Spanish government too optimistic on 2020 growth - Capital Economics
European Economics

Spanish government too optimistic on 2020 growth

European Economics Update
Written by Jessica Hinds

Spain’s new government has downgraded its forecasts for economic growth and eased up on the planned pace of budget deficit reduction. But we think that GDP growth this year will be even slower than it expects, due to weakening domestic demand and the multiple headwinds for exporters.

  • Spain’s new government has downgraded its forecasts for economic growth and eased up on the planned pace of budget deficit reduction. But we think that GDP growth this year will be even slower than it expects, due to weakening domestic demand and the multiple headwinds for exporters.
  • Earlier this week, the left-wing coalition government announced that it expects GDP growth to slow from 2019’s 2.0% to 1.6% in 2020. That’s a bigger slowdown than the previous Socialist government estimated and brings it into line with the IMF, the EC and the consensus. But we think that the government is still too optimistic. Our own forecast is for GDP growth to be weaker this year, at 1.3%. (See Chart 1.) There are three key reasons why we expect growth to fall short of the government’s expectations.
  • First, we doubt that household spending growth will pick up this year. Granted, the announcements last month of a 5.5% hike in the minimum wage for 2020 as well as boosts to pensions and public sector salaries will increase disposable incomes. But the proportion of workers earning the minimum wage is small. And with household saving as a share of disposable income close to a record low, many households will be inclined to put aside some of the extra income rather than spend it. Meanwhile, employment growth has slowed and surveys of firms’ hiring intentions suggest that this will continue.
  • Furthermore, while the government is right that investment will be a key driver of the slowdown, its forecast for annual growth of 1.3% is very optimistic. To achieve that, investment growth would need to average over 1% q/q throughout 2020. While not impossible, that seems unlikely. After all, the housing market is slowing and indicators such as demand for bank loans and capital goods orders are pointing to continued weakness in equipment investment. And while political uncertainty is unlikely to have a big impact, firms responding to the January PMI survey said that they were delaying investment plans until there was greater clarity; it’s still not clear if or when the government will be able to pass a budget.
  • Finally, we doubt that net trade will offset weakening domestic demand, as it did in Q4. The automobile sector, which accounts for 8% of Spanish industrial production and 10% of its goods exports, is still struggling. Spanish manufacturing is also exposed to coronavirus-related disruption in Chinese suppliers. As a share of manufacturing value added, Spain’s industrial sector is more reliant on intermediate goods imports from China than that of any other major euro-zone economy, Germany included.
  • As part of its set of forecasts, the government also announced that it would be easing up on the pace of deficit reduction. It expects the budget deficit to fall from about 2% of GDP in 2019 to 1.8% in 2020 and is no longer aiming to eradicate the deficit by 2022. If we are right that the economy and inflation will be weaker than it expects, then it is likely to fall short of even those less onerous targets. But even so, and contrary to fears that embracing far-left Podemos would spark a spending splurge, the government still appears committed to fiscal tightening. (See Chart 2.)

Chart 1: Spain GDP Forecasts
(% y/y)

Chart 2: Spanish Government’s Budget Balance Forecasts (% of GDP)

Sources: Refinitiv, Spanish Ministry of Finance, Capital Economics

Sources: Refinitiv, Spanish Ministry of Finance


Jessica Hinds, Europe Economist, +44 20 7808 4067, jessica.hinds@capitaleconomics.com