Xavier Brun’s reflections on GDP and the Spanish economy

Xavier Brun is the director of the UPF Barcelona School of Management’s master program in financial markets. In this article, he analyses Spanish GDP, outlining what the Spanish economy needs to reduce public spending without touching productive pillars such as R&D, education, health, but addressing non-productive areas (overlapping functions, Ave, airports) and temporary assistance from the European Central Bank.

Spanish GDP’s Indian summer

The current Indian summer in Spain seems to have a parallel in the Spanish economy. Spanish GDP has grown by 0.5% in the first quarter, putting the year-on-year rate at 1.6%. It seems that the storm clouds are clearing... are blue skies ahead? I would dare to say almost. If nothing goes awry, it seems that the Spanish economy is set on an upwards trajectory. In order to maintain this improvement, we need to look at where we are coming from, where we are, and where we’re going.

Where are we coming from? For this heading we know everything. If we look back to 2008-2011, Spain was in the middle of the perfect storm: zero or negative growth, maximum public and private debt, low competitiveness, etc. Three actions were taken to deal with this situation. The first was to reduce spending. Private consumption saw huge reductions: -2.8% in 2012 and -2.1% in 2013. The second was to reduce the massive private debt. Total private credit -of individuals and companies- went from 1,870 billion euro in December 2008 to 1,423 billion euro in June 2014. This was independent of the lowering of interest rates from 2.5% to 0.05% by the European Central Bank. The third was the courage of business owners, who laced up their boots, put on their backpacks, and scoured the globe looking for clients from outside of our country. Thanks this work, and the wage cuts taken by many Spanish citizens, exports begin to increase by 2.1% in 2012 and 4.9% in 2013, and the economy was growing again.

Where are we? In parallel to increased exports, reduction of private debt meant that saving (or debt repayment) turned into consumption. And now, the baton of growth is passed from the external sector to the private sector. Household consumption has gone from -2.1% in 2013 to a growth of 1.7% in the first quarter and 2.4% in the second quarter of 2014. So, our uphill path is becoming more visible and the storm clouds are indeed clearing.

Where are going? If household consumption and exports continue to grow, company profits will grow alongside them. Companies can then invest in productive assets. It seems that this situation is already in its nascent phase and the gross fixed capital formation (machinery, factories, etc.) has gone from negative figures to growth rates of 1.2% in the second quarter of this year which are predicted to reach 3.2% in the second quarter of next year. When these predictions materialise we can begin to talk about reducing unemployment; timidly but in the right direction. This is when we will be able to say that the storm clouds have given way to blue skies and sunshine.

However, this path is not easy. We are currently in the middle of the deleverage phase in developed countries (the last time this happened was the 1930s). The private sector seems to have done its homework; it is now the turn of the public sector. This will not happen with various areas still in the red, that is, with the public deficit which is increasing our debt levels. It is time to reduce spending without touching our productive pillars (R&D, education, health).

If we bear in mind that private consumption is growing very little, public consumption is reducing, logistics costs are lower due to the cheaper oil and the European Central Bank balance sheet is lower; it comes as no surprise that the most recent inflation data or, more accurately, deflation data, has been -0.1%.

With a storm-cloud appearing on the horizon, it is time to attack the problem: reduce public spending on non-productive (overlaps, Ave, airports) and temporary assistance from the European Central Bank.

Only time will tell if this deleveraging was a good or bad thing. In the meantime it seems that international companies with little debt are behaving well on the markets.