Spain: Leaning against the wind - ING

Geoffrey Minne, Economist at ING, notes that the second reading of Spain’s 3Q GDP print confirmed a growth rate of 0.7% QoQ (3.2% YoY) and despite the fact that it is the lowest figure since 4Q14, the slowdown is softer than initially expected.

Key Quotes

“In 3Q, the main growth driver remained private consumption (+0.6% QoQ), despite a progressive slowdown observed since the beginning of the year. The decreasing unemployment rate continued to bring a welcome boost to consumers' purchasing power. The resilience of Spanish growth is also explained by other components: public spending (+1.0% QoQ) and exports (-1.3% QoQ) which decreased less than imports (-1.8% QoQ). As for public spending is concerned, the drop seen in 2Q seems to be a one off but in any case, the commitment of the government to reduce spending in 2017 and 2018 does not offer encouraging prospects for the coming quarters. In short, we should not count on public spending to support strongly GDP growth in the next quarters. As we expected, investment undertook a more severe slowdown (from 1.1% QoQ in 2Q to 0.1% in 3Q) as the manufacturing sector is still waiting for a fresh boost and a new set of structural reforms.”

“On the political side, the budget has not been agreed yet in Parliament and this difficult process might be an appetizer of the political deadlock the conservative government should expect for next year. For the moment, Rajoy could still threaten the Socialist party and Ciudadanos of triggering a new election round but this will be seen as idle words if the opposition strengthen in opinion polls and/or if Rajoy was to use this threat too often. This “half political deadlock” should continue to affect negatively investment in Spain.”

“When looking forward though, not everything is dark and one sector having a large potential for growth is the real estate sector. The cocktail of low interest rates, increasing households' purchasing power, hotel capacity calling for new investment, foreign investors looking for a second residence and lowering inventories of unsold houses could drive the hiring intention and investment prospects in the sector to a higher level. Knowing that the employment in the construction sector decreased by about 1.7 million workers between 3Q07 and 2Q16, we can expect that the reduction of the slack in this sector will continue in the coming years.”

“All in all, the Spanish economy probably reached its fastest pace of GDP growth a few quarters ago and continued its natural slowdown in 3Q. At the current juncture, economic growth remains however more resilient than expected and we expect GDP growth to reach 3.2% in 2016.”