Spain Approaches Cycle Maturity: Urged To Correct Current Imbalances And Weaknesses

Bank of spain new

The beginning of the new term brings with it the updating of the macroeconomic projections by analysis services and institutions. In this case, this is focusing greater interest in our country due to the generalised downgrading of expectations for growth in the Spanish economy which coincides with a complicated political scenario.

The Panel of forecasts for the Spanish economy realised by Funcas, the main reference point for what can be expected of the Spanish economy in our country, shows this perfectly. The September poll shows a cut of one tenth in the consensus on growth in 2018 and 2019, compared to the replies collected in July, putting the average of the 18 study services participating at 2.7% and 2.3% for these years respectively.

In yoy terms, Spain did not grow at the initially targeted 3% and 2.7% during the first two quarters, but it did at 2.8% and the 2.5%, respectively. Therefore, the growth figures begin to signal a certain moderation and show the maturity of the economic cycle. This should not be exaggerated but should not be underestimated either given the time limit on expansión phases. In fact we are at a key moment for taking a step forward and preparing ourselves for the next recession, which will always arrive, and this implies tackling the most important tasks in public accounts and structural reforms.

In the new phase we are facing, we must asume that growth rates of 3% are in the past and, in the best of the scenarios, will lead us progressively towards our potential, which we could put at 1.5%, although the IMF lifts it to 1.75% while the European Commission lower it to 1%. Looking to the future, household consumption, which represents the core of Spain’s GDP, will consolidate its moderation, with houesholds that still can give value the renewals of their cars (driven by the worse treatment of diesel technology) or the need for new domestic equipment which usually accompanies the reactivation of the housing market, but little else. The moderation in the creation of employment, the containment of salaries, the exhaustion of the reserve of demand or the increase in housing prices in the main centres of consumption favour a future characterised by less dynamic household spending.

As far as the external contribution is concerned, the tourist sector has reached the ceiling, as the figures for tourist entries based on data collected over the last 12 months confirm, which declined from maximums of 82.65 million in March to 82.01 million in July, accompanied by a slowdown in income from tourism. In fact, this gave up 70 million euros in July compared with the historic highs of 61.472 billion euros in the previous month, again taking as a reference the figures collected over 12 months.

The stabilisation seen in important competitors or the collapse of currencies in destinations like Turkey, resulting in a tougher competitive environment for our tourism and requires a critical analysis of the situation, which reveals the return of past bad practices. For example the increase in daily expenditure by international tourists has had a vital role in the increase in prices, and is confirmed by the increases in the costs of hotel rooms, up 24.68% last August compared to the same month in 2012. An example which could seem rather extreme, taking the one of the worst years of the crisis as the comparison, even if this should not concede the need to deepen the strategy of selling more services and with more added value for the tourists, instead of squeezing through prices.

Then the more difficult part

However, the less favourable external demand extends beyond the services sector. In fact, in the third week of September, the OECD reduced its growth forecast for the global economy one tenth for 2018 and two tenths for 2019, putting it at 3.7% for both years. The forecasts for the Eurozone were not immune to this adjustment, especially those for Germany. There is a general agreement that the German economy will grow less than 2% when, at the beginning of the year, the consensus was suggesting without doubt higher rates.

Our economy will also have to accommodate the increase in oil prices and the declining stimulus offered by ECB monetary policy. In the case of oil, the impact on the Spanish economy will be relatively greater tan on other European partners due to the high intensity in the import of energy products, especially oil. In relation to monetary policy, even the Bank of Spain´s simulations, including the base scenario, suggest that the low margins in financing costs for non-financial companies would also have been exhausted.

In fact, although weak, we are already seeing an increase in the Euribor at twelve months and the most likely scenario is a progressive recovery in the near future.

It appears that we have forgotten one of the main lessons of the last crisis: reforms and adjustments should be carried out at a time of growth, because, if not, they are much harder. We therefoe need to start remedying the weak points.

The weaknesses in the public counts should be one of the first points to be dealt with. In the latest evaluation of the Spanish economy by the IMF, the international body called attention to this question and stated: “the reduction of the nominal deficit over the last three years results entirely from the strong economic cycle”. An analysis supported by a structural deficit which has not been corrected in recent years and that, probably, is around 3% of GDP in 2018.

The figure in the previous paragraph shows the need to articulate a restrictive fiscal policy to achieve a margin with which to confront any future tensions with security. The current proposals tending to articulate a pro-cyclical strategy are a major error and will force us to adopt pro-cyclical measures when it hurts most: in the lower part of the cycle. In the phase before the major crisis, Spanish public debt stood at 35.6% of GDP compared to the 98.1% in the second quarter of 2018. The isolated impact of that crisis meant 38 more points of debt between 2008 and 2014, which would be unthinkable in the future given that with the actual level of debt and in case of a similar scenario, the markets would not finance us.

Fortunately, the next recession should not be so deep, but the problem lies in the need to change the dynamic of our public debt. This was made clear in a provocative path for reducing public debt presented by the Independent Authority for Fiscal Responsibility (AIReF) in a conference with the Bank of Spain and the IMF in April.

This presentation suggested that, in an environment marked by a continued growth of nominal growth of 3.3% and a primary structural balance balanced until 2033, public debt would still reach 83.3% of GDP at the end of this period. In fact, in the same time framework and with the same growth levels, a primary structural surplus of 2.5% would be necessary to comply with the debt limit of 60% set by the Growth and Stability Pact, which would reduce to 58.4% in 2033.

External financing has become a key aspect, as is confirmed by the 417.831 billion euros invested by foreigners in Treasury bills last June (44% of the total). The current expansionary phase is producing a mistaken complacency about the public accounts, whose potential to destabilise is greater than is thought, above all, because the aggregate level is concealed by the sanitising of the private sector. The financing capacity of the Spanish economy, despite its recent deterioration, currently reaches 1.8% of GDP and is sustained, basically, by the contribution of companies (5.6% of GDP) given that excesses can be seen again among households whose financing needs have risen to 1.1% of GDP.


The return of interest in the residential market and the good performance of consumption, woith credit for this rising 47% since the end of 2014, has left its impact in the increased financing needs of households. A process which, logically, has evolved together with the deterioration in household savings which have reached an alarming 4.4% of GDP seasonally adjusted, although this figure is almost encouraging in comparison with the negative data for the rate of net savings, in other words that which discounts the payment of financial charges.

Households are considerably less indebted than a year ago, but their deleveraging process would have ended and they would not enjoy a cushion of savings. We should therefore pay careful attention to the tensions being suffered in Italy, especially when we have weaknesses that the Italians do not. Firstly, the tax revenue capacity of our public sphere is much less and, in fact, the income reached 37.9% of GDP in 2017 compared to 46.6% in Italy, at the same time as the Italians are able to generate a recurrent primary surplus (an average of 1.5% of GDP since 2007). In terms of GDP, Italy´s external debt is 42 points less and 23.5 points less if we refer to that held by companies, which is even more striking when household financial debt is around 60% of their gross disposable income compared to 100% in Spain. However, the icing on the cake would be the position of  net international investment, which records the difference between the investments of a country abroad (assets) and investments coming from abroad (liabilities). In Italy this reaches -10.4% of GDP, whereas in our country it breaches the -35% set by Brussels as an excessive imbalance reaching -82.4% of GDP.

In conclusion, there are good reasons to conclude that the moderation in the growth of the Spanish economy will consolidate and that this makes even more urgent the task of correcting the existing imbalances and weaknesses.


About the Author

Francisco Vidal
Francisco Vidal is Chief Economist at Intermoney. Since 2006, his professional career has been focused on elaborating economic analysis for the group, which has become a reference for financial intermediation in Spain. This is a situation which has allowed him to specialise in the interrelationship between the real and the financial economy, as well as the study of monetary policy.