Spain: from recovery to resilience (Conference of Governor of the Banco de España about Spanish economy and labour market)

The Governor of Banco de España, Luis M. Linde, participated yesterday, April, 3, in a conference organised by the International Monetary Fund, devoted to the recent evolution of the Spanish economy in the Euro-Zone and European Union context. With the title of “Spain: From Recovery to Resilience”, these are some of the key statements said by the Governor:

Figures about Spanish economy

In 2017 Spain’s economic recovery maintained the strong growth path of previous years, exceeding expectations for the fourth year in a row. In particular, GDP grew by 3.1%, meaning that the economy has grown above 3% for the third consecutive year.

Strong domestic and external demand pushed GDP up, and the economy has proved quite resilient to uncertainty shocks. The positive behaviour of the economy contributed to and, in turn,

was stimulated by the correction of the macro-financial imbalances accumulated during the pre-crisis and crisis periods. Such corrections were particularly significant as regards private sector deleveraging, the reduction of unemployment, the progressive absorption of disequilibria in the housing market, and the balancing of the external accounts, not least due to significant gains in competitiveness.

The economic and social impact of the recent crisis has been deep and painful in many aspects, including in the case of public finances. During the past decade, public authorities in Spain had to deal with the challenge of keeping welfare state services functioning, while, at the same time, delivering the necessary fiscal adjustment that could ensure the long-term sustainability of public finances. Between 2011 and 2017, the public deficit-to-GDP ratio was significantly cut, from a peak of 9% in 2011, excluding financial sector assistance, to 3.1% last year. In that process, public expenditure was reduced, as a proportion of output, by more than 3.5 percentage points (pp).

Notwithstanding this effort, the historically very high debt-to-GDP ratio of the Spanish General Government sector, currently around 98% of GDP, poses specific risks for economic growth. Economic literature finds evidence that maintaining a very high public debt-to-GDP ratio over a prolonged period tends to hamper economic growth, becoming a source of economic vulnerability, which, in addition, reduces the stabilising capacity of the public budget. Simulations by Banco de España staff show that, under plausible assumptions, the deleveraging process of the public sector towards levels considered safer will be very gradual in Spain, and in developed economies in general, possibly taking up to several decades to reach the reference value of the 60% debt-to-GDP ratio.

Challenges of the Spanish labour market

During the last three years, the annual growth rate of employment has been 3.0%. In the last five years, the unemployment rate decreased to 16.5% at the end of 2017, more than

10 pp below its peak at the beginning of 2013.

Despite these positive developments, unemployment is still at unacceptably high levels, in fact, the second highest in the euro area after Greece. The high incidence of long-term

unemployment, which now stands above 50%, is signalling the risks of hysteresis in the labour market, which would make the reduction of the unemployment rate to pre-crisis

levels more difficult.

From a longer perspective, the Spanish economy also faces three important challenges. First, even at the height of the last expansion in 2006, Spain had an unemployment rate of 8.2% which was far off the best performers at that time. Second, during recent decades, 6/9 the segmentation of the Spanish labour market has been very marked, with a temporary rate exceeding 25%, 10 pp above euro area averages, which contributes to exacerbating the volatility of employment and reducing productivity growth. Third, the Spanish economy should be ready to accommodate the worldwide process of automation of certain tasks, especially in a context in which the incidence of low-skills unemployment is high and the labour market is not flexible enough.

In this sense, the analysis of the Banco de España suggests that the higher possibilities for firms, in the presence of adverse shocks, to adjust wages and, in particular, hours worked, which were

introduced through the 2012 labour market reform, led to a significant slowdown in job destruction flows, despite the adverse economic situation in 2012 and 2013. Apparently, however, the reform has not been able to change either the structure of the collective bargaining system or the acute segmentation of the working population. These two features of the Spanish labour market have been at the core of the high volatility of employment and the high level of unemployment and, therefore, should be at the core of the reform agenda in this area.

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