Spain consumption: three factors explaining why this will suffer in 2017

Spain consumptionSpain-consumption

Every national and international economic organisation and the most respected research houses agree in predicting a deceleration in the Spanish economy in 2017, due mainly to the slowdown in private consumption. The factors determining this downward trend will be tax increases, a deterioration in the labour market and a rise in inflation.

Experts are forecasting a slowdown in growth of between 0.7 and 0.9 percentage points in 2017, mainly because of the consumption factor. Three key factors are behind the likely slowdown in household consumption during the coming year, according to Afi analyts.

The first of these is taxes. The reduction in personal tax in 2015 had a direct positive impact on households’ disposable income and this effect lasted into 2016. In 2017, this “tail wind” will have completely disappeared, and there will be the added factor of the tax hikes recently announced by the government. These are basically focused on an increase in indirect taxation (alcohol, tobacco and fizzy drinks). That said, the impact of this on aggregate consumption will be relatively moderate. In fact the IMF has suggested the Spanish government take a different tack: a gradual reduction in VAT exemptions to bring them in line with other EU countries.

  • The second key factor will be the trend in the jobs market. Everything seems to indicate that Spain will continue to create employment at rates of over 2%, but it will be very difficult (not to say impossible) to maintain the momentum of the last two years, with the creation of more than a million net jobs.
  • The third factor, and probably the most important in terms of the slowdown in consumption, will be the trend in inflation. Oil prices have shot up 50% this year and a barrel of Brent is trading at over $55. Although the gradual appreciation of the euro against the dollar will produce a slight reduction in the price of crude in euro terms, its effect will be decisive for households’ purchasing power and will therefore hit consumption.

So Spain’s GDP could grow 2.5% in 2017, far off the 3.3% level at which it could end this year, but still above the majority of our neigbouring countries.

About the Author

Francisco López
Working for more than 25 years in the world of journalism and communications, Francisco has gained valuable experience at several well-known newspapers such as El Mundo and La Vanguardia. He specialized in economic and financial news before making the leap to the corporate communication sector where he has held several positions: Adviser to the Ministry of Economy, Director of the Bank of Spain’s Communication Department, in addition to his consultancy role at Analistas Financieros Internacionales, where he currently works.