Productivity, an endemic weakness of the Spanish economic model

"España Digital 2026", “Estrategia Española de Ciencia, Tecnología e Innovación 2021–2027” and “España 2050”: since the pandemic, there has been no lack of structural programmes designed to increase the competitiveness of the Spanish economy. The Spanish Government is right: the country's fundamental problems, which contributed to the 2011 crisis, persist today. Spain has one of the lowest levels of private and public investment and one of the lowest stocks per capita of productive capital in Europe. In addition, the country still suffers from a significant productivity deficit when compared to its major European partners, a deficit which it is struggling to make up as it is intrinsically linked to its low capital stock. In particular, significant delays remain in the acquisition of intangible assets. With the increasing importance last year and in 2023 of the national recovery, transformation and resilience plan (NRRP), the Spanish authorities have further fiscal room for manoeuvre to claw back some of these gaps. However, the targets set could be undermined by the economic situation in Europe at the turn of 2023 and the uncertainty this would cause with regards to corporate investment decisions.

The Spanish economy suffers from chronically low productivity gains, which is symptomatic of southern European countries. Apparent hourly labour productivity has only recorded an average annual growth of 0.7% over the past 20 years (2000–2021), compared with a rise of 1.1% in Germany, 0.9% in France and 1.0% for the Eurozone (see Chart 1).

Three countries performed worse than Spain during this period: Italy (+0.3%), Greece (0.0%) and Luxembourg (+0.1%), although Luxembourg's level of productivity is already high and its economic structure bears little comparison to Spain. Even if these differences in productivity growth seem modest, they have lasted over an extended period of time, and Spain already had a much lower level than most of its European neighbours. Therefore, there has been no catch-up effect over the past 20 years. In fact, the gap has widened.

More specifically, Spain experienced a drop in productivity at the end of the 1990s, followed by a period of near-stagnation which lasted more or less until the global financial crisis of 2008. This was in singular contrast with the sustained annual growth rate in real GDP, which averaged 3.1% between 2000 and 2008. This significant gap in growth between productivity and GDP was a clear indication that the expansion model followed by Spain during that time was not sustainable, being mainly driven by unproductive investments and private debt. Indeed, the high level of gross fixed capital formation (GFCF) during this period was excessively based on the construction of buildings, which generates fewer productivity gains than other types of investments.

In addition, in the years preceding the Covid-19 pandemic, the Spanish economy relied mainly on the volume of hours worked to stimulate its GDP growth. On average over the period 2014–2019, the hours worked actually contributed as much as 70% of GDP growth, a share well above that estimated in France and Germany (see Chart 2).

This is partly a result of the high number of jobs created over this period, linked to the economic recovery following the major recession and financial crisis of 2008. Furthermore, the contribution made by hours worked to GDP growth has been rising for the last three decades, although the increase has been slowing down for 20 years. Conversely, the contribution made by investment has fallen.

Although real GDP growth bounced back during the five years preceding the pandemic (it rose by 2.6% per year on average between 2014 and 2019 compared to 1.9% for the Eurozone as a whole) the gap in real GDP per capita continued to worsen compared to Germany. Over the past 20 years, it went from a (negative) gap of 26% in 2000 to 30% in 2019. This gap widened further once the pandemic struck and was 34% in 2021. In 2021, Spain ranked 11 out of the 19 Eurozone countries in terms of per capita wealth[1].

Multiple factors behind Spain's low productivity

Role of composition effects

This productivity deficit has been fuelled by composition effects of activity linked to a reorientation of the economy towards “consumer” services which is labour intensive, especially in trade (retail, wholesale, catering and hotels) and public services (education and health), while jobs in industry fell. Since the late 1990s, the process of deindustrialisation in Spain has gone further and faster than in most other European countries.[2] The Spanish economy now essentially relies on the performance of sectors that have grown in size over the past two decades and whose productivity levels are lower, particularly in relation to manufacturing (Chart 3) and services classed as “knowledge-intensive”, which encompass a large proportion of jobs in information and communications, and professional, scientific and technical services in particular.

This rebalancing of the employment landscape is not the only explanation for Spain's weak productivity gains, as there is a significant gap within the business sectors themselves. In 2018,[3] Spain registered hourly labour productivity above the Eurozone average in only eight of the 31 industries studied (Table 1), with an average productivity deficit of 18%. The difference is more than 30% when set against Germany and France[4].

Capital stock levels too low

Although net capital stock continued to grow (Chart 4), this process was interrupted from the 2008 global financial crisis onwards. Following an initial phase where the accumulation slowed, it became more acute in 2012 after the sovereign debt crisis in the Eurozone. More specifically, investment in housing and other buildings and civil engineering works ("construction" below) fell strongly. This logically caused a slowdown in the accumulation of capital in construction: average annual growth fell from 3.7% between 1998 and 2008, to 1.6% the following decade.[5] As the rate of depreciation of this capital (construction) is relatively slow – unlike, in particular, that of intangible assets which quickly become obsolete[6] – the volume of gross investment, although falling, has therefore remained sufficient for the net capital stock to increase.

Until 2008, the increase in investment in the construction sector therefore helped sustain economic growth and thus mask the low levels of investment in other asset classes that are more likely to generate productivity gains. Investment in construction as a share of total GFCF reached a peak of 70% in summer 2006, whereas the EU average did not exceed 55%. This unsustainable pattern reversed abruptly from 2008, and a rebalancing took place. The share of investment in construction in Spain has now fallen below the Eurozone average, which has also declined slightly compared to 15 years ago (Chart 5). This significant volume gap between investment in construction and in other items largely explains why productivity in Spain remained well below the rest of the Eurozone, despite an overall rate of investment which was much higher than the average across these same countries.

Under-investment in intangible assets

Capital stock in assets other than construction remains lower than in most other industrialised countries. In 2018, net capital stock per capita (excluding construction) was approximately 25% lower than in France, 50% lower than in Germany, and almost a third lower than the Eurozone average (Chart 6). More specifically, while in 2018 Spain's net capital stock per capita was close to its major European partners in terms of transportation and communications equipment and in IT equipment (hardware), it was significantly behind in research and development (R&D) and, to a lesser extent, in capital goods excluding transportation. R&D plays an important role in generating productivity gains[7], particularly in high-tech manufacturing industries and in the services classed as “knowledge-intensive” mentioned earlier. This low level of capital stock in R&D reflects the many years of under-investment in this area. In addition, a measure of GFCF which captures a larger set of intangible assets (some are not taken into account in the current calculations of GDP) would indicate an even greater deficit in Spain’s investment in this area compared to its major European neighbours (Box 2).

Although the data used in this article (KLEMS) currently ends in 2018, it is highly unlikely that a reversal of the trend has occurred since then: Eurostat figures indicate that the gap in investment in intangible assets, mainly derived from intellectual property rights (software and databases, R&D) has persisted to date (Chart 7).

Cuts in public investment

Spain's investment deficit cannot only be attributed to private sector companies. Public sector GFCF in Spain has also fallen sharply. As a share of GDP, it declined from 5.2% in 2009 at its peak to 2.7% in 2021 (Chart 8). Set against national GDP, these investment levels remain among the lowest in the OECD today. However, there may be significant synergy between public and private sector investment: the first allows new sectors and activities to emerge and receive support, which ultimately furthers the development and productivity of private companies.

The fiscal austerity policies implemented in Spain following the two major economic crises of 2008 and 2011 were at the expense of this long-term public investment. The budget category of "economic affairs" (asuntos económicos), which accounts for the largest share of state investments, suffered in particular. Despite a slight recovery in recent years, the amount of spending on this item in 2019 was hardly above the level seen in the early 2000s and was almost 60% below 2010, which was the record high year. All sectors were affected by these budget cuts, but especially transport, the largest item (down 65% compared to 2010), as well as energy (down 80%) (Chart 9).

Is a recovery possible?

After a short but sharp fall during the first lockdown (-8.3% q/q in Q2 2020), investments in intellectual property rights in Spain recovered. They hovered at around 3% above pre-pandemic levels, reaching 3.5% as a share of GDP at the end of 2022. The figure is likely to rise soon above 4% of GDP, especially as the investment plans contained in the National Recovery and Resilience Plan (NRRP) become a reality on the ground.

The digitisation of business activities, which accelerated with the pandemic, is one lever to increase the productive efficiency of Spanish companies. Given Spain's low level of investment in this field, it is paradoxical that the country is ranked among the most advanced in the EU in this area. According to the Digital Economy and Society Index (DESI) compiled by the European Commission and updated last July[8] (see Chart 10). Spain ranks seventh in the EU, two places higher than last year. One of Spain’s main improvements in the new report is in the integration of digital technologies into businesses, where the country is ranked eleventh, five places higher than in 2021. However, the report underlines that “companies are not capitalising enough on new technologies such as artificial intelligence, big data and the cloud, which could help drive productivity and the expansion of e-commerce.” Training workers in new digital technologies

is the other obstacle, which will take time to resolve. In particular, and as emphasised previously in this article, information and communications technology (ICT) specialists as a share of total employment is even lower than the European average (4.1% in 2021, compared to an EU average of 4.5%). In terms of digitisation, Spain therefore has a number of attributes that should be strengthened with the help of the structural programmes announced by the executive since the Covid-19 crisis – especially the España digital2026 agenda and the España 2030 industrial policy, which form the basis for the Strategic Projects for Economic Recovery and Transformation (PERTEs).

PERTE: a public-private partnerships to transform the Spanish economy

The PERTE programme, which is a key plank of the NRRP, forms a set of 11 projects aiming to underpin the long-term transformation of the Spanish economy. The originality of the programme is in the creation of a public-private partnership through which the government supports investment by private companies and research centres via grants and loans. Since its launch in July 2021 and until 2027, EUR 33 billion in public funds (2.7% of Spanish GDP) will gradually be allocated to the financing of these strategic projects. These state support payments to companies – mainly SMEs – should, according to estimates from the prime minister's office (Moncloa), raise an additional EUR 36 billion from the private sector (2.9% of GDP) by 2030.

Owing to their significant contribution to growth and employment in Spain, several projects focus on key sectors of the economy. Examples include the automotive industry, which accounts for 15% of Spanish exports, and the naval industry and the food processing industry, sectors set to be transformed to ease the passage of the energy and digital transitions. Other projects aim to develop activities that remain limited but are essential in the long term to allow Spain to face additional challenges related to energy (renewable hydrogen, electricity storage, the circular economy), industry and technology (aerospace, semiconductors) and the population (social economy, health and social care). In particular, these initiatives should enable an increase in spending on research and development in line with the España 2050 strategy, which would then constitute an important first step towards improving productivity in the country.

Boosting productivity: essential in the long run

Insufficient productive investment and chronically low productivity gains are weighing on the potential growth of the Spanish economy, which since the 2008 crisis has been growing at an average annual rate much lower than before (Chart 11). There is a real risk that this potential growth will reduce further to the point of approaching near-stagnation – primarily because of Spain's ageing population and the impact of this on the level of working population. The contribution of the labour factor, the main driver to growth in Spain, is therefore likely to weaken over time. In these circumstances, investment and productivity gains will need to grow stronger in order to maintain a growth trajectory which is sustainable and sufficient to contain the country’s debt trajectory, in particular.

The lack of investment and low stock of productive capital is reflected in Spain’s delay in creating jobs in highly technical sectors, especially, for example, “information and communications” services and “scientific and technical professional activities”. These two sectors currently account for one in 10 jobs in the country. The structurally high unemployment rate in Spain and difficulties for young people to enter the labour market[9] are also hampering job creation in these sectors. Although the youth unemployment rate is falling, it still stood at 27.9% in December 2022, almost double the Eurozone average (14.8%). Another feature of Spanish society is that it has one of the highest education dropout rates in the Eurozone, with almost half (48%) of the working population aged 25–64 without qualifications in 2019. These causes of disengagement, which were amplified during the period of economic recession in the country that started in 2009, fuel the country's low employment rate. The employment rate has been rising markedly since.the major lockdown in 2020 ended (65.4% for 15–64-year-olds in Q4 2022), nevertheless remaining below what can be found elsewhere in Europe – the employment rate in the Eurozone sits five points above Spain, at 69.5% in Q3 2022

The increase in high-tech investments and in productivity, labour and capital, rightly form the central pillars of the España 2050 plan[10] unveiled by the government of Pedro Sanchez in May 2021. Composed of 50 indicators divided into nine major themes, the principal aim of this long-term programme is to close the gap between Spain and the most advanced European countries. The first part of this plan, which is summarised in Table 3, aims to raise labour productivity – especially by targeting an increase of 10% by 2030, and of 50% by 2050. To this end, there will be a major boost in R&D spending, the objective being to achieve a level of spending equivalent to 3% of GDP, more than double the current level (1.4% of GDP in 2020, according to the OECD).

Raising the employment rate is a third important lever which would help restrict the negative effects of an ageing population on the labour market. The Spanish government expects the employment rate of 15-64-year-olds to rise to 68% by 2030 (compared to around 65% in Q4 2022), which would bring Spain closer to the Eurozone average (70% according to OECD data) without closing the gap though. For the time being, the España 2050 plan only offers major policy orientations. It must be supported by concrete projects or structural measures in order to assess its potential for success. Nevertheless, it already has the merit of putting on paper the profound weaknesses of the Spanish economy and the strategic indicators designed to remedy them, which seem credible and achievable.

Some interesting trends are already in place with regard to the labour market. Employment bounced back vigorously after the pandemic, reaching record levels in 2022. The unemployment rate fell back to 12.4% in the summer of 2022, a level not seen for almost 14 years. The employment structure also improved following the reform of employment law introduced in early 2022, which led to a record rise in permanent employment contracts[11]. An improvement in workforce stability should encourage companies to make greater use of on-job training, which would increase the quality and productivity of work, in turn supporting potential growth.

When it comes to investment, the volume of financing unlocked for the NRRP is growing perceptibly: between the beginning of the year and mid-September 2022 (14 September), the Spanish government released almost EUR 19 billion via this programme – EUR 7 billion more than at the same time last year. These funds are fully financed by subsidies from the EU Recovery and Resilience Facility, payments which are strongly concentrated in 2022 and 2023 (Chart 12). The effects on investment are contained for the time being, and at the end of 2022, the ratio of GFCF to GDP remained below its level of 2019. Nevertheless, the impact of this plan on investment is expected to be most apparent over the next two to three years, while the benefits in terms of productivity and jobs will be spread out more over time.

Furthermore, one reason for the decline in private investment was that Spanish companies as a whole had been heavily indebted in the years leading to the great crisis of 2008, and that the subsequent debt reduction phase was long, leading to a cut in corporate capital expenditure. Although still historically high, and up recently as a result of the pandemic, overall non-financial corporations’ debt-to-GDP ratio is currently lower than in the past. This will not prevent companies from suffering very severely from the current spike in production costs, but it should allow them to better withstand the shock than if it had occurred a decade ago.

****

In the short term, the tightening of lending conditions, the challenging economic situation in Europe and uncertainty about the outlook for 2023 risk weighing on companies' investment decisions. While the Spanish economy still has a long way to go to close its investment and productivity gaps and therefore its competitiveness compared to the rest of Europe, the scope for doing so appears greater than in the past.

[1] Source: Eurostat

[2] See BNP Paribas EcoConjoncture Spain: the tortuous path to reindustrialisation, 22 September 2021.

[3] The OECD does not provide level data for productivity by sector. We are thus using the latest available EUKLEMS data (https://euklems-intanprod-llee.luiss.it/), which are for 2018. Despite this constraint, it is unlikely that sector productivity levels have varied significantly since then.

[4] Our calculation method is similar to that used in an article by the Bank of Spain: P. Cuadrado, E.Moral-Benito and I. Solera (2020) A Sectoral Anatomy of the Spanish Productivity Puzzle, Bank of Spain working document

[5] According to KLEMS, net capital by volume of residential assets rose from EUR 1,187 billion to EUR 1,728 billion between 1998 and 2008, a total increase of 46%. Subsequently, it only increased from EUR 1,779 billion to EUR 2,022 billion between 2009 and 2018 – growth of 13.7%.

[6] According to KLEMS estimates, the annual asset depreciation rate, in ascending order, is as follows: housing (1.1%); other construction (3.2%); communications equipment (11.5%); machinery and equipment other than transportation (13.1%); other intellectual property rights (13.1%); transportation equipment (18.9%); cultivated biological resources (20.0%); research and development (20.0%); software and databases (31.5%); ICT equipment (31.5%).

[7] See, for example, D. Guellec and B. van Pottelsberghe de la Potterie (2001). R&D and Productivity Growth: Panel Data Analysis of 16 OECD Countries, OECD research paper.

https://digital-strategy.ec.europa.eu/en/library/digital-economy-and-society-index-desi-2022[8]

[9] From primary school to vocational training and university, Spain has some of the highest levels of educational failure of all the advanced economies. In 2019, 29% of 15-year-old students had repeated a school year at least once, compared to 11% across the OECD; 17.3% of young people left the education system after secondary school, the highest rate in Europe (compared to 10.2% across the EU-27). And for those who completed secondary education, only 70% were studying in 2019, compared to 85% across the EU-27.

[10] 200521-Estrategia_Espana_2050.pdf (lamoncloa.gob.es – in Spanish)

[11] See BNP Paribas "Chart of the week": "The effects of labour market reforms in Spain are clearly visible", 19 July 2022.