Como se combate o populismo? "Com eleições", responde Fukuyama

[Karamba]

Spain: A Services Driven Economy

Vincenzo Guzzo (London)

Further acceleration lies ahead. When it comes to economic growth, Spain outstripped the Euro area in 10 of the past 11 years. The GDP growth differential, which was close to zero in the first half of the nineties, moved to 1.1 percentage points over the following five years and likely hovered close to 2 percentage points between 2001 and 2005. While the current debate is focusing on the extent of the potential slowdown from the brisk pace of the past few years, in contrast, we think that Spain may well accelerate further over the next 12-18 months. True, an appreciating real exchange rate will likely lead to further weakness in the tradable goods sector, while gradually rising interest rates should dent activity in the overvalued construction sector. Yet, banks, media, utilities and services in general are all likely to be strong areas, well supported by sustained income and rising profits.

Migration has significantly boosted Spanish GDP. We know migration is playing a key role in the Spanish success story. One in three immigrants entering the European Union picks Spain as their final destination. Around 1.7 million immigrants crossed the borders of the European Union in 2003. According to National Statistics INE, nearly 600,000 of them reached Spain. This number not only places the country at the top of the EU15 rank for net flows, with 14.2 immigrants to every 1,000 inhabitants, but also says that Spain on its own captures over 35% of the annual migratory flows into Europe. When in May National Statistics INE published the first annual accounts based on the new 2001 Census, which in turn incorporated the acceleration in migratory flows, it literally re-wrote Spanish economic history. All of a sudden, we now find out that between 2000 and 2004, Spain grew in real terms half a percentage point more than previously believed. At current prices, Spain’s GDP level is now nearly 5% higher (for a detailed analysis of the impact of migration on the Spanish economy see our June 10 report, Europe’s Favorite Destination).

Virtuous circle far from over. Activity in the services sector is likely to drive the next phase of economic expansion. Spain is currently accelerating its transition from an uncompetitive manufacturing base towards a powerful, demand-geared services economy. Spain is managing to absorb a high number of immigrants owing to noticeable wage moderation. In other words, the labour market appears to be flexible enough to let migration exert substantial downward pressure on wages. Strong job creation and moderate wage gains keep supporting income generation in the midst of this big migratory wave. This is the source of a virtuous circle made of more jobs, more demand, more profits, and so on — a virtuous circle that is far from over. The appreciation of the real exchange rate in times of intense global competition and the overvaluation of the housing market suggest that any acceleration is unlikely to come from manufacturing or construction. However, these factors will not derail growth, in our opinion.

Productivity stagnation at least partly related to labour market adjustment. Virtually all of the growth reported over the past eight years in the Spanish economy has come from new jobs, while the implied rate of labour productivity has stagnated. Weak productivity has boosted unit labour costs and ultimately led to a sizeable appreciation of the real exchange rate, in a pattern similar to that in other southern European economies. This pressure has not resulted in a major loss of market shares so far, but a further extended period of real exchange rate appreciation could undermine the competitiveness of the Spanish economy, critics say. The issue is more controversial than it looks, we think. While greater investment in information technology would certainly push productivity higher, one should not underestimate the transition taking place in the labour market. As the economy adjusts to a new equilibrium, the sharp rise in the number of jobs necessarily comes at the expense of productivity. Once the new equilibrium is reached, the case for a rebound in productivity is intact though.

House price dynamics still consistent with gradual adjustment. Most long-run equilibrium models point to a sizeable overvaluation in Spanish house prices. Fast rising house prices have come hand-in-hand with growing private indebtedness. While loans to households as a percentage of GDP still fall short of the peaks currently seen in the UK or the Netherlands, Spain has exhibited a noticeable rising trend over the past few years. The risk of a correction in the housing market is clear. Two factors, however, suggest that the current dynamics are still consistent with a gradual adjustment. First, higher migratory flows than accounted for previously have pushed up the fair value for house prices and thus reduced the gap between actual and equilibrium prices. Second, and, more importantly, incipient signs of a turnaround in several leading indicators support the case for improved business cycle conditions and gradually higher interest rates in the year ahead. In turn, higher rates would help rein in the excess liquidity and contain asset prices.