The Bank of Spain estimates that real GDP grew by 0.7% q/q in the second quarter of 2016, slipping below its gains of 0.8% q/q in early 2016 and the final two quarters of 2015. Meanwhile, the central bank argues it is too early to determine how the financial volatility following the British vote to leave the EU will affect the Spanish growth outlook.
IHS perspective | |
Significance | The Bank of Spain estimates Spanish economic growth slowed slightly to 0.7% q/q in the second quarter of 2016. |
Implications | The central bank argues it is too early to determine how the financial volatility following the British vote to leave the EU will affect the Spanish growth outlook. |
Outlook | The UK's decision to leave the EU is likely to slow the pace of the Spanish economic recovery during the next few years. The main brakes are likely to be the hit on business and consumer confidence, heavily affecting investment intentions while taking the edge off the current consumer spending upturn. |
According to the Bank of Spain, the economy posted its 12th consecutive gain by mid-2016, following nine consecutive quarters of decline. The central bank estimates that real GDP grew by 0.7% quarter on quarter (q/q) in the second quarter of 2016, slipping below its gains of 0.8% q/q in early 2016 and the final two quarters of 2015. Meanwhile, real output was up by an estimated 3.1% year on year (y/y) in the second quarter from 3.4% y/y in the first. Furthermore, the economy grew by 3.2% in 2015 as a whole.
IHS had estimated that real GDP grew by 0.56% q/q and 3.0% y/y in the second quarter.
The central bank notes that both consumer spending and business investment continued to drive the recovery in the second quarter of 2016. Indeed, the Bank of Spain reports that domestic demand contributed 0.6 percentage points to the change in real GDP between the first and second quarters, down from a 1.0-point contribution in early 2016.
Private consumption appeared to grow for a 12th successive quarter, and at a solid pace. The Bank of Spain acknowledges that household spending continues to enjoy support from improved labour market and financial conditions. In addition, temporary factors continue to elevate purchasing power. They include energy prices being lower than a year ago, tax cuts brought forward by six months to July 2015 and the government paying public-sector employees one-quarter of the extra salary payment suspended in December 2012. Other factors have placed household spending on a sustainable upward trajectory. First, consumer confidence has benefited from reduced sovereign financial tensions, alongside Spain developing a broad-based recovery, falling prices, and a lower unemployment rate compared with one year ago, triggering more upbeat spending intentions. Therefore, consumers are returning to the high street to satisfy pent-up demand for durables, attracted by discounted prices, with the additional spending being financed by a lower propensity to save.
Business capital spending continued to head north, albeit at slower pace of ascent during the second quarter. The upturn in machinery and equipment investment appeared to soften, but continued to receive support from improving financials, triggering a release of some pent-up demand for items such as new machinery, alongside higher level of capacity utilisation and the improvement in the availability of credit. The Bank of Spain believes construction investment continued to recover after bottoming out after six years of contraction, and notes that house prices are also levelling off after falling continuously since late 2007, and are further lifted by the backdrop of the rise in house sales. However, it notes investment in other construction could be affected by the slowdown in public works, and highlights the "recent weakness of some indicators, such as cement consumption or Social Security registrations in the civil engineering sector."
The Bank of Spain estimates that net exports made a marginal contribution to real GDP developments between the first and second quarters, with export growth exceeding imports.
Finally, the Bank of Spain argues it is too early to determine how the financial volatility following the British vote to leave the European Union (EU) will affect Spanish growth outlook. Prior to the UK EU exit vote, the central bank expected the Spanish economy to grow by 2.7% in 2016 and 2.3% in 2017. The central bank had acknowledged risks to the outlook have heightened as a result of risks to global growth – notably an uncertain economic environment being fuelled by some weakness in emerging economies. In addition, domestic risks are heightened after the inconclusive election outcome, and could signal "potential structural reform fatigue" and "might adversely affect growth expectations and bear negatively on current consumption and investment decisions."
Outlook and implications
We had assumed balanced real GDP gains during 2015 and early 2016 alongside positive survey data bode well for the rest of the year and 2017. A key factor was the recovery being underpinned by continued gains in employment, household income, and corporate financials. But the UK's decision to leave the EU is likely to slow the pace of the Spanish economic recovery during the next few years. The main brakes are likely to be the hit on business and consumer confidence, heavily affecting investment intentions while taking the edge off the current consumer spending upturn. Meanwhile, trade flows across the EU are likely to be negatively affected, damaging increased Spanish export prowess, but the prospect of a weaker euro will help to protect its export shares beyond the single currency region.
Spain's relatively brisk recovery is expected to slow sharply from the fallout of the UK exit vote, but the country is still expected to remain one of the better growth performers in the EU. Prior to the UK vote, we had assumed growth would remain solid in the near term, but lose momentum in an orderly manner. However, intensified economic and financial risks arising from the UK exit are set to trigger a sharper slowdown, namely the uncertainty set to engulf the Eurozone and global economies, presenting a further headwind to its recovery momentum. Spain has significant economic, social and financial ties with the UK, which is likely to deepen the hit, and extend the impact into 2018. First, Spain is a notable destination of UK foreign investment, while 25% of its foreign visitors originate from the UK. Clearly, the Spanish tourist sector will worry that some British visitors may decide to stay away when enduring a loss of euro-denominated purchasing power as a result of the weaker pound. Meanwhile, major Spanish banks and companies have direct commercial exposure in the UK, with Ferrovial, Banco Santander, Iberdola and Telefónica acquiring major UK assets in recent years.
Also, the strain on the recovery cycle is likely to be heightened after a second general election (26 June) in six months failed to deliver a decisive outcome, namely a working majority for the ruling party Partido Popular (PP) which won the largest share of the vote. Clearly, the outcome still implies a hung parliament for a second time, with the likely composition of the new government still far from clear. The options include a centre-right pact with the PP which increased their share of the vote with the new party Cuidadanos or even a grand coalition between the PP and Socialists. The better performance of the PP was expected in line with improving economic and labour market conditions, but the lack of a decisive outcome is a further layer of risk to the recovery already facing a wide and expanding spectrum of risks.
Our first take of a new UK EU exit baseline assessment for Spain signals a broad-based hit, affecting consumer spending and business investment near-term outlook, alongside some damage to trade flows across the EU. Overall, we now expect Spanish real GDP to expand by 2.6% in 2016 (down from 2.8%) in 2016, and probably sit between 1.5% and 2.0% in both 2017 (from 2.4%) and in 2018 (from 2.2%). These are provisional estimates, but broadly similar adjustments will be reflected in the July update. However, our new projection for 2017 signifies a potentially sharp downward adjustment, which also reflects the possibility of further political bickering after the general election failed to deliver a clear winner. Still, we suspect the new growth rate is at the bottom end, and could be subject to steady upward revisions should the political gridlock be swept away and the fog after the UK exit vote begins to clear.