25 November 2013

BoS/Linde: A review of the Spanish economic situation

Linde stressed the importance of seeing through fiscal consolidation and structural reform, so that the ongoing reduction in budgetary imbalances may combine with an improvement in potential growth.

Several reasons explain the change in the Spanish economic situation in recent months. Firstly, the international economic setting has improved and the effects on the Spanish economy have been reinforced by the headway in the economic governance of the euro. The degree of fragmentation persisting in euro area financial markets, however, is still high and is not allowing monetary impulses to be transmitted efficiently to all countries in the area. Indeed, the Spanish economy as a whole - households, firms, credit institutions and general government - continues to face financing costs which, though they have moderated, remain excessive when taking into account the strongly expansionary stance of the ECB's monetary policy.

Secondly, household spending began 2013 weighed down by the impact of the decline in employment on income from work and by the debt-reduction process. However, as the year unfolded, improved confidence and the somewhat less unfavourable state of the labour market have meant that private consumption has begun to pick up. Further, according to the available indicators, investment in equipment has posted increases in the first nine months of the year.

The positive contribution of the external sector to activity has increased in 2013. That reflects the strong dynamism of exports, driven in recent months by the improvement in Spanish competitiveness and the buoyancy of the euro area markets; but it is also indicative of the weakness of domestic expenditure, giving rise to the contractionary behaviour of imports. As a consequence of these developments, Spain will show a net lending position against the rest of the world of around 2 per cent of GDP, an unprecedented and record figure in recent decades.

For 2014, a central scenario has been outlined in which the factors that have been affecting domestic demand progressively slacken. It is projected that the processes of adjustment in the economy, and most particularly the redressing of private-sector debt and the ongoing fiscal consolidation, will continue to influence the pace of recovery of demand and activity; but, at the same time, the reduction in uncertainty and the culmination of the restructuring of credit institutions, along with their improved results, will lay the foundations for improving financial conditions for the resident sectors.

It is against this macroeconomic background that the discussions on the draft Budget for 2014 are framed. The so-called 2014 Budgetary Plan, devised by the Government in compliance with its reporting obligations to the European Commission, includes information on overall general government revenue and expenditure for 2014, based on the draft budgets not only for central government and the social security system, as was habitually the case, but also for the regional governments.

The macr-economic figures accompanying the 2014 Budget project real GDP growth of 0.7 per cent, as a result of the positive 1.2 percentage points contribution of the external sector, offset in part by the negative contribution of national demand. The overall general government deficit should stand at 5.8 per cent of GDP, 0.7 percentage points down on the forecast for 2013. The target for 2014 entails an improvement in the general government structural balance of between 0.1 and 0.3 percentage points of GDP. Following the considerable adjustment made in the past two years, when the structural deficit was cut by 6 percentage points of GDP, the budgetary plans for 2014 are more conducive to the entrenchment of the recovery and compliance therewith will help maintain agents' confidence in fiscal consolidation.

On the expenditure side, three budgetary items - namely pensions, unemployment benefits and the burden of interest on public debt - will continue to influence budgetary programming, given that they account for almost 50 per cent of total overall general government spending.

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