Barclays analysts sent us the following comments on Thursday:
BdE estimates that private consumption and investment were the main growth drivers in Q2. It estimates that domestic demand grew by 0.3% q/q. The contribution of external demand to GDP growth in Q2 was 0.2pp, driven by better export performance in Q2 relative to Q1 and a slight slowdown in imports. However, exports in H2 have clearly decelerated relative to 2013. We think that the deceleration is related to weaker demand conditions in export markets, together with improving internal demand. We expect the current account to stay in surplus but slightly lower than in 2013. The central bank also sees Spanish inflation remaining low for long, driven by the downward trend in unit labour costs and excess capacity in the Spanish economy, a view that we share (we forecast 0% inflation in 2014).
On the labour market side, INE today released the quarterly labour market data showing that the unemployment rate fell to 24.7% in Q2 14 (seasonally adjusted, sa) from 25.2% in Q1 14. The number of unemployed (sa) fell in Q2 14 to 5.66mn (-3.1% q/q), which is 454k below the peak of the series in Q1 13. Improving net employment has become the driver of the drop in the unemployment rate in Q2, as the participation rate remained unchanged at 59.6% (sa). This is in contrast to previous quarters when an important factor reducing the unemployment rate has been a falling participation rate on the back of significant net migration outflows.
Figure 1: Growth and labour market improve
Source: Haver Analytics, Barclays Research
The regional debate takes centre stage
The Budget Ministry yesterday published for the first time the regional fiscal balances which show that Madrid is the main net contributor with EUR16.7bn, followed by Catalonia (EUR8.4bn) and Valencia (EUR6.6bn), whereas the largest net recipient is Andalucía with EUR7.4bn. The analysis shows that about two-thirds of the balances are explained by the larger fiscal revenues of the wealthier net contributors, such as Madrid and Catalonia. Of the remaining one-third, the majority is explained by the current system of regional financing, which explains c.20% of the fiscal balances. The regional financing system has become a thorny issue for the government in the ongoing discussion on the fiscal adjustment planned for the regions.
The regional financing system is likely to be critical in the upcoming discussions between the central government and Catalonia. The regional government of Catalonia continues to support the independence referendum scheduled for 9 November 2014. The central government has repeatedly demanded that the referendum is called off as it is unconstitutional, a view shared by the socialist party (the main opposition group). We would expect that the debate is likely to intensify in September and may lead to some market volatility as the positions of the central and regional governments still remain far apart. On the one hand, the government demands that the regional government calls off the referendum as a pre-condition to beginning negotiations; on the other, the regional government wants to see clear proposals from the central government as a token of goodwill before it contemplates postponing the referendum.