Perspectives

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EcoPerspectives // 1 quarter 2019  
economic-research.bnpparibas.com  
Spain  
Growth slows but the economy continues to recover  
The current slowdown is in keeping with the European economic cycle. Prospects are still looking relatively good, and Spain’s  
expected growth rate is among the highest of the big eurozone countries. Unemployment is falling rapidly but it is still massive,  
especially long-term unemployment. Prime Minister Pedro Sanchez just presented his 2019 budget proposal to Parliament, but he is  
not sure it will pass. In any case, the deficit most likely slipped significantly below 3% of GDP in 2018, and Spain is preparing to exit  
the excessive deficit procedure that was launched 10 years ago.  
1- Growth and inflation outlook  
A slowdown is underway  
GDP Growth (%)  
Inflation (%)  
In line with the eurozone economic cycle as a whole, Spanish  
growth is slowing. At 0.6% q/q in Q3 2018, quarterly GDP growth  
was stable for the third consecutive quarter, but fell slightly below  
the growth rates reported in 2017. On a year-on-year basis, growth  
fell steadily to 2.4% y/y last summer, the lowest level in nearly four  
years. Data available for the fourth quarter suggest that growth was  
still relatively robust at the end of the year, driven by domestic  
demand, and household demand in particular. Retail sales were  
sluggish last summer but rebounded during the year-end period,  
thanks apparently to the drop-off in inflation, from 2.3% in October  
to 1.2% in December. Survey data, especial the purchasing  
manager indexes, support this image: after declining in Q3, the  
activity index for the services sector rebounded in October and has  
held at a high level (54) through the end of the year. In  
manufacturing, in contrast, the activity index has steadily weakened  
to 51.1 in December, reflecting the slowdown in foreign trade.  
Forecast  
Forecast  
3
.2  
3
.0  
2
.5  
2
.2  
2.0  
20  
2.0  
17  
1
.7  
1.7  
19  
1.3  
20  
-0.3  
16  
17  
18  
19  
16  
18  
Source: National accounts, BNP Paribas  
2- The turnaround is nearly complete  
Estimations of the output gap (% of potential GDP)  
OECD  
IMF  
EC  
On the whole, after an annual growth rate of more than 3% over the  
past three years, GDP growth is estimated at about 2.5% in 2018.  
Though slowing, this is still one of the most robust growth rates of  
the big eurozone countries. It is also much higher than the country’s  
long-term potential growth rate, as estimated by the various  
international institutions (which is currently closer to 1%). According  
to these estimates, the Spanish economy is on the verge of closing  
the output gap. Apparently, a few more quarters will be needed  
before we see the first signs of pressure on production capacity,  
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5
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5
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10  
15  
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prices and wages . Buoyed by domestic factors, GDP growth is  
currently being hampered primarily by foreign demand. Ultimately,  
however, slowing international trade and uncertainty over changes  
in the European and global economic environment could end up  
straining investment spending. As in 2018, Spanish growth is likely  
to hold at about 2% in 2019.  
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00  
02  
04  
06  
08  
10  
12  
14  
16  
18  
20  
Source: European Commission, IMF, OECD  
nearly 2.1 million jobs have been created according to the national  
accounts. Thanks to these job creations, the jobless rate has  
declined by more than 11 points in 5 years, to 14.7% in November  
018. Nonetheless, this is still one of the highest jobless rates in  
Europe.  
A labour market in transition  
The labour market still faces major challenges. From an overall  
perspective, the labour market is in the process of recovering:  
employment dynamics are keeping pace with activity. Up 2.5% a  
year since 2015, employment increased nearly 2% in 2018, which is  
undeniably a solid pace. Since the cyclical trough in late 2013,  
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The scope of unemployment does not sit well with the idea of an  
economy nearing its long-term growth potential. A look at detailed  
data paints a highly contrasted picture of the labour market, which  
shows signs of both dynamic momentum and rising pressures, but  
also the impact of the crisis. In terms of unemployment, the number  
of short-term unemployed (unemployed for less than a year, see  
1
The volatility of headline inflation should not be allowed to mask the great stability  
of core inflation, which has fluctuated around 1% since spring 2018, with no signs of  
accelerating.  
st  
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EcoPerspectives // 1 quarter 2019  
economic-research.bnpparibas.com  
3
- Lasting unemployment  
chart 3) is falling very slowly now and is about to return to the pre-  
crisis average. This suggests that a certain “cruising speed” may  
have been reached for the mobility of new entrants, and that  
tensions could emerge in certain sectors and skills levels. Long-term  
and very long-term unemployment (between 1 and 2 years, and  
more than 2 years), in contrast, is now falling rapidly, although it still  
accounts for more than half of the unemployed (54%), or 1.7 million  
Breakdown of the unemployment rate by duration, % of the active population  
<6 months 6 months to 1 year 1 to 2 years More than 2 years  
30  
25  
20  
15  
10  
5
0
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individuals .  
The Sanchez government nonetheless decided to raise the  
minimum wage by 22%, from EUR 858 to EUR 1050 a month, at the  
beginning of 2019. Although this leaves Spain in an intermediate  
position in terms of minimum wage levels in Europe (chart 4), it is  
nonetheless a big increase and follows on increases of 8% and 4%,  
respectively, in 2017 and 2018. Past increases seem to have had  
only a small gearing effect, and the turnaround in wages as a whole  
97  
00  
03  
06  
09  
12  
15  
18  
Source: INE  
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has been very mild so far . The increase in nominal wage costs per  
capita was nil or negative in 2016 and 2017, and remained  
moderate before accelerating a little last summer, to 1.9% y/y,  
mainly in the services sector. Although it will probably accelerate  
again this year, at this point in any case, a minimum wage increase  
might seem surprising due more to the massive unemployment  
described above rather than to wage cost fluctuations (even relative  
to the other European countries).  
4- Minimum wages in selected European countries  
Gross monthly wages (12 months), in euros  
second half of 2018, in Spain, early 2019  
2
000  
1600  
200  
00  
1
While awaiting the 2019 budget  
The massive increase in the minimum wage is part of a broader  
economic policy that the Pedro Sanchez government has put  
forward in its 2019 budget proposal. It calls for an increase in social  
expenditures and pensions, along with higher taxes for high income  
households and major corporations.  
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RO HU LV HR CZ SK PL PT EL SI ES UK DE FR BE NL IE LU  
Presented to Parliament in mid-January, the budget proposal might  
very well fail to pass due to the lack of a majority. The Sanchez  
government is in a minority position and must rely on the support of  
representatives from Podemos and the Basque and Catalonia pro-  
independence parties in order to pass legislation. The budget bill  
incorporates measures to boost investment spending in Catalonia,  
but this might not suffice to win their support as long as political  
negotiations over the Catalonia question are at an impasse. Until a  
new budget bill is passed, the previous year’s budget is  
automatically renewed. Note that there is nothing new about this  
situation, which has already occurred twice since the latest  
legislative elections: the 2017 budget was not adopted until May  
Source: Eurostat, government  
this spring. Spain is the last European country still subject to this  
special procedure. Low financing costs and vigorous growth should  
continue to reduce the deficit this year, masking yet again the  
probably expansionist nature of fiscal policy.  
Frédérique Cerisier  
frederique.cerisier@bnpparibas.com  
2
017 and the 2018 budget until June 2018.  
In any case, Spain’s budget deficit fell below the 3% threshold last  
December (probably to 2.7% of GDP) for the first time since 2007,  
and it should officially exit the European excessive deficit procedure  
2
It is tempting to compare the scope of long-term unemployment with the  
number of jobs that were eliminated in the construction sector during the crisis:  
nearly 1.5 million workers (between early 2007 and today).  
3
According to OECD data, in 2007 the minimum wage in Spain amounted to  
only 40% of the median wage, which is one of the lowest levels in the OECD.  
Only the United States reports a lower level of 34% of the median wage. In  
France, the minimum wage amounted to 62% of the median wage in 2007.  
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