In its September Economic-Financial Report, the AEB estimates that, two years after the relapse into recession, the Spanish economy is beginning to show signs of improvement that pave the way toward recovery. The report highlights that, in addition to the strong performance of the foreign sector, there is a stabilization of private consumption and an initial increase in investment in capital goods. The slowdown in job losses, the decline in the sovereign risk premium, the return of foreign investment, and the rise in stock market indices support this assessment. Indicators available for the third quarter of the year confirm a stronger momentum in spending and activity, along with an improvement in consumer and business confidence, suggesting that positive GDP growth can be expected.
The adjustment of imbalances….
From an internal perspective, the gain in competitiveness resulting from the decrease in our relative unit labor costs (internal devaluation) stands out, which has translated into a significant contribution from the foreign sector. The current account deficit has been corrected to reach a surplus position and, despite a recessive context, the primary structural deficit of the Public Administrations has been substantially compressed. The adjustment of the real estate sector, in terms of both volume and prices, has progressed considerably and has reactivated the interest of institutional investors. The private sector has continued to make progress in the deleveraging process, although the level of debt remains high. In the financial sphere, in its September monitoring review, the Troika confirmed that the financial sector assistance program is being implemented correctly and that the solvency of banks is comfortable. Within this new framework, market confidence has been regained, and access to more fluid financing at lower costs has been recovered.
…and the European Union’s new framework for action.
Important initiatives have also been taken in the European Union. Of particular note is the design of the Banking Union which, starting from a single supervisory mechanism for Eurozone banks under the responsibility of the ECB—expected to be operational from autumn next year—must be completed with a common resolution and deposit guarantee mechanism. These are three fundamental pillars for the viability of the Monetary Union, to break market fragmentation, restore monetary policy transmission mechanisms, and ensure the proper flow of credit. Given the profound deterioration of the economic situation, the Eurogroup decided to extend the deadlines for meeting budgetary targets within more reasonable limits. In the longer term, the authorities have reaffirmed their commitment to advancing fiscal, economic, and political integration as guarantors of the viability and successful functioning of the euro.
An opportunity…
The opportunity therefore arises to leverage all these assets to consolidate a more consistent and sustainable recovery with the capacity to generate employment. The prospects for stabilizing real disposable household income, together with improved household confidence and the need to release pent-up demand from the recession phase, leave room for a more sustained tone in private consumption. The stronger momentum in activity, improvements in profitability, and replacement needs should consolidate the incipient recovery of investment in capital goods. In the real estate market, the adjustment made in terms of both prices and volume points toward a smaller detraction from growth and job losses. Although with less intensity than in the past, due to the greater boost from domestic demand and imports, the foreign sector—more competitive and within the framework of a gradual recovery in the Eurozone—will continue to contribute to GDP growth. Predictable improvements in financing conditions will also play an important role. Under this scenario, the dynamics of multipliers would come into play with a positive effect on various segments of spending, activity, and employment, which would facilitate the laborious consolidation of public accounts, private sector deleveraging, and the desirable flow of credit.
…which requires maintaining a policy oriented toward stability and extending structural reforms.
In our opinion, this assessment does not mean, in any way, that the crisis has been overcome or that we are free from significant risks. It will therefore be necessary to maintain a policy decisively oriented toward macroeconomic stability (budgetary consolidation, moderation of internal costs, etc.) and to extend structural reforms in order to expand growth potential through a more exhaustive (employment) and efficient (productivity) use of production factors. There remains significant room for improvement in the area of market flexibility and, specifically, in the fiscal field to address a major reform that eases the burden on companies and families and to progress in the reform of Public Administrations under strict criteria of rationalization and efficiency.
