Economic Outlook no. 1189-1190 |Macroeconomic, Risk and Insolvency Outlook
Spain
Salvation in exports
Note pays structurelle
Country Risk Level AASENSITIVE
H CRI
FFI 3
Overview GDP is expected to contract by -1.6% in 2012, after five consecutive quarters of negative growth. In 2013, GDP growth should remain negative, dragged down by falling domestic components. Household consumption, which still bears the psychological scars from the real estate crisis, will continue to shrink (-1.4%), in line with a worsening job market and the ongoing austerity measures. The grim outlook for the construction sector will continue to weigh on investment (-3.8%). The only bright spot is foreign trade, which will continue to contribute positively to growth (+1.0%) thanks to buoyant exports. In 2014, activity is expected to gradually recover (+0.6%) on the back of an upturn in investment (+2.1%) and household consumption (+0.3%). The budgetary adjustment should continue over the coming two years, but meeting the targets, in particular a return to a deficit of -3% of GDP in 2014, promises to be very challenging.
The financial sector’s fragility should continue to weigh on the financing of the economy. Hit by the real estate cri- sis, a surge in defaulting loans (at 10.7% of total loans in September 2012 compared with 9.2% at the peak of 1995) and a significant rise in capital requirements following the pressures on Spanish sovereign debt, Spanish banks are now under european recapi- talization plan with the ESM. Although this should help the banks shore up their balance sheets, lending is likely to remain very weak in the short term.
Fiscal consolidation far from com- pleted. In 2011, the budget overrun (greater than initially announced) was mainly attributed to the regions (which account for half of total public spend- ing). The budgetary adjustment in 2012 promises to be arduous, despite the local government finance reform voted earlier in the year, in light of its scale: +2.6 pp of GDP with the aim of reaching the target of -6.3% of GDP at the same time as a -1.6% contraction in GDP. Also, a budget overrun this year is likely and a return to -3% in 2014 appears to be in jeopardy. The public debt should con- tinue to increase in the medium term to reach nearly 100% of GDP in 2014, due to the bailout of the banks (10% of GDP) and the high interest expendi- tures. Against this backdrop, the social and political risk remains high. Households will continue to pay the
32
consequences of the real estate crisis. Households still suffer from excessive debt (125% of gross disposable income at end-June 2012) and a still-depressed housing market (prices are down more than 30% from their 2007 peak). In addition, real wages are falling, the job market continues to slump (unem- ployment rate at an all-time high of more than 25%) and austerity meas- ures have been ramped up. As a result, the outlook for household consump- tion out to 2014 remains bleak.
Business investment is expected to return to positive territory only in 2014. Investment is expected to hit a trough in 2013 at nearly -40% below its pre-crisis level. After rising by 24%, company failures are forecast to rise a further +25%. Investment is unlikely to pick up before 2014. Such a recovery will originate from (i) a gradual recov- ery in investment in the tradable goods sector in line with an improvement in global demand and (ii) a slower rate of contraction in the construction sector.
Exports should remain buoyant in 2013 and 2014. Since the first quarter of 2009, Spanish exports have increased by more than 30% in volume terms, showing greater buoyancy than the eurozone average (+25% over the period). Spain’s financing imbalances continue to shrink, with a sharply decreasing current account deficit
(nearly 10 pp of GDP since 2008 to 2% of GDP at end-2012). The diversification of exports towards more high-end products – and therefore less exposed to the global cycle – and the adjust- ment in labor costs (-7% since H1 2009) have been veritable trumps cards in improving the competitiveness of the Spanish economy. Thus, exports should continue to be buoyant over the coming two years, while imports are expected to be contained by weak domestic demand. This should allow a positive contribution of foreign trade to growth (albeit to a lesser extent than in the previous years)._AB/MI
To watch…
>The ongoing structural reforms. >The decision by the European Council regarding a possible transfer of the Spanish bank bailout to the ESM. >The trend in the budget deficit and a possible introduction of additional austerity measures/the revision of budgetary targets in agreement with the European Commission._