Spanish companies ready for the external demand pickup

By Carlos Díaz Guell, in Madrid | Activity levels had lately improved, in the private sector although productivity has since 2007 recorded a slowdown, as evidenced by lower growth in Gross Value Added (GVA) of companies, whose figures began to fall in that same year (6.6% versus 8% in 2006) and contracted in 2008 (-2.7%) to drop sharply in 2009 (-7.7%).

In 2010 companies’ GVA recorded a recovery in produccion activity (2.1%) in all sectors, except information and communications, as a result of a pickup in consumption and the revival of external activity. However, the improvement has not continued in 2011, still in a context of weak domestic demand, when GVA up to the third quarter of 2011 contracted by 0.5% yoy. This is trend expected for the coming quarters in light of the prospects of slower growth in demand.

The loss of activity in companies, following the sharp fall in demand, had as an immediate consequence an adjustment on personnel costs, especially by way of job cuts, as in the 1990s’ crisis, rather than by moderating in average earnings. Declines in employment are still very biased towards temporary employment which slows necessary falls in average earnings.

Personnel costs were moderated significantly during 2008 (3.9% versus 7% in 2007) and fell sharply in 2009 (-3.3%), substantially less in 2010 (-0.4%) and remained stable until the third quarter of 2011 (0.5%). However, it should be noted that during 2011, the adjustment in employment impacted all sectors except in retail and hospitality, which increased their average workforce by 2.1%.

In terms of average wages, there was greater dispersion since wages gently advanced in retail and hospitality, and grew more in information and communications. There is a more intense increase in wages per employee in companies under workforce reductions as opposed to what happens in those who maintained or increased the average number of employees, who experienced much lower growth in their earnings.

Looking at operating profits, they show that an adverse demand has been dragging business margins down. The combined effect of reducing staff costs and lower business margins shows the internal reform Spanish companies are undertaking and which leads to increased competitiveness. This is a key element in the current context, in which the external demand will become one of the pillars to restart internal activity.