While growth deteriorated gradually throughout 2012, the dynamic in 2013 will be the opposite, with economic activity improving steadily. Indeed, it believes that 2014 will be a more positive year due to improved financing conditions, reduced financing costs, a less restrictive fiscal policy and a "more efficient" operation of the labor market. However, it considers that it is "essential" to make the most of the window of opportunity that has opened with reduced tensions on the capital markets to bolster the reforms that Spain needs.
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The activity data in Spain still shows a contraction process that will predictably extend throughout the first six months of the year. The ongoing recession is explained by an environment of lower growth in the main European partners, due to the speeding up of the fiscal adjustment process in the last half of the year and the continued fragmentation seen in the European financial system.
These factors point to a "somewhat more negative" scenario than the one forecast three months ago and leads to a downward revision of GDP expectations, according to BBVA Research. The economy will decline by 1.4% in 2013, 0.3% more than the forecast given in the previous issue of Spain Economic Outlook, and begin a process of "moderate growth" in 2014, reaching 0.9%, 0.2% less than the last forecast.
Growth next year will be driven by improved financial conditions on the capital markets, which have performed better than expected; a significant reduction in the cost of financing of Spain’s sovereign bond, which in principle should be reflected in the economy in the coming months; and a fiscal policy less restrictive than expected if the European Commission ratifies the new deficit targets in line with those announced by the Government.
BBVA Research also sees signs that point to a "more efficient" operation of the labor market. In this regard, the Spain Economic Outlook report points out that had wage demands not been curbed in 2012, 60,000 additional jobs would have been lost in the short term. In the medium term, the added destruction of employment could reach 300,000 jobs.
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By GlobalDataIt also stresses that if wage demands had been adjusted in 2008 and 2009 as they were in 2012, through more adequate labor institutions since the onset of the crisis, the destruction of one million jobs would have been avoided in the long term and the unemployment rate would be six points lower.
At regional level, Spain will remain highly heterogeneous and fiscal adjustments and the exposure to domestic demand will determine the dynamic in each Autonomous Region. In the opinion of BBVA Research, the deficit target of 1.2% of GDP for the regions as a whole is "ambitious and will require a significant effort".
In this respect, the research service believes that the Government should continue to use the instruments that proved successful in 2012 and enabled the deficit to be reduced, "demanding firm measures when the least risk of deviation exists".
However, BBVA Research considers that it is "essential" to make the most of the window of opportunity that has opened with reduced tensions on the capital markets to bolster the reforms that the country needs. The extension of the deadline by the European Commission for meeting the deficit targets offers, in its opinion, an opportunity to improve the composition of the adjustment, increasing the efficiency of public spending and of the tax system, and replacing some temporary measures with permanent ones.
Additional measures:
The BBVA research service also considers that it is necessary to continue moving toward a fiscal framework with lower marginal rates and fewer deductions which increases pressure on consumption while reducing the pressure on employment. BBVA Research sees the need to carry out the reforms aimed at reducing structural spending, "which are being delayed", such as the Bill for the Rationalization and Sustainability of Local Administrations, or the Reform of Public Administrations.
The report Spain Economic Outlook also stresses the importance of moving toward an "ambitious" proposal for ensuring the sustainability of the pension system so that the system’s solvency is guaranteed in the medium and long term.
As for the National Reforms Plan (PNR) announced by the Government, the BBVA research service considers that the diagnosis of the economic weaknesses is "right", but "additional measures are required to complement the labor market reform" given the high unemployment rate.
The aim of these proposals is to reduce the segmentation of the labor market, promote part-time employment and improve the effectiveness of the active and passive labor market policies. BBVA Research also highlights the need to implement the announced measures "swiftly and with the highest possible level of ambition".
The BBVA research service insists that the projected recovery of the Spanish economy is not without risks and that, despite the measures introduced in 2012, the additional easing of financial tensions is still conditioned by the progress made in the reform processes both in Europe and in Spain.
Export recovery:
BBVA Research also points out that real exports of goods from the trade balance returned to positive growth rates at the start of the year, and the balance of the industry’s export order portfolio closed the first quarter with an average figure higher than for 2012 as a whole. This has translated into a recovery of sales of non-tourism goods and services of 0.8% and 2.6% quarter-on-quarter, respectively. The research service expects exports to close the year with 4.7% growth and increase to 6.4% in 2014.
As regards employment, the Spain Economic Outlook report points out that the expected reduction in public sector employment as a result of the fiscal consolidation process will add to the destruction of private sector employment, which will abate due to the lower than expected deterioration of economic activity. As a result, the unemployment rate will rise despite the expected drop in active population, exceeding 27% in 2013.
The recovery of growth in 2014 and the expected improvement in the labor market’s efficiency resulting from the labor reform approved in February 2012 should help bring down the unemployment rate in the private sector next year, with a slight reduction in the second half of the year. BBVA Research expects the unemployment rate to drop slightly to 26.4% in 2014.
As for the fiscal adjustment, BBVA Research points out that the consolidation policies will continue in 2013 but, taking into account the measures announced and implemented, the deficit in 2013 will stand around 6.5% of GDP, 0.2% above the new stability target proposed by the Government in the 2013-2016 Stability Program update.
This deviation from the target would also extend to 2014, when Spain’s public deficit would be around 5.7% of GDP, despite the fact that both the economic cycle and the structural improvement of revenue and expenditure will start correcting the fiscal deterioration. The structural deficit of Public Administrations would be around 2.3% of GDP in 2014, after discounting the economic cycle effect.
BBVA Research states that the National Reforms Plan (PNR) has set the deadline for implementation of the Independent Fiscal Responsibility Authority at year-end, and therefore this body will find it difficult to meet all the objectives set this year. In any event, the BBVA research service considers that it is "essential" for the Government to guarantee the independence and impact of this institution, and in its opinion "it would be advisable for it to report to Parliament and not to the Executive".
As for developments in the world economy, BBVA Research expects the growth rate to slow down in 2013 to 3.3%, while in 2014 it should reach 3.9%. In the United States growth will stand at 1.8% this year and at 2.3% in 2014, while the euro zone will fall 0.1% this year, but increase 1% next year. The Chinese economy will grow 8% in 2013 and also in 2014.
