In its June Economic and Financial Report, AEB considers that progress in correcting basic imbalances, the implementation of a broad range of adjustment measures and others to stimulate activity, together with the design of the Banking Union and the European Union’s greater flexibility for meeting budgetary targets, pave the way for a recovery of the Spanish economy.
Regarding the correction of imbalances, the Report highlights the adjustment made by the external sector based on competitiveness gains and the internationalization of Spanish companies, a process that has been favored by the notable reduction in relative unit labor costs. It also considers that progress has been made in the restructuring, recapitalization, and consolidation of the financial system, private sector deleveraging, and the adjustment of the real estate market. In a particularly adverse context, progress has been made in consolidating public accounts, as evidenced by the reduction in spending and the primary structural deficit.
Regarding the financial sector, AEB notes in its Report that balance sheets have been cleaned up, so that all credit institutions comfortably meet the requirement of a 9% core capital ratio along with a high level of provisioning. It also highlights the launch of Sareb as manager of impaired assets from institutions that have required public assistance, which has significantly reduced financial institutions’ exposure to the real estate sector.
At the European Union level, the Report emphasizes important initiatives adopted, such as the ECB’s incorporation of Outright Monetary Transactions (OMT) last September, and the Eurogroup’s design of the Banking Union which, starting from a single supervisory mechanism under the ECB’s responsibility, must be complemented by a common deposit guarantee and resolution system.
In AEB’s view, these three complementary and interdependent pillars are essential to correct market fragmentation, restore credit flow, and reestablish monetary policy transmission mechanisms. It also refers to the extension of deadlines for meeting budgetary targets facilitated by EU authorities, who are simultaneously paying greater attention to activity-boosting policies with the recent allocation of funds to combat youth unemployment and support SMEs.
The Economic and Financial Report emphasizes that, since the beginning of the year, activity, spending, and employment indicators point to improvement. If this trend consolidates, it indicates that a smaller GDP decline can be expected in the second quarter—around 0.2 percentage points—leading to stabilization in the second half of the year and the beginning of a recovery throughout next year, with average growth close to 1%. It adds that this recovery will necessarily be moderate due to the containment of domestic demand linked to the adjustment and deleveraging process, although it could benefit from an improvement in the international environment and competitiveness gains. According to the Report, it can also be expected that the fruits of the structural reforms undertaken will begin to be reaped, especially in employment matters, if the growth threshold from which new jobs are generated can be reduced.
In any case, AEB specifies in its Report that vigilance must not be relaxed, as the path ahead to position basic balances in a comfortable position and recover pre-crisis production and employment levels remains considerable. AEB’s Economic and Financial Report concludes that this process can and must be accelerated by persevering in supply-side policies aimed at making markets more flexible and expanding growth potential as a source of job creation.
