A good start to the year

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May 10th, 2016

GDP grew in Q1 and maintained its rate of growth at 0.8% quarter-on-quarter, 0.1 pp more than predicted (3.4% year-on-year). Judging by the robust nature of consumption indicators, domestic demand, boosted by continued job creation, continued to be the driving force behind this growth. On the other hand, foreign demand more than likely deducted a little from the growth in GDP: the good performance by exports has occurred together with a sharp increase in imports, pushed up by dynamic domestic demand. Nevertheless, this year the foreign sector is expected to make a positive contribution to growth again, albeit gradually and at a moderate rate, thanks to the strong increase in exports and, to a lesser extent, the slight slowdown in imports.

Solid growth prospects for 2016. According to CaixaBank Research's estimates, the Spanish economy will grow by 2.8% year-on-year in 2016 (compared with 3.2% in 2015). In accordance with this scenario, indicators are still at high levels although some seem to be slowing down a little, such as the PMI for services which fell slightly in Q1 (to 54.7 points, compared with 55.9 in Q4), although it is still clearly in the expansionary zone. Another activity indicator, industrial production, also posted notable but lower growth (2.6% year-on-year in January and February, on average, compared with 4.2% in Q4). The same message of solidity can be deduced from the upward trend in production capacity utilisation for industry, which is now around its historical level in spite of having recorded a certain slowdown in Q1. With regard to demand indicators, while the growth rate for retail and consumer goods in Q1 was still solid and had even speeded up compared with Q4, consumer confidence dipped a little early in the year, partly due to the recent episode of financial turbulence. Although the information available for Q2 is still very incomplete, the business confidence index shows that this positive trend has continued in the current quarter. On the whole, the trend in all indicators therefore reinforces the view of solid but more moderate growth for this year.

Changes in the measures to correct the budget deficit. The 2016-2019 Stability Programme presented by the government and still pending Brussels' approval contains a more relaxed plan for fiscal consolidation. Specifically, the deficit predicted for 2016 has been raised by 0.8 pps to 3.6% (from 2.8%) and the task of reducing the deficit to below 3%, set by the Stability and Growth Pact, has been postponed until 2017. The new deficit target for 2016 is slightly below the 3.9% predicted by CaixaBank Research. However, lacking details on the specific measures contained in the new Stability Plan, we have revised upwards our deficit forecast for 2017 to 3.1% instead of the previous figure of 2.1% (see the Focus «Spain's budget deficit: eppur if muove (and yet it moves)?» in this Monthly Report). The upward revision of the budget deficit will entail higher growth for the economy, so we have placed our 2017 growth forecast at 2.4%, a figure in line with the new macroeconomic situation presented by the government.

The recovery in employment is still on track. According to LFS data there was notable growth in employment in Q1, recording a quarter-on-quarter change of 0.9%, seasonally adjusted (compared with 0.8% in Q4). This good performance by employment was expected given the monthly increases in the number of registered workers affiliated to Social Security from January to March, totalling 116,260 people (seasonally adjusted). By sector, services saw strong growth, in spite of being affected by Easter falling entirely in March this year, unlike last year. The increase for employment in industry and construction was slightly more contained than in previous quarters but was still high. The fact that the private sector has remained dynamic over the last few months, with a high rate of year-on-year growth, namely 3.5% in Q1 (compared with 2.1% in the public sector), is helping to reinforce the recovery. The data, therefore, are gradually confirming the scenario of strong improvement in employment which, however, should slow down gradually over the coming months.

Unemployment picks up slightly in Q1 but for seasonal reasons. The usual dip in employment at the beginning of year, on this occasion totalling 64,600 people (not seasonally adjusted), caused a slight increase in the unemployment rate 0.1 pp up to 21.0%. This rise would have been even bigger if the labour force had not decreased (by 52,700 people). It should be noted, however, that this temporary upward movement does not imply that the downward trend in the unemployment rate has ended and we expect it to continue and finish the year below 20%.

The improved labour market is helping private sector deleveraging to progress. The downward trend in the debt of households and non-financial firms continued in 2015 Q4, standing at 67.5% and 104.6% of GDP, respectively. The ratio between the stock of private debt and GDP will continue to fall over the coming quarters, a process that will still be compatible with an increase in flows of credit towards households and companies thanks to the rise in household gross disposable income and in corporate earnings.

The ECB's expansion of monetary stimuli is boosting credit. According to the bank lending survey in Spain, in Q1 the criteria to grant loans to households for consumption and to purchase housing were relaxed, while the criteria for SMEs and large firms remained unchanged. Similarly, in February the NPL ratio fell to 10.1% of credit as bad debt continued to shrink at a faster rate than total credit. This is making bank balance sheets increasingly healthy, a necessary ingredient for the supply of credit to increase. All this therefore suggests that the flow of credit towards households and firms will grow over the coming months.

The improvement in the quality of bank balance sheets can also be seen in the good trend of the real estate market. Both the notable rate of job creation, which has been key to increasing the purchasing power of households, and also easier conditions to grant loans by banks, have boosted house sales. Specifically, these grew by 9.9% year-on-year in February (cumulative over 12 months), reaching levels similar to those at the start of 2012. It should be noted that the pressure on prices varies greatly from region to region as there are also great regional differences between the stock of new housing available for sale and the growth in sales.

Inflation fell by 0.3 pps in April, down to –1.1%, while the CaixaBank Research forecast predicted a slight recovery (0.1 pp). Lacking the breakdown by component, the drop seems mostly due to the fall in the price of electricity and package holidays, this last case due to the fact that Easter fell entirely in the month of March this year. This decline in inflation is the result of temporary factors and consequently does not alter the expected scenario of a gradual recovery in prices.

Low oil prices boost the balance of trade through savings in the energy bill. Nominal goods exports rose by 3.0% year-on-year in February (cumulative over three months), more than imports which grew by 1.9%. However, if we exclude energy goods, the growth in imports is still high and larger than that of exports, reducing the non-energy balance. Given that the outlook over the next few months is for the consumption of durables to continue increasing at a good rate (and given that Spain imports around two thirds of its consumer durables), this strong trend in non-energy imports is likely to continue (see the Focus «Spanish imports during the recovery» in this Monthly Report). Nonetheless, in 2016 the energy balance and income balance will continue to improve thanks both to lower oil prices and interest rates. The services balance should also improve, judging by the increase in exports of non-tourism services and the good figures posted for the tourism industry. In this respect, of note is the sharp increase in total expenditure of the international tourists visiting Spain, namely 8.0% year-on-year in February. Regarding the balance of goods, new orders for Spanish industry received a boost in February from the foreign market, both from the euro area and from the rest of the world, which suggests that goods exports might perform better over the coming months, supported by less uncertainty regarding developments in the global economy.