eurozone forecast summer 2011 spain

8/6/2019 Eurozone Forecast Summer 2011 Spain

1/8

AustriaBelgium

Cyprus

Estonia

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Malta

Netherlands

Portugal

Slovakia

Slovenia

Spain

Ernst & Young Eurozone Forecast Summer edition June 2011

Eurozone


2/8

Published in collaboration with

17 Eurozone countries

Outlook for Spain

Ernst & Young Eurozone Forecast Summer edition June 2011

Spain

Portugal

France

Ireland

Finland

Estonia

Netherlands

Belgium

Luxembourg

Slovakia

Austria

Slovenia

Italy

Greece

Malta

Cyprus

Germany


3/8

1Ernst & Young Eurozone Forecast Summer edition June 2011 | Spain

HighlightsSpain still ghting

to distinguish itselffrom the smallerperipherals

The economic landscape remains fragile,

with a rapid turnaround unlikely amid

ongoingscaltightening,together

with deleveraging in the private sector.

Domestic demand will contract this year

undertheburdenofthescalsqueeze

and the ongoing weakness of the labor

market, leaving net trade as the driver

of growth. We forecast GDP growth of

just 0.7% in 2011 as a whole, picking up

only modestly to 1.2% in 2012.

Activity in the Spanish economy

continuedtoexpandintherstmonthsof 2011, driven by strong exports and a

surprise rebound in public expenditure,

whichlikelyreectedtemporary

overspending before the regional and

local elections in May. GDP grew by

0.3% in Q1 when compared with the

previousquarter,bringingtheannual

rate of growth to 0.8%.

The near-term outlook appears

particularly unfavorable for investment

expenditure, which we forecast tocontract by 4.5% this year, representing

the fourth consecutive annual decline.

While business capital outlays are

expected to decline by 3%, residential

investment is forecast to fall by more

than 13% as the construction sector

continues to shrink.

Consumer spending growth will

also remain sluggish while the dire

situation in the labor market persists.

Unemployment rose to a 14-year high

of 21.3% of the workforce in Q1, up

from20.3%inthepreviousquarter.

Withinationrunningatanannual

rate of 3.5% in April, this will act as a

further drag on incomes. These factors,

combined with the need for households

to reduce debt, are expected to limit

consumer spending growth to just 0.1%

in 2011, with only a modest acceleration

to 0.6% in 2012.

Spain made good progress with its

scalconsolidationlastyear,cutting

thebudgetdecitby1.9percentage

points(ppt)to9.2%ofGDP.Even

moreaggressivescaltighteningis

planned for 2011, with the Government

targetinga6%decit.Weremain

cautiously optimistic about the

outlook,forecastingadecitof6.6%

of GDP, only narrowly higher than the

Governments target. Nevertheless,such achievements are threatened by

political uncertainty, the surfacing of

moredecitsfromlocalgovernments

and slow progress with reforms.

Much of the markets worries about

Spain relate to the state of the banking

sector and the potential for spillover

intopublicnances.Inthisregard,the

latest data is not reassuring, with the

bad loans ratio having soared to a

15-year high of 6.2%.

The Spanish Government has unveiled

a second round of restructuring for the

regional savings banks (cajas) to restore

condenceinthenancialsystem.On

top of the 15 billion already spent on

their recapitalization, the Bank of Spainestimated in March that the banking

system needs an additional 15 billion

of capital. Although this sum appears

manageable, independent analysts

estimate that the cost of recapitalizing

the cajas could actually be as high as

120 billion. If these higher estimates

prove correct, this could potentially

derailthescalconsolidationeffort.


4/8

2 Ernst & Young Eurozone Forecast Summer edition June 2011 | Spain

The Spanish economys slow recovery

continued in Q1 Activity in the Spanish economy continued to

expand in the rst months of 2011, albeit at a

sluggish rate. GDP grew by 0.3% in Q1 when

compared with the previous quarter, bringingthe annual rate of growth to 0.8%.

Foreign trade continued to provide the main

impetus to the expansion, courtesy of

relatively robust export growth combined with

a meager expansion of imports. But public

expenditure also rebounded, perhaps

reecting temporary overspending before the

regional and local elections in May. Other

components of domestic demand remained

weak, however, reecting the ongoing scal

tightening at the federal level. Consumer

spending remained at on the quarter, whilexed investment continued to contract

sharply, falling by 1.4%.

putting GDP on track to expand by

just 0.7% in 2011 as a wholeThe economic landscape remains fragile, with

a rapid turnaround unlikely amid ongoing scal

tightening, together with deleveraging in the

private sector. Domestic demand will contractthis year under the burden of the scal

squeeze and the ongoing weakness of the

labor market, leaving net trade as the main

driver of the recovery. We forecast GDP

growth of just 0.7% in 2011 as a whole,

picking up only modestly to 1.2% in 2012 as

domestic demand begins to recover. In fact,

we expect growth in Spanish GDP to remain

below 2% per year to 2015, as the rebalancing

of public nances and restructuring of the

economy will be a prolonged process.

Investment to contract for the fourthconsecutive yearThe near-term outlook appears particularly

unfavorable for investment, which we forecast

to contract by 4.5% this year, representing the

fourth consecutive annual decline. Positive

growth of 1.6% is expected in 2012, however,

driven by corporate investment as spare

capacity in the economy begins to tighten,

especially in the export sector.

Recent surveys signal that the business

environment continues to be challenging,

despite rising demand for Spanish exports.

The May Purchasing Managers Index (PMI)

for the manufacturing sector signaled a

contraction for the rst time in eight months

as both output and new orders declined. The

services PMI was also downbeat, showing only

a fractional increase in activity in May, with

new business continuing to fall. Both sectors

reported ongoing job cuts. Against this

background, we forecast business investment

expenditure to contract by 3% this year,

although positive growth of 2.8% is expected

in 2012.

Spainstillghtingtodistinguish itself fromthe smaller peripherals

Source: Oxford Economics

Table 1

Spain (annual percentage changes unless specied)

2010 2011 2012 2013 2014 2015

GDP -0.1 0.7 1.2 1.6 1.6 1.9

Private consumption 1.2 0.1 0.6 0.8 0.8 1.1

Fixed investment -7.6 -4.5 1.6 3.7 4.3 3.9

Stockbuilding (% of GDP) 0.4 0.6 1.0 1.0 1.0 1.1

Government consumption -0.7 -0.7 -1.4 0.1 1.4 2.3

Exports of goods and services 10.3 10.2 6.0 7.4 6.5 6.6

Imports of goods and services 5.4 4.2 4.4 6.2 6.4 7.0

Consumer prices 2.0 3.3 2.0 1.4 1.5 1.5

Unemployment rate (level) 20.1 20.5 19.9 19.1 18.5 17.6

Current account balance (% of GDP) -4.5 -4.4 -3.0 -2.8 -2.6 -2.1

Government budget (% of GDP) -9.2 -6.6 -4.7 -3.4 -3.1 -2.7

Government debt (% of GDP) 62.0 67.4 70.6 71.8 72.6 72.8

ECBmainrenancingrate(%) 1.0 1.3 2.3 3.1 3.5 3.9

Euroeffectiveexchangerate(1995=100) 120.7 122.4 121.8 119.5 115.2 113.3

Exchange rate ($ per ) 1.33 1.42 1.38 1.33 1.27 1.24


5/8


Figure 1

GDP and industrial production

Figure 2

Unemployment rate

Source: Oxford Economics Source: Oxford Economics

By contrast, residential investment is forecast to contract by more than

12% this year, with positive growth not expected to return until 2013.

Activity in the real estate sector will continue to shrink as construction

rms are burdened by strained balance sheets, a stock of over one

million unsold homes and falling house prices. Indeed, the pace of

house price declines appears to have accelerated recently, with pricesdown by 4.6% in the year to Q1, compared with a 3.5% annual pace of

decline at the end of last year. This may be linked to a number of

factors, including the end of a tax allowance for mortgage interest

payments and rising interest rates. Between the beginning of the year

and early May, the one-year Euribor rate, a money market measure that

most Spanish mortgages use as a reference rate, had risen by over

60 basis points (bp). With house prices still overvalued on several

measures, further price declines are expected this year and next.

Labor market situation remains dismal, but conditions

are stabilizingConsumer spending growth will also remain sluggish while the dire

situation in the labor market persists. Unemployment in Spain rose to a14-year high of 21.3% of the workforce in Q1, up from 20.3% in the

previous quarter. We think that the unemployment rate is close to its

peak, especially if new labor market liberalization measures come into

force. A return to positive, albeit sluggish, employment growth is likely

toward the end of the year, helped by positive spillovers from the

exports sector. However, this forecast remains subject to a high

degree of uncertainty.

It should be borne in mind that, although the number of Spanish

unemployed appears very high, the labor market situation in Spain is

rather more benign than the headline numbers would suggest. This is

because unregistered employment represents a large and growing share

of total employment in Spain. Many small- and medium-sized enterprises

have employees whom they pay fully or partially in cash to avoid tax andsocial security obligations. Although the discrepancy is hard to quantify,

this means that the effective unemployment rate is somewhat lower

than the reported data. The implications for consumer spending are

therefore somewhat less dire than the ofcial unemployment rate would

suggest, although this situation does make the ongoing scal

consolidation more difcult by lowering tax revenues. This is partly why,

despite a much higher ofcial unemployment rate, we forecast more

robust private consumption in Spain than in Ireland, for instance.

High ination will act as a further drag on

consumer spendingRising ination is acting as a further drag on household incomes.

The harmonized consumer price index (HICP) for April showed inationrunning at an annual rate of 3.5%, up from 3.3% in March. Although

higher energy prices have contributed to the rise in the headline index,

core ination (which excludes volatile energy and food components)

also picked up to 2.1% in April from a 1.7% rate of increase the previous

month. However, with domestic demand remaining weak,

unemployment high, and the start of a new rate-hike cycle by the

European Cental Bank (ECB), we expect ination to moderate later

this year, especially after July when the VAT rise falls out of the

year-on-year comparison.

-25

-20

-15

-10

-5

0

5

10

1980 1984 1988 1992 1996 2000 2004 2008 2012

% year

Industrial

production

GDP Forecast

5

10

15

20

25

1980 1984 1988 1992 1996 2000 2004 2008 2012

%

Forecast


6/8

4 Ernst & Young Eurozone Forecast Summer edition June 2011 | Spain

Figure 3

Contributions to GDP growth

Figure 4

Government balance and debt

Nevertheless, these factors, combined with the need for households to

reduce debt, are expected to limit consumer spending growth to 0.1% in

2011, with only a modest acceleration to 0.6% in 2012.

Fiscal problems in Greece have placed renewed focus

on SpainSpain made good progress with its scal consolidation last year, cutting

the budget decit by 1.9ppt to 9.2% of GDP. Even more aggressive

scal tightening is planned for 2011, with the Government targeting a

6% decit. We remain cautiously optimistic about the outlook,

forecasting a decit of 6.6% of GDP, only slightly higher than the

Governments target.

Spains rapid and decisive action to tackle its public nances, together

with structural reforms to boost competitiveness and trend output,

have not gone unnoticed by nancial markets. Since mid-2010, spreads

on Spanish sovereign debt appear to have decoupled from government

bond spreads in the rest of the periphery. Still, concerns that Greece

may be moving toward a restructuring of its government debt haverecently hit broader investor sentiment in Eurozone bond markets and

revived fears that the debt crisis could envelop Spain. Spreads on

Spanish government bonds had risen back above 220bp in early May,

and there remains a risk of further contagion that would increase the

chances that Spain could also require rescue loans.

Indeed, the path to scal sustainability is not without risk, in part due to

the role of scal decentralization in Spain. Most of the improvement in

Spains public nances has so far been delivered by the central

Government, while only eight of the countrys 17 regional governments

met their decit goal for last year. The ability of the regions and

municipalities to stick to their scal consolidation strategies remains aconcern going forward.

The health of the banking sector remains a key riskMuch of the markets worries about Spain relate to the state of the

banking sector and the potential for spillover into public nances. In this

regard, the latest data is not reassuring. While ECB lending to Spanish

banks has continued to contract, falling to 48.7 billion in February

compared with a peak of 145 billion, the bad loans ratio has soared to

a 15-year high of 6.2%. Bad loans held by Spanish banks now amount to

over 112 billion.

The deterioration in credit quality is closely linked to the bursting of the

house price bubble. With further house price declines likely, this willhave a particularly large impact on the cajas that are heavily exposed to

the construction sector. The Spanish Government has unveiled a second

round of restructuring for the cajas to restore condence in the

nancial system. On top of the 15 billion already spent on their

recapitalization, the Bank of Spain estimated in March that the banking

system needs an additional 15 billion of capital. Although this sum

appears manageable, independent analysts estimate that the cost of

recapitalizing the cajas could actually be as high as 120 billion. If these

higher estimates prove correct, this could potentially derail the scal

consolidation effort.

Source: Oxford Economics Source: Oxford Economics

Spainstillghtingtodistinguish itself fromthe smaller peripherals

0

10

20

30

40

50

60

70

80

1992 1995 1998 2001 2004 2007 2010 2013

-12

-10

-8

-6

-4

-2

0

2

4

% of GDP

Forecast

Government debt

(right-hand side)

Government budget balance

(left-hand side)

% of GDP

-8

-6

-4

-2

0

2

4

6

8

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

% year

Forecast

GDP

Net exports

Domestic

demand


7/8


Follow the Eurozonesprogress online

Please visit www.ey.com/eurozone to: View video footage of macroeconomists and Ernst & Young

professionals discussing the future of the Eurozone and

its impact on businesses

Use our dynamic Eurochart to compare country data over

ave-yearperiod

Download and print the Ernst & Young Eurozone Forecast

and forecasts for the 17 member states

Or follow our ongoing commentary on Twitter at

http://twitter.com/EYnews


8/8

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and

advisory services. Worldwide, our 141,000 people are united by

our shared values and an unwavering commitment to quality. We

make a difference by helping our people, our clients and our wider

communities achieve their potential.

Ernst & Young refers to the global organization of member firms of

Ernst & Young Global Limited, each of which is a separate legal entity.

Ernst & Young Global Limited, a UK company limited by guarantee,

does not provide services to clients. For more information about our

organization, please visit www.ey.com

2011 EYGM Limited.

All Rights Reserved.

EYG No. AU0884

In line with Ernst & Youngs commitment to minimize its

impact on the environment, this document has been printed

on paper with a high recycled content.

This publication contains information in summary form and is therefore intended for

general guidance only. It is not intended to be a substitute for detailed research or the

exercise of professional judgment. Neither EYGM Limited nor any other member of the

global Ernst & Young organization can accept any responsibility

for loss occasioned to any person acting or refraining from action as a result of any

material in this publication. On any specific matter, reference should be made to the

appropriate advisor.

The views of third parties set out in this publication are not necessarily the views of the

global Ernst & Young organization or its member firms. Moreover, they should be seen in

the context of the time they were made.

EMEIA MAS 132.0611

About Oxford Economics

Oxford Economics was founded in 1981 to provide independent

forecasting and analysis tailored to the needs of economists and

planners in government and business. It is now one of the worlds

leading providers of economic analysis, advice and models,

with over 300 clients including international organizations,government departments and central banks around the world, and a

large number of multinational blue-chip companies across the whole

industrial spectrum.

Oxford Economics commands a high degree of professional and

technical expertise, both in its own staff of over 70 professionals

based in Oxford, London, Belfast, Paris, the UAE, Singapore, New York

and Philadelphia, and through its close links with Oxford University

and a range of partner institutions in Europe and the US. Oxford

Economics services include forecasting for 190 countries, 85 sectors,

and over 2,500 cities sub-regions in Europe and Asia; economic impact

assessments; policy analysis; and work on the economics of energy

and sustainability.

The forecasts presented in this report are based on information obtained from public sources

that we consider to be reliable but we assume no liability for their completeness or accuracy.

The analysis presented in this report is for information purposes only and Oxford Economics

does not warrant that its forecasts, projections, advice and/or recommendations will be

accurate or achievable. Oxford Economics will not be liable for the contents of any of the

foregoing or for the reliance by readers on any of the foregoing.

eurozone forecast summer 2011 spain

Documents