Spain RecoveryEmbassy of the Kingdom of Norway in Madrid

September 2017

José Moisés Martín

Red2Red Consultores

Index

• Evolution of main aggregates

• Fiscal Consolidation and financial position

• External Sector

• Employment

• Long term growth

• Conclusions

Evolution of main aggregates

• Since 2014, Spain has had one of the strongest recoveries in the EU.

• Three reasons for that:• Softening of fiscal and wages adjustment.

• External sector evolution

• ECB QE effects on credit costs

• Nevertheless, Spain reached the pre-crisis level of GDP in 2Q 2017: a lost decade.

GDP Evolution

• Spain lost up to 8 GDP pointssince the starting of the international financial crisis.

• There was a strong recovery since2013.

• Spain reached the pre-crisis GDP level in 2Q 2017, nine years later.

GDP Composition: a demand-driven growth

• GDP decrease was largely lead by investment declining

• Internal demand was the mainengine for recession and recovery. External demandplayed a contra-cyclical role between 2009 and 2014.

• Between 2014 and 2016, consumption –both private and public- has played a major role.

GDP and change of growth model

• According to the GDP supply-sidebreakdown, Spanish economy is quite similar to that which entered in the crisis in 2007-2008.

• Significant variations have beenhappened in Public Administration(+), Professional Services (+) and sectors related to tourism , as Commerce, transport and hospitality(+) .

• Financial Services and Industry havelost weight.

GDP evolution: conclusions

• GDP suffered a significant drop during the crisis, followed by a strongrecovery fueled by the internal demand.

• From the supply side, sectoral changes in added value do notrepresent a significant “new model of growth” for the Spanisheconomy.

Fiscal consolidation

• It is expected that Spainwill exit the ExcessiveDeficit Procedure in 2018.

• Most of the fiscal effortbetween 2011 and 2016 made by the regional and local governments.

• Despite the initialrecommendations by the European Commission, fiscal consolidation has notbeen frontloaded: since2012, the actual pace of consolidation have beenquite growth-friendly.

Fiscal challenges: structural deficit

• Despite the fiscal adjustmentand the end of the ExcessiveDeficit Procedure, structuraldeficit continues to be out of the Stability and Growth Pactlimits.

• This can be seen as a weakness in the long termsustainability of Spanishpublic finances.

Fiscal challenges: revenues

• Around half of the public sector deficitcreated between 2008-2009 wasgenerated by a drop in publicrevenues.

• New fiscal measures in 2010 and 2012 –Income tax, VAT- contributed to raisethem.

• But in 2015 and 2016, new tax cuts (in green) reduced revenues again.

• Consecuently, since 2013 most of the financial adjustment has beenproduced from the expenditure side.

Fiscal challenges: public debt

• Gross Public debt has dramatically increased between2008 and 2014.

• Since 2014, the pace of reductionis very slow, as it amounts fornear 100% of GDP.

• Interests have been presseddown by the ECB EQ, but aneventual increase in interest ratescould generate new problems

Financial position: total debt

• In spite the strong deleveraging in the private sector, the increase in public debt has led total debt to a kind of stabilization.

• We can see then that rather thantotal amount, main change has been on composition of debt

• Total debt amounts for 250% of GDP.

• Public debt amounts for 99% of GDP.

Public sector finances: conclusions.

• Before the crisis, Spain had a balanced public sector with low debt.

• Between 2008-2010, public deficit rised from both the expenditure and revenues sides.

• Public deficit management has not been frontloaded as the actual pace of consolidationhas been much slower than initially expected.

• Spain was expected to be out of the EDP in 2015: it will be out in 2018.

• Most of the fiscal consolidation is based in the expenditure of regional and local governments.

• Spain’s remaining challenges are the public revenues, the structural deficit and the publicdebt.

• Because of that, even after the exit of the EDP, Spain should pay attention to its longterm fiscal position.

• Due to the increased public debt, total liabilities remain with no significant reduction.

External sector: imports and exports

• The evolution of the external sector has been positive for the Spanisheconomy.

• Key driver for external surplus has been the evolution of imports ratherthan an increase of exports.

External sector: current account balance

• While payments suffered a disruption in 2009 due to the financial crisis, exports havekept the same long-term path.

• With these data, it is difficultto say the Spain is becomingan export nation.

• The decrease in the importsare much related with the depression of demand duringthe structural adjusment.

• There are doubts about thissituation will be sustainable in the long term.

External sector: tourism

• Tourism is the main factor of external revenues forthe Spanish Economy and the one which moves the balance into positive figures.

• It represents around 11% of GDP.

• Positive external balance by 36 billion euros (+- 3,3% GDP in 2016).

• There are some signs of “social and environmental” sustainability of suchincrease.

External sector: net external liabilities

• Spain cointnues to have a very weakposition regarding external liabilities and assets.

• Its net invesment position continuesnear the situation in 2008, with no significant improvement.

External sector: gross external debt

• Gross external debt is now in its highestpoint.

External sector: conclusions

• The external sector has played a counter-cyclical role during the crisis and now its contribution to the GDP growth is positive.

• Tourism and oil prices were main factors to understand thatevolution.

• This was one of the main macroeconomic imbalances that have beencorrected.

• Balance is due to the evolution of imports rather tan exports. Spain isnot becoming an export nation.

• Despite these positive changes, external debt remains as one of the key weakneses regarding the external sector.

Labour market: employment

• Employment recovery is strong, but figures are far away fromthose before the crisis.

• Since 2014: Near 2m jobs havebeen created.

• In Q2 2017, employed workerswere 2 million less than in Q2 2008.

Labour market: unemployment

• Unemployment rate has declinedsince its high in 1Q2013 (26,94%) to17,22% in 2Q2017.

• Youth unemployment still being toohigh.

Labour market duality: part-time jobs

• There is an increase in part-time jobs but most of this increase is affectingyoung people.

Labour market duality: temporary jobs

• While total temporalityhas been declined overthe years of the crisis, temporary contracts are rising for the youngworkers.

• Temporality rate issubstantially higher thanin the EU.

Long term unemployment

• Long term unemployment(more than one year) still beinga huge challenge, speciallyamong those between 45-64 years old.

Labour market: UCL

• Due to the increase in labourproductivity and wagesadjustment, Real UCL has decreased since 2012.

• Employment creation has notlead to a significant wagesrecovery

Employment: conclusions

• Spain is having a strong recovery in job creation since 2013.

• Employment figures are far away from pre-crisis data.

• Recent labour market evolution shows a new deepening of dualitywhich is affecting mainly to young people.

• Long term unemployment, specially among 45-64 y.o. is a risingchallenge.

• Despite the job creation, labour costs are not rising, and thereforecompetitiveness seems not to be affected by them.

• But, on the other hand, wages still being lower than before the crisis and this have an impact in social situation.

Competitiveness and long term growth

• According to the Global Competitiveness Report, Spain isscaling up post in the index: from 36 in 2012 to 32 in 2016.

• In most of the components of the index, Spain scores near the averageof Europe and North America.

Long term growth: Innovation

• According to the EU InnovationScoreboard, Spain is far from the european innovation leaders and below the European Union average.

• R+D expenditure have been reducedfrom 1,33% of GDP in 2008 to 1,22 in 2015.

• Entreprenurial ecosystem, lifelonglearning and venture capital fundingare among most negative factorsregarding its performance

Human Capital and long term growth

• Despite the similar share of universitystudents, Spain amounts twice thanthe EU the young people with basiceducation.

• Spain is one of the countries withmost “NEET” young people.

• This is jeopardizing the incorporationof young people to the knowledgebased economy.

Conclusions

• Spain has managed to correct most of the macroeconomic imbalancesaccumulated during and before the crisis.

• Reasons for strong recovery are based in internal and external factors: end of austerity, ECB QE, low oil prices and devaluation of Euro.

• Despite that, some weaknesses remain as challenges: debt –internal and external-, fiscal revenues and structural balance.

• Sectoral composition and evolution of external sector do not allow us to directlythink that Spain has managed to change its growth model.

• There are strong weaknesses in the labour market: increased duality and longterm unemployment.

• Factors for long term economic performance still being unsolved or, even worse, unattended.

• Is this a “recovery” from the crisis or a “new normal”?