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The economic recovery continues at a good rateThe economic recovery continues at a good rateThe economic recovery continues at a good rateThe economic recovery continues at a good rateThe economic recovery continues at a good rateThe economic recovery continues at a good rateThe economic recovery continues at a good rateThe economic recovery continues at a good rateThe economic recovery continues at a good rate

The Spanish economy is increasingly dynamic but could cool down slightly in the second half of the year. After the sharp growth in GDP recorded in Q1, the business indicators of the last few months point to GDP growth remaining strong in Q2. This has led us to revise upwards our growth forecast for GDP for the whole of the year by 0.3 pps, to 3.1%. As from Q3 we have maintained a slight slowdown in growth due to the progressive disappearance of that temporary support factors which the Spanish economy has been benefitting from, such as the drop in oil prices and the euro's depreciation. This gradual slowdown in the rate of growth for GDP will continue in 2016, a year for which we expect 2.6% growth.

The IMF improves its growth prospects for Spain. In June, the International Monetary Fund (IMF) notably increased its growth forecast for the Spanish economy compared with its estimates just two months before. Specifically, the forecast was increased by 0.6 percentage points for 2015, to 3.1%, and by 0.5 pps for 2016, to 2.5%. The institution, in its conclusions report after its annual visit to the country, recommends continuing with the agenda of reforms to bolster the country's growth capacity in the medium and long term. Regarding the labour market, the IMF insists on the need to reduce its dual nature and to encourage job creation, for example by linking wage rises to specific conditions in the company. It also urges measures to encourage the growth of SMEs, such as accelerating the implementation of the single market, eliminating regulations that hinder companies from growing in size and encouraging alternative sources of financing. With regard to the macroeconomic adjustments that have yet to be finalised, the IMF asks Spain to continue its efforts to improve fiscal consolidation, reinforce solvency in the banking industry and reduce private debt.

Corporate investment and private consumption appear to drive growth in Q2. Regarding supply indicators, both the PMI manufacturing and services indices are still at levels compatible with a slight acceleration in the rate of growth for investment in capital goods in Q2. The PMI manufacturing index rose to 55.8 points in May, boosted by the increase in new domestic and foreign orders, especially from the euro area. The PMI services index corrected part of the sharp rise seen the previous month but was still at a very high level (58.4 points). Other indicators also provide good news for investment, particularly the good performance by industrial production, whose average growth in the last three months was 2.3% year-on-year, higher than the figure recorded pre-crisis, between 2000 and 2007, which was 1.6% year-on-year on average. Concerning demand, the solid advance of retail and consumer goods, with average growth over the last three months of 3.3% (compared with 2.8% between 2000 and 2007), points to household expenditure increasing sharply in Q2, a rise that, to a large extent, is supported by the pace of job creation.

Favourable trends in the labour market. In May, the number of registered workers affiliated to Social Security increased by 57,721 people (seasonally adjusted), speeding up the year-on-year rate of change to 3.6%. This rise is widespread across all activity sectors, suggesting it is not just a passing phase. The employment expectations of the European Commission also point to the labour market continuing to recover although we will probably see a slight reduction in the sharp increase in employment observed in the first half of the year. Specifically, this index, which measures the intention of entrepreneurs to hire new workers over the next three months, was a little lower in Q2 than in Q1, particularly in industry.

Household wage income picks up. The gross disposable income of households grew by 2.5% year-on-year in Q1 (1.4% in Q4), boosted by the rise in total employee income which, in turn, can be explained both by the good rate of job creation and by higher wages. Specifically, hourly wage costs rose by 0.8% quarter-on-quarter in 2015 Q1 (0.1% in Q4), an upswing that is largely due to the impact in this quarter of the refund to civil servants of 25% of their extraordinary pay from 2012. In any case, over the coming months wages might increase slightly more than the rates recorded in the last three years. In May, the wage rise established in official collective agreements was 0.7% (0.6% in Q1). Moreover, the wage agreement signed this month between employers and the trade unions establishes recommended wage increases of up to 1.0% in 2015 and 1.5% in 2016. The agreement also establishes an inflation guarantee clause to be applied at the end of 2016 should, in 2015 and 2016 as a whole, inflation rise above the agreed wage increase; i.e. more than 2.5%. This indicates a certain change in trend in wage rises which should continue to be very moderate so as not to endanger the gains in competitiveness achieved over the last few years.

Inflation returns to positive figures. The improvement in domestic demand is gradually being reflected, as expected, in price rises. Specifically, the CPI posted a 0.1% change year-on-year in June, representing an increase of 0.3 pps compared with the previous month's rate. The rise in core inflation is also notable, this being more closely related to the performance of consumption, increasing in May by 0.2 pps to 0.5% year-on-year.

The real estate market is showing signs of recovery, particularly in terms of demand: house purchases rose in April by 9.8% year-on-year (according to the cumulative figure over 12 months). This advance is being supported by the improved labour market and better financial conditions, boosting growth in new loans granted to households to purchase housing (between January and April, the number of loans granted was 15.2% higher than in the same four months in 2014). While demand is gaining traction, construction is still lagging behind due to the high levels of stock of empty residential properties for sale. On the other hand, the fall in house prices seems to have bottomed out. Valuation prices shrank by 0.4% quarter-on-quarter in Q1 (–0.1% year-on-year). Although this figure is not very encouraging, two factors point to the adjustment in prices almost being complete. Firstly, the contraction in Q1 offset the surprising rise posted in 2014 Q4 (by 0.5% quarter-on-quarter). Secondly, the effort required by households to buy residential property is now at a sustainable level. House prices are therefore very unlikely to fall much further over the coming months.

The current account surplus continues to grow, standing at 1.0% of GDP in April. Goods exports grew strongly by 7.4% year-on-year in cumulative terms from February to April, boosted by demand from the euro area and the rest of the European Union. Imports increased by 5.7% year-on-year but this figure would have been much higher had it not been for plummeting oil prices, resulting in considerable savings in the import bill. The services component is still the great support for the trade balance thanks to the excellent performance of tourism. Spain received 6.5 million foreign tourists in May, a 6.8% increase on the same period last year. A new annual record is expected to be set in 2015, higher than the 65 million visitors in 2014. These good figures, and the prospect of this trend consolidating for the rest of the year, have led us to improve our forecast for the current balance to 1.5% of GDP. In 2016 we expect the current balance to shrink to 1.2% of GDP once the positive impact of low oil prices disappears, making imports more expensive again.

Considerable growth in the amount of credit granted to the real economy. The figures for new loans granted show a clear upward trend, especially in terms of credit to SMEs. Moreover, according to estimates by the Bank of Spain, the likelihood of companies being granted credit has increased in the last two years. It can also be seen that this probability is significantly higher among companies with a better financial situation, something that was less evident a few years ago. There has also been a continuous decline in the NPL ratio in the banking system. This stood at 12.0% in April, 0.1 pps less than the previous month thanks mostly to a marked drop in doubtful loans (–15.8% year-on-year). We expect the balance of doubtful loans to continue shrinking over the coming months which, combined with a moderate fall in the outstanding balance of credit, will help to reduce the NPL ratio even further. In addition to the improvement of indicators in the banking sector, June also saw progress in the construction of its key pillars. Specifically, Act 11/2015 has been passed regulating the recovery and resolution of credit institutions and investment service firms, establishing the responsibilities, instruments and powers allowing Spanish authorities to resolve the situation of banks with problems of capital in an orderly fashion while protecting their critical functions. The Bank of Spain will be responsible for developing the resolution plan and the bank recapitalisation fund (FROB), as an independent body, will be in charge of implementing this plan.

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