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Spain 2019-2020: Riding the economic slowdown wave

 

growth expected to decline to +2.3% in 2019e

After four consecutive years of economic growth rates in excess 3%, the economic slowdown was evident in the 2018 figure: +2.5%. We expect a moderate reduction in this rate to +2.3% in 2019e and +2.1% in 2020e, although downwards pressures may lead to additional revisions. However, Spain may surpass EU growth rate once again in 2019e by 0.6pp.

The external and internal pressures

We identify three main external pressures for the Spanish growth in 2019e and 2020e: (a) the economic slowdown worldwide and mainly in the EU, (b) the ongoing risk of a commercial war due to US new politics; and (c) the political instability derived from Brexit, and extremist parties. We also identify four additional internal pressures: (a) the savings ratio of the households is at its minimum historical (4.7% of GDI in 3Q18) and may start to rise should any risk materialize; (b) the gains on competitiveness based on salaries control have come to an end; (c) the new electoral wave (general, municipal, regional and European elections in April–May, 2019) may prevent cost conscious policies; and (d) the lack of a reforms’ agenda to solve the structural problems of our economy, principally, pensions and precarious employment.

A case for a soft–landing scenario

After the last crisis hard hit the Spanish economy, the fears of a hard–landing are understandable. However, we believe that a soft–landing scenario is the most likely outcome. The main differences between the Spain 2019 and the Spain 2007 are: (a) the private financial leverage has declined to European standards (c. 135% of GDP); (b) the investment in residential construction has reduced its weight in GDP to 5.6%; and (d) the current account balance is positive.

Which economic indicator should we track?

We reckon that the speed and depth of this economic slowdown has to be checked in the forthcoming months. The high frequency data that have to be tracked on our view are: (a) Social Security contributors, (b) retail sales, (c) electricity consumption, (d) industrial production, (e) services PMI, (f) imports and exports and (e) the economic sentiment indicator (ESI), specifically the consumer confidence indicator. Most of these indicators have already shown lower or even negative growth rates than a year ago. Let’s wait for these data!