Spain: GDP growth at 0.8% QoQ, better than expected - ING

Geoffrey Minne, Economist at ING, explains that after 2 consecutive quarters at 0.7% QoQ, Spanish GDP growth accelerated in 1Q17, hinting at another year of GDP growth hovering around 3%.

Key Quotes

“1Q GDP growth was higher than in the two previous quarters and as we expected, the momentum does not seem to be fading away in 2017. No details are available for the moment but we can reasonably infer that domestic demand remains the engine of Spanish growth. With still strong gains in employment (400K exited unemployment in one year) and consumer confidence improving (be it about concerns on unemployment, saving or the economic situation), it is difficult to be pessimistic about private consumption in Spain. In parallel, today, the national institute of statistics showed that retail sales growth rebounded in March by 2.6% YoY after two months in negative territory, suggesting that the consumer is set for a strong contribution to GDP growth this year. In 2016, private consumption’s contribution to GDP growth was 1.8ppt and we do not expect a lower figure in 2017.”

“A second driver of GDP growth – and maybe a more surprising one – could be external demand. Thanks to growing external demand (particularly within the Eurozone) and to a growing number of exporting firms, we expect net exports to have contributed decently in 1Q and to become a stronger growth driver by the end of the year. Export of services is the main contributor to the trade surplus, thanks notably to the buoyant tourism sector. Despite the Brexit and the plunge of the pound Sterling, British tourists surprisingly continue to travel to Spain (+14% YoY in February). The low euro might also have attracted tourists from outside the Eurozone. In the first two months of 2017, the number of tourists flying from the US increased by 31% as compared to the first two months of 2016. On the other hand, the export of industrial goods is also improving (though from a lower basis) and at one point could trigger new investment in the manufacturing sector.”

“Stronger GDP figures also mean the government is winning its bet on the excessive deficit issue. Even without new fiscal cuts, the deficit to GDP ratio could shrink through an increase of its denominator. This strategy isn’t a game changer for the growth pattern but at least it avoids public spending becoming a drag on GDP growth in the short run.”

“All in all, it lacks only a little to forecast a third consecutive year above the 3% threshold for GDP growth. On the back of steady private consumption and strengthening external demand, the Spanish recovery should continue to support job creation. As Luis De Guindos mentioned, GDP growth could exceed 2.5% for the next 2 to 4 years, a necessary step to bring the unemployment rate back to pre-crisis levels.”