PM Rajoy announced that the government will raise its 2014 GDP growth forecast to 0.7% from 0.5% previously. The full set of revised 2014 macroeconomic projections is expected to be announced this Friday. The government’s forecast is somewhat below our 2014 growth projection of 0.9%. We expect the economy to emerge from the recession in Q3 13 (+0.1 q/q). However, the pace of the recovery will be very gradual – for 2014, we project (average) q/q growth of 0.3%. We expect domestic demand to remain a drag on growth. By our estimates, private consumption will continue to shrink through mid-2014, as disposable income and real wealth will only stabilise by mid-2014. Investment in capital goods will grow in H2 13 and in 2014 (as it did in Q2 13), but construction investment will remain a drag throughout 2014.
The good news is that exports remain strong, and we expect them to continue to grow at a healthy pace in 2014. Unit labour costs are adjusting on the back of lower real wages and (in recent months) on nominal wages. As a result, the current account will print a surplus of over 1% of GDP this year. Deleveraging is also proceeding at brisk pace for corporates, and although households are also deleveraging, they are doing so at a slower pace, as the bulk of household debt is in (owner-occupied) residential mortgages. Unemployment is likely to stabilise by year end, and we expect it to fall in 2014, not because net employment will increase, but rather because of weaker participation and migration outflows.
Also on the positive side, overall investor sentiment seems to have improved, as tighter sovereign spreads show. The improved sentiment also has benefited the Spanish banking sector. Bank equity has rallied and credit spreads have tightened in recent months. International investors participated in the recent capital increase of Banco de Sabadell. In addition, Bankia and Caixabank have managed to sell part of their real estate business to foreign investors. This general improvement has occurred despite the ongoing increase in NPL ratios, including for residential mortgages (the largest exposure for most of Spanish banks), which increased to 5.1% by Q2 13. NPLs are still within our baseline scenario; we expect residential mortgages to peak in 2014 at slightly over 7% and the overall NPL ratio to peak at c.14%.
Overall we still consider the recovery fragile, and we do not rule out the possibility that the upcoming Asset Quality Review and stress test (expected in H1 14) will show additional capital requirements, in part because neither the severity of the tests nor the “passing grade” have yet been defined. Another possible source of risk (over the next six months) is related to any negative news regarding the Greek and Portuguese programmes, even if contagion risk is now more contained than last year. In particular, any possible PSI discussions in relation to those countries (not our baseline view) would likely have a significant impact on Spanish sovereign debt markets.