The pace of growth is still robustThe pace of growth is still robustThe pace of growth is still robustThe pace of growth is still robustThe pace of growth is still robustThe pace of growth is still robustThe pace of growth is still robustThe pace of growth is still robustThe pace of growth is still robust

Domestic demand is boosting growth. The data from the National Accounts system confirm that the Spanish economy grew by 0.8% quarter-on-quarter in Q4 thanks to the notable contribution made by domestic demand (0.6 pps). Of note is dynamic private consumption (0.8% quarter-on-quarter) which has benefitted from households' increased purchasing power for several months now, a result of the rate of job creation, the fall in energy prices and improved financial conditions. Domestic demand was also supported by capital goods investment which grew by 1.9% quarter-on-quarter. After several quarters contributing negatively to growth, foreign demand made a positive contribution in the last quarter of 2015 of 0.2 pps thanks to the good trend in exports and the moderate advance made by imports. Nevertheless, for the whole of 2015 foreign demand deducted 0.5 pps from the annual growth in GDP which was 3.2%, while domestic demand contributed 3.7 pps. In 2016 our main scenario predicts that domestic demand will continue to expand although at a more moderate rate, and that foreign demand will make a slightly positive contribution to GDP growth, which we expect to be 2.8%. For the time being the uncertainty related to the political impasse and financial turbulence at a global level are not affecting business indicators. However neither internal nor external risks to economic developments have eased and are still downside. Consequently, for the economic recovery to continue at a good rate, it will be crucial for these sources of uncertainty to gradually diminish over the coming months.

Investment is still robust. After a year with a notable contribution from capital goods investment, the business sentiment index (PMI) in January pointed to a good start to the year. Specifically, the manufacturing index rose to 55.4 points, above the average figure for Q4 (52.5). However, the services index fell slightly and stood at 54.6 points, below its average for Q4 (55.9) but still in a comfortable zone of expansion. The economic sentiment indicator (ESI) published by the European Commission also remained at levels above its historical average in spite of a moderation in optimism in the first few months of the year. In particular, the confidence indicator for the industrial sector has corrected significantly both in January and February, explained mainly by the deterioration in expectations regarding industry's portfolio of orders. It is worth noting, however, that the outlook for future production has improved. The good levels maintained by these indicators in the months of January and February, together with the positive trend in corporate earnings (see the Focus «The points of support for corporate profitability») suggest that the contribution made by investment to GDP growth will remain at a high level in Q1.

Private consumption remains strong. Consumer confidence is still above its historical average in spite of falling slightly in the first two months of the year, reaching –1.4 points after recording large advances in 2015. The good figures for the consumer confidence index in this start to the year point to private consumption continuing to boost growth in 2016.

Job creation is still dynamic. According to data from the National Accounts system, the growth in full-time equivalent employment was 0.6% quarter-on-quarter in Q4. For the year as a whole the percentage change stood at 3.0%, the equivalent of 495,000 net jobs being created. The number of registered workers affiliated to Social Security in January confirmed the favourable trend in employment in 2016. Specifically, contributors grew by 3.2% year-on-year which represents an increase of 24,602 workers affiliated, seasonally adjusted. For its part registered unemployment fell by 8.3% posting a particularly large drop in industry and construction. In spite of these good employment figures, wage increases are still moderate within a context in which there is still extensive underutilisation of the resources in the labour market. Wages rose by 0.7% in Q4, taking the annual increase to a contained 0.9%. Wages agreed in January, however, seem to indicate slightly higher increases of 1.1%.

Inflation surprised again in February by falling to –0.8%, mainly due to the drop in fuel prices and food. This fall, much higher than our forecast, is surprising in a context where the average price of oil in February was higher than in January. However, we expect core inflation, which excludes energy and unprocessed food, to have remained stable at 0.9%, a level very similar to the one observed in the last few months. This drop in inflation, larger than predicted in our main scenario, has led us to revise downward our forecasts. Specifically, we now place inflation at 0.1% for the whole of 2016 (compared with 0.5% previously). According to our estimates, low oil prices will keep inflation in negative terrain until the summer and it will then pick up once the base effect of the slump in oil has disappeared. We therefore expect inflation to recover and come close to 1.6% by the end of year.

The fall in oil prices contributed positively to the foreign sector in 2015 with savings in the energy bill totalling EUR 12 billion. However, in spite of this reduction in the energy deficit and the good performance by non-energy exports which increased by 6.1% year-on-year, the balance of trade only improved by EUR 300 million due to the rise in imports (11.6% year-on-year). The balance of payments ended 2015 with a comfortable surplus of EUR 16.7 billion, equivalent to 1.5% of GDP, an improvement of 0.5 pps compared with 2014 which can mostly be put down to the increase in the balance of primary and secondary incomes and, to a lesser extent, the aforementioned reduction in the trade deficit. In 2016 low oil prices will continue to favour the balance of goods but it is important to continue adopting measures that improve the balance of trade in structural terms, something that will become more evident once oil prices start to recover (see the article «The Spanish economy and oil: a close relationship», in the Dossier of this Monthly Report).

The real estate market consolidates its recovery in 2015. For the year as a whole, house sales rose by 11.1% compared with 2014 while mortgages grew by 19.8% year-on-year, also for the whole of 2015. These figures reflect the greater dynamism in demand which has been boosted by the good performance of the economy, improved financial conditions and high returns from housing compared with other investments (see the Focus «Demand for housing is picking up»). This vigorous demand has affected house prices which rose by 1% quarter-on-quarter in Q4 according to the Ministry of Public Works, while in year-on-year terms prices grew by 1.8%. On the supply side, the National Accounts reflect how investment in building residential properties gradually built up steam in 2015 compared with non-residential construction. Consequently, new building permits grew by 29% in November in comparison with November 2014, according to the cumulative figures over 12 months. The outlook is favourable over the coming months and the upward trend in prices and activity looks like continuing thanks to improved financing conditions and labour market and the shortage of stock in some prime zones. Consequently, the sector will continue to expand although with a highly heterogeneous trend in different provinces.

The increase in bank credit supports growth. The positive trend in new loans to households during 2015, which grew by 20% for the year's cumulative figure, has strengthened domestic demand. New loans to non-financial firms for SMEs rose by 12.9% in the cumulative annual figure and growth in new loans for large firms was 7.7%. Mortgage loans were up by a considerable 33.4%, boosted by the stabilisation of house prices and the increase in real estate transactions. On the other hand, the low non-performing loan rate highlights the healthier state of Spain's banking system. In the last two years non-performing loans have fallen by 3.5 pps from the peak reached in December 2013.

Public debt shows signs of stabilising. Public debt ended the year at 99.0% of GDP. This high level, although somewhat lower than expected, highlights the importance of continuing with fiscal consolidation. In this respect, the European Commission warned that the high amount of debt makes the Spanish economy vulnerable to shocks in international financing conditions. Given this situation, there is very little margin to adopt expansionary fiscal policy.