BBVA Research maintains its forecast of 2.4% growth for Spain in 2019, and predicts 2% growth in 2020

The report Spain Economic Outlook indicates that the recovery continued in 2018, increasing GDP to 2.5%. Growth rose at the end of the year, albeit temporarily. Domestic demand consolidated as a source of economic growth in 2018, adding an average annual GDP growth of 2.9% — the same rate as 2017. Meanwhile, external demand drained 0.4% even though net exports gained some traction in the fourth quarter of the year.

Looking ahead, the recovery and job creation are expected to continue, and salaries could start to rise consistently above the inflation rate. Thus, GDP could reach 2.4% in 2019 and 2.0% in 2020. If this forecast is confirmed, the economy could add around 800,000 jobs over the next two years, and the unemployment rate could drop from 15.3% in 2018 to 12.6% in 2020.

According to BBVA Research forecasts, the estimates suggest that GDP will grow at a healthy rate (between 0.6% and 0.8% quarterly growth) in the first quarter of 2019. However, uncertainty over the pace of growth has increased, as reflected in BBVA’s Economic Activity Survey.

In the 2019-2020 period, GDP growth will be approximately 2.0%. In this regard, the foundations of the Spanish economy attest to the continuity of recovery in the coming years, although at a lower rate than the 2015-2017 period. This expected slowdown in growth is based on both external and internal factors. The main external factors include decreased momentum from monetary policy, as well as moderation of global growth. In terms of internal factors, tourism flows are decreasing due to less geopolitical tension in some competing countries. Household consumption is also showing more moderate growth, as a result of less tailwinds than in previous years, such as the absorption of deferred demand from the crisis. Finally, uncertainty remains high, primarily as a result of economic policy, what has affected the evolution of household expenditure.

Nevertheless, growth will remain strong in Spain, thanks to falling oil prices and a somewhat more expansive economic policy than was expected several months ago. In particular, the positive contribution to growth from falling fuel costs could reach an annual average of approximately 0.4%. Furthermore, lower inflation and the economic slowdown in the EMU have delayed the expected interest rate hikes. Finally, some of the measures approved by the Spanish government over the past six months will continue to support growth in domestic demand over the short-term, although with long-term costs from the increase in structural deficit. This is the case of the higher level of public expenditure that was approved for salaries and pensions in 2019.

Recovery in the job market will lose momentum

According to BBVA Research estimates, job creation will slow in 2019 and 2020, influenced in part by the increase in minimum wage. The employment rate is expected to rise 2.1% this year - five tenths less than the previous year. Given that the increase in working population will be modest, job creation will translate into a 1.5% decrease in the unemployment rate, which will reach 13.8%. The growth in the working population and the decrease in the unemployment rate will persist in 2020, but at a slower pace: 1.8% and 12.6%, respectively. The notable increase in the minimum wage in 2019 could condition the evolution of the economy and employment in the short and long term if the foundations for significant growth in productivity are not established. Specifically, a negative impact is expected on net job creation that could cost between 20,000 and 75,000 jobs in 2019. In the medium term, without an increase in productivity to compensate, the impact could be greater, affecting more than 160,000 jobs. This would impact especially vulnerable groups, as well as sectors and regions whose contracts are tied to the minimum wage. In order to mitigate these negative repercussions from the minimum wage hike, it should be accompanied by greater efficiency in active labor market policies.

Risks on the rise and uncertainty remains elevated

In the external environment, a high level of uncertainty remains over economic policy. First of all, trade tensions between the U.S. and China remain and will continue to put the future of global trade at risk. Second, changes to U.S. monetary policy continue conditioning adjustments to investment portfolios and greater volatility in flows to emerging markets. In Europe, the probability of not reaching an agreement on the United Kingdom’s withdrawal from the European Union has increased. Furthermore, although uncertainty is declining over reductions to Italy’s public deficit, tensions related to social unrest in France and other European countries has risen.

Risks also remain in Spain. Uncertainty over economic policy continues to be elevated. In terms of fiscal policy, it is not clear whether the 2019 government budget will be approved. Even if it is implemented, the measures announced by both the national government and other public authorities will not be sufficient to meet the deficit target of 1.3% of GDP by the end of this year. This is without taking into account the high level of public expenditure, which could increase as elections approach. Therefore, depending on the approval of the government budget, the imbalance in public finances will remain between 2.0% and 2.3% of GDP. At the same time, the lack of consensus regarding the measures needed to address the imbalances and structural limitations still present in the Spanish economy is concerning.