Annual Report of the Banco de España: the expansion of the Spanish economy continued in 2018

The Annual Report of the Banco de España has just been released. This report reviews economic and financial developments in the Spanish economy and the main risks and vulnerabilities it faces in the short and long term. Particular attention is paid to the international environment, the euro area and economic policies.

The report comprises an initial chapter that offers an overview of the Spanish economy over the past year, followed by a series of theme-based chapters that look in some depth at specific matters of particular interest.

Key figures

• Since the start of 2018 the Spanish economy has faced a more adverse international environment, notably marked by the uncertainty over trade tensions
• The expansion of the Spanish economy continued in 2018. GDP growth was 2.6%, somewhat down on 2017. Growth remained very intensive in employment creation.
• The slight slowdown observed was in line with expectations, but the composition of GDP was very different: domestic demand continued to be very robust, set against the significant slowdown in exports.
• Activity and world trade were affected by the tightening of global financial conditions and heightening uncertainty over trade conflicts and the Chinese authorities’ difficulties in redressing this economy’s debt
• This scenario particularly impacted the exports of the (generally very open) euro area economies. Compounding this were the effects of the cumulative appreciation of the euro and the uncertainty arising from Brexit. Moreover, in some countries, such as Italy and Germany, there were other adverse factors bearing down on the weakness of domestic demand. As a result, year-on-year growth in the area dipped from 2.7% at end-2017 to 1.2% a year later.
• The buoyancy of domestic demand in Spain accounts for GDP growth exceeding that of the euro area as a whole in 2018. Underpinning the favourable course of household and business spending were the expansionary behaviour of these sectors’ incomes, their improved financial position and the availability of financing under favourable conditions.
• In the case of households, the fresh decline in the saving rate and the high growth of borrowing to finance consumption suggest that households might be basing their spending decisions on overly optimistic expectations about their future incomes.
• Also upholding the strength of activity last year was the expansionary fiscal policy stance.
• Overall inflation continued to be somewhat volatile, owing to the ups and downs of energy prices. Core inflation, meanwhile, remained low, against a background of rising unit labour costs.
• The recent creation of the Spanish macroprudential authority (AMCESFI) and the extension of the macroprudential tools available to the sectoral supervisory authorities strengthen the capacity for preventing and mitigating risks to financial stability.

Spanish Labour market

The Spanish labour market continues to evidence symptoms of a high degree of dysfunctionality, chief among which is the persistence of very high unemployment.

True, the unemployment rate has fallen most significantly since the start of the recovery; but it still remains very high. This is particularly so in some specific groups such as the young and the less skilled. And it is in these groups where long-term unemployment is largely concentrated. In addition, there is significant room for improvement in the quality of existing jobs, where the rates of temporary employment and unwanted part-time employment are very high.

Given this diagnosis, the remedies involve reducing the mismatch between the skills of the unemployed and those demanded by employers. This in turn, requires improving the human capital of the less-skilled unemployed, to allow for their reinsertion into the labour market. Moreover, the need to address phenomena such as globalisation and digitalisation calls for reconsideration of the institutional design of the education system, learning methods and the very content of the educational

curriculum.

Reducing the high rate of temporary employment requires the adoption of regulatory changes that make permanent hiring more attractive. Collective bargaining should, moreover, take into account the high dispersion between sectors and firms in terms of productivity, in order to better align productivity and wage remuneration.

Progress on these two fronts would help prevent adverse shocks from bearing down so disproportionately on employment, as has historically been the case in the Spanish economy.