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Business and confidence indicators reinforce the optimistic messageBusiness and confidence indicators reinforce the optimistic messageBusiness and confidence indicators reinforce the optimistic messageBusiness and confidence indicators reinforce the optimistic messageBusiness and confidence indicators reinforce the optimistic messageBusiness and confidence indicators reinforce the optimistic messageBusiness and confidence indicators reinforce the optimistic messageBusiness and confidence indicators reinforce the optimistic message

GDP is reducing its rate of contraction and the signs of an incipient recovery are gradually being confirmed. In 2Q 2013, GDP shrank by 0.1% quarter-on-quarter, 0.3 percentage points less than in 1Q 2013. Support by the foreign sector was once again crucial, with a 0.2 p.p. contribution to growth, the same as in 1Q 2013, while domestic demand reduced its negative contribution slightly (–0.3 p.p. in 2Q 2013 vs. –0.5 p.p. in 1Q 2013). In line with this trend, the labour market also showed the first signs of stabilising: in 2Q 2013 the number of employees posted one of its largest rises in the last few years (149,000 people) and the unemployment rate fell for the first time since the second recessionary phase started in 3Q 2011. Leading business and confidence indicators for 3Q 2013 augur an incipient return to positive growth rates, albeit modest ones. Our scenario of macroeconomic projections would therefore be confirmed, with 0.1% quarter-on-quarter growth in the two last quarters of the year. With this, the annual rate of change in GDP would stand at –1.2%, 0.2 percentage points above our previous forecast due to the base effects from the revision of GDP's historical series. Should this trend consolidate in 2014, growth will reach 0.8%.

Our scenario contrasts with the IMF's more pessimistic view. In its annual report on the Spanish economy, the IMF gave an overall positive evaluation of the advances made in terms of macroeconomic adjustments and reforms carried out to date. However, its new projection scenario is markedly more pessimistic that ours and even the IMF's own scenario from last April: it predicts a change in GDP of –1.6% in 2013 and of 0.0% in 2014 (April IMF forecast: –1.6% and 0.7% respectively). Perhaps the most worrying note is the medium-term outlook: growth will not go above 1% until 2018. This pessimism results both from the negative effect on growth of greater fiscal consolidation than previously planned (general government deficit in 2014: 5.9% vs. 6.9% forecast in April) and also scepticism regarding the capacity of the labour reform to improve the dynamics of the labour market. With regard to the effect of fiscal consolidation, the IMF believes its impact on growth will be greater than in other European countries. The adjustment in the structural deficit planned for Ireland, Greece or Portugal does not differ greatly from the one planned for Spain. However, in these countries the IMF expects positive growth rates, something that is surprising as, to date, growth in Spain has held up relatively better.

The labour market is of most concern: in the IMF's scenario, jobs will not be created until 2016 and unemployment will continue above 25% until 2018. According to our projections, however, the consolidation of the incipient recovery process should help the 2014 unemployment rate to fall below its 2013 figure. To boost the labour market, the IMF recommends furthering some aspects of labour reform, in particular: increasing internal flexibility, reducing the dual nature of contracts and improving job opportunities. Some of the effects from the reform have probably yet to materialise and, in this respect, it is too soon for any definitive diagnosis. In any case, according to the IMF,  increasing flexibility would help to boost job creation during the recovery.

For its part, the government has evaluated the labour reform positively. As it had undertaken with the EU, the government presented a report with a positive appraisal of the effects of the labour reform passed one year ago.
Wage moderation, which has helped to regain lost competitiveness, and increased flexibility (for example, the higher number of people working a shorter day) have helped to stabilise the labour market. Specifically, the government estimates that 225,000 jobs have been saved thanks to the reform. However, the Minister for Employment and Social Security, Fátima Báñez, has announced that the government is working on reducing the number of contracts from 41 to 5 to make it easier to employ workers while providing them with legal backing. The OECD, for its part, will present an independent report evaluating the labour reform before the end of the year.

The good start to the tourist season and the dynamism of export sectors are supporting job creation. Although
the start of the tourist season usually boosts labour market trends, this year has exceeded expectations. The number of employees posted one of the biggest increases seen in the last few years (149,000 in 2Q 2013). Moreover, unlike what normally happens in 2Q, the labour force shrank (–76,000) (see the Focus «Examining the drop in the labour force»). All this reduced the unemployment rate by 0.9 percentage points to 26.3%. The main issue is to determine whether this incipient recovery in the labour market goes beyond the seasonal boom typical in 2Q and is supported by structural factors. In this respect, a pattern can be seen of greater job creation in export sectors, reflecting the good results of the effort being made to internationalise Spanish firms. Specifically, the rise in employment in 2Q was 6.8% in industries with a relative weight of sales abroad greater than 50%, while employment fell by 8.8% in those sectors with a relative weight below 20%. The improvement seen in employment expectations in July, mainly in industry and retail sales, reinforces these signs of stabilisation seen in the labour market.

The end of the euro area's recession is encouraging the foreign sector's good performance. In 2Q 2013, the main economies of the euro area grew further (Germany: 0.7% quarter-on-quarter; France: 0.5% quarter-on-quarter), while in the periphery the intensity of the recession lost steam. With the recovery in European demand, Spanish exports to the euro area rose notably (9.6% vs. –3.2% in 1Q 2013) while exports to outside the euro area lost some of their strength due to the slowdown in the emerging countries (13.2% vs. 13.7% in 1Q 2013). Visits by foreign tourists in July (7.9 million) confirm the positive trend of the last few months. This year could see the all-time high of 2008 being matched, namely 59.4 million tourists.

Leading business and confidence indicators reinforce this optimistic message. Available indicators for 3Q point to
the consolidation of the recovery although this will be very gradual and fragile. Supply indicators are performing the best. Although industrial production continues to contract (–1.9% year-on-year in June), the increase in industrial orders from the euro area (0.7% year-on-year) and the smaller decline in national orders (–5.6% year-on-year) point to a possible change in trend. Orders from outside the euro area are losing steam but have still seen the most growth (5.5% year-on-year). The PMI manufacturing index fell slightly in July (49.8
vs. 50.0 in June) but the advance of the services sector (48.5 vs. 47.8 in June) meant that the composite PMI is gradually approaching the value of 50, the boundary between expansion and contraction. Demand indicators continue to fall, albeit at a slower rate. Retail sales dropped by 3.5% in July (–5.0% in 2Q 2013) and consumer confidence, although still below its historical average, increased significantly.

No let-up in compliance of the central government budget target. The government deficit reached 4.4% of GDP in July, 0.1 percentage points less than in 2012. In spite of this improvement, the central government has already reached the deficit target set for the whole year (3.8% of GDP). Additional effort will therefore be required in the second half of the year to meet the target (see the Focus «Deficit target: a tough second half to the year»). Consequently, we have revised our deficit forecast upwards by 0.4 percentage points to 6.9% in 2013 and 6.2% in 2014. In any case, the fact that there may be a slight deviation does not seem to be affecting the financial markets for now: the risk premium has fallen notably and the Treasury's auctions were successful this summer.

House prices have yet to bottom out. Weak demand and the large stock of unsold housing are continuing to push prices down (–2.4% quarter-on-quarter in 2Q 2013). With this, the cumulative fall since 2008 is now 29.5% and house prices are at the levels of 2004. For their part, free house sales rose by 1.8% year-on-year in 2Q 2013, boosted by sales of second-hand homes, placing the number of free homes sold at around 290,000 a year. In the medium term, we expect the economic recovery to help consolidate these figures.

The upward trend in the NPL rate is sharpening while past-due notes are falling. In June, non-performing loans rose by 6.2 billion euros, raising the NPL rate by 0.4 percentage points to a new historical high of 11.6%. This partly reflects the application of stricter criteria to classify refinanced loans. On the other hand, the trade credit NPL rate seems to be falling slightly: past-due notes accounted for 3.6% of notes due in June, thanks to the improvement in the quality of trade credit being granted.

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