22 February 2013

Commission Winter Forecast 2013 - Spain

After the intensification of the contraction in the fourth quarter of 2012, the fall in GDP is expected to moderate in the course of 2013, with GDP bottoming out towards the end of the year. Economic growth is expected to return to positive territory in 2014.

The  announcement of the Outright Monetary Transactions programme by the ECB and other decisions at euro area level, in combination with  progress on bank recapitalisation and restructuring  under the banking sector programme and progress  on key structural reforms, led to a reduction in the Spanish sovereign bond spreads and a higher  inflow of private foreign capital. However, this improvement in external financing conditions for the sovereign and for financial institutions has not yet fully reached the real economy. Therefore, the short-term outlook for internal credit conditions remains broadly similar to the autumn 2012 forecast.

The rebalancing of the Spanish economy continued in the second half of 2012, with the share of net exports in GDP rising at the expense of domestic demand. The protracted correction of the large external and internal imbalances accumulated in the boom period is holding back private consumption and investment. Real GDP is expected to contract by around 1½ per cent in 2012 and 2013.

Following the entry into force of additional  consolidation measures (increase in VAT,  elimination of the Christmas bonus in the public  sector, corporate tax measures), budgetary consolidation advanced in the final months of  2012. Also at regional level, expenditure cuts in education are expected to have had their main impact in the last quarter. For the year as a whole, the deficit is therefore expected to narrow to about 7 per cent of GDP, down from 8.9 per cent in 2011, excluding in both years the effects of bank recapitalisations. The latter are currently estimated at around 3.2 per cent of GDP in 2012, but final figures will only be available after the EDP notification in April.

The budgetary performance in 2012 was blighted  by considerable shortfalls of both indirect and direct tax revenues. These shortfalls are linked with negative composition effects (due, inter alia, to shifts in private consumption patterns and the  slump in housing transactions), an even sharper than-expected fall in employment and labour income, and negative asset price developments. Additional revenue-raising measures introduced throughout the year helped to offset these shortfalls, so that final tax revenues are likely to have turned out broadly in line with initial plans. In 2013, the general government deficit (excluding  bank recapitalisations) is expected to narrow somewhat further, thanks to discretionary measures likely to more than offset the impact of  the continued recession. The general government  deficit is forecast to reach around 6¾ per cent of GDP in  2013. Stronger VAT revenues due to the full effect of the rate hike and some increased cost control should outweigh an increase in expenditure on social transfers and interest. Despite the return to positive, albeit weak, growth in 2014, the general government deficit is expected to deteriorate to around 7¼ per cent of GDP on a no-policy-change assumption, due to the possible expiry of some of the measures introduced in 2012.

Large public deficits, negative or low nominal  GDP growth and the costs of bank recapitalisation are likely to result in a rise of the general government gross debt from around 88 per cent of GDP in 2012 to above 100 per cent of GDP in 2014.

Full Spanish forecast

© European Commission