In brief (March 1, 2013)
We expect that the Popular Party will remain in office until the end of the parliamentary term in late 2015, and that it will work to improve the public finances and implement structural reforms. We forecast a GDP contraction of 1.6% in 2013, after which growth will remain subdued. Several risks weigh on our forecast and could force the country to apply for a credit line from the European Stability Mechanism, allowing the European Central Bank to intervene directly in secondary bond markets.
Spain at a glance: 2013-17
The conservative Popular Party (PP), led by Mariano Rajoy, has a large majority in parliament. The economy will remain weak as it undergoes a correction of its imbalances. The Economist Intelligence Unit’s central scenario is that Spain will remain in recession in 2013. GDP growth will remain subdued even in the second half of the forecast period, with significant downside risks attached to the forecast. The public finances will continue to post large deficits throughout the forecast period, with the government missing its targets by some distance. The debt/GDP ratio will rise significantly as the government has to shoulder the costs of the bank bail-out. Spain has been forced to access emergency financial support from its euro zone partners to prop up its banking sector. We expect the government to apply for some sort of sovereign bail-out from the euro zone during 2013, although it may have some scope to delay this or even avoid it altogether. A bail-out would probably take the form of an enhanced credit line, aimed at reducing yields for short-term debt but without complete loss of market access.
Key changes from last month
The corruption scandal involving senior PP figures is continuing to occupy the centre of the political stage, and is expected to continue to weaken the government’s credibility.
Economic policy outlook
Following its success in issuing a US$2bn five-year bond on February 19th, the Treasury was able to tap the markets again two days later, issuing more than the targeted €4bn in medium- and long-term debt at reasonable rates.
Spain’s economic contraction worsened in the final quarter of 2012, with real GDP falling by a seasonally adjusted 0.8% quarter on quarter and by 1.9% on a year-on-year basis, which resulted in a GDP contraction of 1.4% for 2012. We maintain our forecast of a 1.7% GDP contraction in 2013, although we have amended the quarterly profile slightly.
|Annual data||2012a||Historical averages (%)||2008-12b|
|Population (m)||46.3||Population growth||0.4a|
|GDP (US$ bn; market exchange rate)||1,370.8b||Real GDP growth||-1.3|
|GDP (US$ bn; purchasing power parity)||1,494.0||Real domestic demand growth||-3.3a|
|GDP per head (US$; market exchange rate)||29,595||Inflation||1.8|
|GDP per head (US$; purchasing power parity)||32,253||Current-account balance (% of GDP)||-4.7|
|Exchange rate (av) €:US$||0.78b||FDI inflows (% of GDP)||2.2|
|a Economist Intelligence Unit estimates. b Actual.|
Background: After the death of General Franco in 1975, Spain embarked on a political transition to democracy. Following the legalisation of political parties, the first free election for 40 years was held in 1977. In 1978 a referendum approved a new democratic constitution and repealed many of the laws of the Franco era. In 1986 Spain joined the European Community (now the EU). Spain was one of the founder members of European economic and monetary union (EMU) in January 1999.
Political structure: Spain is a constitutional monarchy. The king, Juan Carlos, will be succeeded by his son, Felipe. The parliament, or Cortes, is bicameral, but effective power resides in the 350-seat Congress of Deputies (the lower house). The Senate (the upper house) has 208 directly elected members and 56 regional representatives. Parliament is elected for a maximum term of four years. Alongside Germany, Spain is the most decentralised large country in the EU, but demands for greater autonomy by Catalonia and the Basque Country are a source of political tension.
Policy issues: Economic policy will remain focused on facilitating a recovery and on improving the public finances and reassuring investors, notably about the banking sector. The government will continue to implement reforms aimed at improving fiscal sustainability and the long-term performance of the economy, such as labour market and public pension reforms, but rigidities are likely to remain. Fiscal consolidation pressures will push the government to focus efforts on increasing efficiency in the public sector.
Taxation: The top rate of personal income tax increased in several regions in 2011, but not nationwide, so the typical rate remains at 43%. The standard rate of corporation tax has stood at 30% since 2008. The flat rate of tax on capital income, which was previously 18%, was split into two brackets from July 2010. Capital income up to a €6,000 (US$7,800) limit is taxed at a rate of 19%; income above this threshold is taxed at a rate of 21%. The standard rate of value-added tax (VAT) was raised from 18% to 21% in September 2012.
Foreign trade: The share of GDP accounted for by exports of goods and services was 30.3% in 2011, and that of imports was 31.1%. The current-account deficit totalled US$52.3bn (3.5% of GDP) in 2011.
|Principal exports 2011||% of total||Principal imports 2011||% of total|
|Machinery & transport equipment||34.0||Machinery & transport equipment||27.1|
|Food, drinks & tobacco||13.4||Mineral fuels, lubricants & related materials||20.8|
|Chemicals & related products, n.e.s.||13.2||Chemicals & related products, n.e.s.||14.4|
|Mineral fuels, lubricants & related materials||7.5||Food, drinks & tobacco||9.5|
|Main destinations of exports 2011||% of total||Main origins of imports 2011||% of total|
- Spain’s attractiveness as a business location remains virtually unchanged over the next five years. Spain remains in 13th place in the regional rankings, but falls from 24th to 30th place in the global rankings. Spain’s core weaknesses over the forecast period will be its macroeconomic environment and the financial sector. Spain’s weak fiscal position also implies a rise in the overall tax burden.
- The economy’s openness and investment in infrastructure are among its most attractive features. Along with improvements in the labour market, more favourable market opportunities and policies toward private enterprise and foreign investment will underpin Spain’s attractiveness. However, these will hardly compensate the unfavourable economic environment.