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5 May 2016
Spain: Could a new government derail the economy? - HSBC
Fabio Balboni, European economist at HSBC, suggests that despite not having had a government in place since October, the Spanish economy continues to perform well, with GDP growing by 0.8% q-o-q in Q1 2016.
Key Quotes
“The strong economic performance is in part due to an unprecedented combination of favourable elements: low oil price, higher deficits, falling interest rates, and the tourism boom.
Spain' macroeconomic imbalances are also less of concern now. Private sector deleveraging continues. For the first time, the country is growing without the current account deteriorating. This reduces the dependence of growth on foreign borrowing. The fall in the oil price shaved 2% off GDP from the energy import bill, but Spain is also retaining its early competitiveness gains, and continues to gain market share.
The downside is that the economy has needed more fiscal support. The deficit last year came in at 5.1% of GDP, well above the 4.2% EU target. Higher government borrowing offset private savings. But public investment is only half the pre-crisis level. The lack of investment - both public and private - is a drag on growth potential.
As the positive impact of falling prices on consumption fades and the bottlenecks in the labour market start to hit, growth should slow in the coming months. If the political uncertainty continues well beyond the new elections 26 June, it could start affecting investment.
From a long-term growth perspective, however, it is more important to see what a new government might do regarding the labour market and deficit reduction:
• Spain needs to create better quality jobs and reduce the pool of long term unemployed. Reforms are needed to incentivise firms to invest more in their own workforce, and eliminate the regulatory and fiscal barriers for firms to grow in size. But parties like the socialist PSOE and leftist radical Podemos have been calling for a U-turn of previous reforms, which could make the situation worse.
• Reducing the deficit to meet EU targets might require a reform of the regional financing system to better align incentives, and/or further cuts to pensions. Both will be difficult to implement politically, taking also into account the anti-austerity claims of many parties. Failure to deliver on the needed cuts could re-ignite the negative spiral of higher borrowing costs and prevent further austerity measures.”
Key Quotes
“The strong economic performance is in part due to an unprecedented combination of favourable elements: low oil price, higher deficits, falling interest rates, and the tourism boom.
Spain' macroeconomic imbalances are also less of concern now. Private sector deleveraging continues. For the first time, the country is growing without the current account deteriorating. This reduces the dependence of growth on foreign borrowing. The fall in the oil price shaved 2% off GDP from the energy import bill, but Spain is also retaining its early competitiveness gains, and continues to gain market share.
The downside is that the economy has needed more fiscal support. The deficit last year came in at 5.1% of GDP, well above the 4.2% EU target. Higher government borrowing offset private savings. But public investment is only half the pre-crisis level. The lack of investment - both public and private - is a drag on growth potential.
As the positive impact of falling prices on consumption fades and the bottlenecks in the labour market start to hit, growth should slow in the coming months. If the political uncertainty continues well beyond the new elections 26 June, it could start affecting investment.
From a long-term growth perspective, however, it is more important to see what a new government might do regarding the labour market and deficit reduction:
• Spain needs to create better quality jobs and reduce the pool of long term unemployed. Reforms are needed to incentivise firms to invest more in their own workforce, and eliminate the regulatory and fiscal barriers for firms to grow in size. But parties like the socialist PSOE and leftist radical Podemos have been calling for a U-turn of previous reforms, which could make the situation worse.
• Reducing the deficit to meet EU targets might require a reform of the regional financing system to better align incentives, and/or further cuts to pensions. Both will be difficult to implement politically, taking also into account the anti-austerity claims of many parties. Failure to deliver on the needed cuts could re-ignite the negative spiral of higher borrowing costs and prevent further austerity measures.”