The external sector has played a counter-cyclical role during the crisis and now its contribution to the GDP growth is positive.
• Tourism and oil prices were main factors to understand thatevolution.
• This was one of the main macroeconomic imbalances that have beencorrected.
• Balance is due to the evolution of imports rather tan exports. Spain isnot becoming an export nation.
• Despite these positive changes, external debt remains as one of the key weakneses regarding the external sector.
Labour market: employment
• Employment recovery is strong, but figures are far away fromthose before the crisis.
• Since 2014: Near 2m jobs havebeen created.
• In Q2 2017, employed workerswere 2 million less than in Q2 2008.
Labour market: unemployment
• Unemployment rate has declinedsince its high in 1Q2013 (26,94%) to17,22% in 2Q2017.
• Youth unemployment still being toohigh.
Labour market duality: part-time jobs
• There is an increase in part-time jobs but most of this increase is affectingyoung people.
Labour market duality: temporary jobs
• While total temporalityhas been declined overthe years of the crisis, temporary contracts are rising for the youngworkers.
• Temporality rate issubstantially higher thanin the EU.
Long term unemployment
• Long term unemployment(more than one year) still beinga huge challenge, speciallyamong those between 45-64 years old.
Labour market: UCL
• Due to the increase in labourproductivity and wagesadjustment, Real UCL has decreased since 2012.
• Employment creation has notlead to a significant wagesrecovery
Employment: conclusions
• Spain is having a strong recovery in job creation since 2013.
• Employment figures are far away from pre-crisis data.
• Recent labour market evolution shows a new deepening of dualitywhich is affecting mainly to young people.
• Long term unemployment, specially among 45-64 y.o. is a risingchallenge.
• Despite the job creation, labour costs are not rising, and thereforecompetitiveness seems not to be affected by them.
• But, on the other hand, wages still being lower than before the crisis and this have an impact in social situation.
Competitiveness and long term growth
• According to the Global Competitiveness Report, Spain isscaling up post in the index: from 36 in 2012 to 32 in 2016.
• In most of the components of the index, Spain scores near the averageof Europe and North America.
Long term growth: Innovation
• According to the EU InnovationScoreboard, Spain is far from the european innovation leaders and below the European Union average.
• R+D expenditure have been reducedfrom 1,33% of GDP in 2008 to 1,22 in 2015.
• Entreprenurial ecosystem, lifelonglearning and venture capital fundingare among most negative factorsregarding its performance
Human Capital and long term growth
• Despite the similar share of universitystudents, Spain amounts twice thanthe EU the young people with basiceducation.
• Spain is one of the countries withmost “NEET” young people.
• This is jeopardizing the incorporationof young people to the knowledgebased economy.
Conclusions
• Spain has managed to correct most of the macroeconomic imbalancesaccumulated during and before the crisis.
• Reasons for strong recovery are based in internal and external factors: end of austerity, ECB QE, low oil prices and devaluation of Euro.
• Despite that, some weaknesses remain as challenges: debt –internal and external-, fiscal revenues and structural balance.
• Sectoral composition and evolution of external sector do not allow us to directlythink that Spain has managed to change its growth model.
• There are strong weaknesses in the labour market: increased duality and longterm unemployment.
• Factors for long term economic performance still being unsolved or, even worse, unattended.
• Is this a “recovery” from the crisis or a “new normal”?