spain’s macroeconomic outlook and policy agenda...spain´s macroeconomic outlook and policy agenda...

Spain’s Macroeconomic Outlook and Policy Agenda Comments to Spain 2014 Article IV Consultation Concluding Statement of the IMF Mission Rafael Doménech Elcano Royal Institute, Madrid Madrid, 28th of May, 2014

Spain´s Macroeconomic Outlook and Policy Agenda May 2014

1. Fiscal consolidation and pension system reform -> reduction in current and future structural deficits

The recovery as the result of reforms and adjustments

3. European efforts (OMT) + (1) +(2) - > More certainty and fewer financial tensions: 10y risk premium around 15 0bp

2. Banking restructuring -> gross flows of credit growing

4. The labor market reform and wage flexibility are helping turn job destruction to job creation (BBVA Research, 2013)

Without these efforts, the recession might still be continuing and unemployment still rising

IMF’s diagnosis


1. Helping firms expand, hire, and invest: voluntary code of conduct and more capital for banks, government participation and personal insolvency

More measures for a stronger and long-lasting recovery

3. Pursuing growth- and job-friendly fiscal consolidation: higher indirect taxes, lower social security contributions and corporate income tax rates

2. Lowering regulatory barriers to boost jobs and growth: Market Unity law, professional services, better ALMP, lower duality and W at firm level

4. More support from Europe: lower borrowing cost, higher demand of Spanish exports and inflation close to 2% in EMU

Higher growth and inclusive recovery for the unemployed

IMF’s recommendations


1. Exports will continue to expand in 2014 and 2015

Current economic conditions

3. More certainty and fewer financial tensions: 10y risk premium below 160bp

2. An increase in savings and financial wealth (+25% from 2H2012)

4. More dynamic investment in machinery and equipment: above 6% y/y in 4Q2014

5. Improvement in new lending flows: growth above 6% y/y in Mar. 2014 for SME

6. A smaller fiscal effort needed in 2014: 0.5 pp in 2014 (2pp in 2013 and 5pp in 2012) and smaller fiscal multiplier than the one assumed by IMF

7. Net job-creation started sooner than expected: +2.4% saar in 1Q2014, above 2% accumulated in 2014 and 2015 and social security flat rate


Potential growth is endogenous to structural reforms

1. Deleveraging and improvement in the finances of the Spanish economy: finalising the restructuring of the financial sector (improve profitability) and

attracting foreign direct investment to promote employment

3. Reforms to improve competitiveness further (keeping internal devaluation), increase the international attraction of Spain in terms of physical, human and

technological capital

4. To continue with the reforms that reduce the duality in the labour market, improve intermediation process efficiency, promote wage flexibility and

increase employability -> more jobs and with better quality

2. Public-sector reform, fiscal consolidation through growth and long-term sustainability of public finances, with an efficient tax system that create

incentives to job-creation -> Report of the Experts Committee

Structural reforms biased to employment growth


Labor market problems go far beyond the high U rate -> the more urgent challenge for Spain -> smart fiscal consolidation, welfare state, deleveraging, inequality

Two-hand approach: wage flexibility (vs wage moderation) to increase employment (composition

effects on W) and more product markets competition

Collective bargaining at firm level (wages flexibility), smart severance payment system, fiscal devaluation,

more and better active and passive LM policies

GDP growth target: at least 2,5% until 2025

Employment in Spain, the US and EU8 Source: Andrés and Doménech (2012)

80#

85#

90#

95#

100#

105#

Pico# 2# 4# 6# 8# 10# 12# 14# 16# 18#años#

#Nivel#de#em

pleo

#al#prin

cipio#de

#la#crisis#=100#

España,#2007>2025#UE8,#2007>2011# USA,#2007>2014#

USA,#1929>1940#

EU8: Sweden, UK, Denmark, Finland, Germany, Netherlands, Austria and Belgium.

+2% acc. in 2014-5

years Peak

Em

plo

ymen

t le

vel a

t th

e beg

innin

g o

f th

e cr

isis

= 1

00


Employment growth and fiscal consolidation

Spain: unemployment rate and public budget balance Source: BBVA Research based on Stability Programme 2014-17

80

81

82 83

84

85 86

87 88 89

90 91 92

93 94

95

96

97 98

99 00 01 02 03 04

05 06 07

08

09

10 11

12 13 14

15

16

17

-12

-10

-8

-6

-4

-2

0

2

4

7 9 11 13 15 17 19 21 23 25 27

Sald

o pr

esup

uest

ario

(% P

IB)

Tasa de desempleo (%)*

14%$(2006)$

18%$(2013)$

* Unemployment rate based on Fuente (2012): “Series enlazadas de los principales agregados nacionales de la EPA, 1964-2009”

A smart fiscal consolidation (timely, targeted and permanent) based on the reduction of the

unemployment rate (also structural)

Size and composition of public spending, and higher efficiency of public administrations

A more efficient tax structure: direct vs. indirect taxation -> more savings, more

investment and more jobs

Gen

eral

gove

rnm

ent

net

lendin

g (

% o

f G

DP)

Unemployment rate (%)*


Employment growth and fiscal consolidation

Spain: public revenues, expenditures and budget balance in per capita terms Source: BBVA Research based on Stability Programme 2014-17

* GDP in 2013 1023 bn of euros. Population 2013: 47,129,783. Public spending and net lending do not include banking restructuring costs.

Smart fiscal consolidation: avoid restrictive fiscal policies (e.g., increased tax rates or

spending cuts w/o higher efficiency)

Maintain real public expenditures in per capita terms at the 2007 levels (changing

composition and increasing efficiency) …

… and increase revenues through a more efficient tax structure that increases employment, growth and tax bases E

xpen

diture

s an

d r

even

ues

(eu

ros

of

20

13

)

Gen

eral

gove

rnm

ent

net

lendin

g (

euro

s of

20

13

) Budget balance

(right)

Total revenues

Non-interest spending

Total expenditures


Fiscal devaluation EU15: Unemployment rate and social security contributions over indirect taxes Source: BBVA Research based on Boscá, Doménech and Ferri (2013)

BE

DK DE IE

EL ES

FR IT

LU NL AT

PT

FI SE UK

4

7

10

13

16

19

0,5 0,7 0,9 1,1 1,3 1,5 1,7

Tasa de de

sempleo

med

ia (%

), 2007 -‐ en

e. 2014

Contribuciones seguridad social/Imposición indirecta 2011

More employment, GDP and private consumption -> more public revenues

Improvement if international competitiveness -> improvement of the current account balance

Less inequality and less hysteresis in unemployment (temporary zero social

contribution rate below a certain wage level?)

Ave

rage

unem

plo

ymen

t ra

te (

%),

20

07

– ja

n.2

01

4

Social security contributions / indirect taxes, 2011


Fiscal devaluation

BE DK

DE

IE

EL

ES

FR

IT

LU

NL AT

PT

FI

SE

UK

-‐0,17

-‐0,13

-‐0,09

-‐0,05

-‐0,01

0,03

0,07

0,11

0,5 0,7 0,9 1,1 1,3 1,5 1,7 1,9

Balanza po

r cue

nta corriente sobre PIB, 2007

Contribuciones seguridad social/Imposición indirecta 2007

BE

DK

DE IE

EL ES

FR IT

LU NL

AT

PT

FI SE

UK

y = 0,0795x + 0,2144 R² = 0,80167 0,23

0,25

0,27

0,29

0,31

0,33

0,35

0,5 0,7 0,9 1,1 1,3 1,5 1,7

Coefi

cien

te de Gini de la re

nta dispon

ible de los

hogares, 2010

Contribuciones seguridad social/Imposición indirecta, 2011

EU15: Inequality and social security contributions over indirect taxes Source: BBVA Research based on Boscá, Doménech and Ferri (2013) http://goo.gl/OaQIIQ

EU15: current account balance and social security contributions over indirect taxes Source: BBVA Research based on Boscá, Doménech and Ferri (2013) http://goo.gl/OaQIIQ

Social security contributions / indirect taxes, 2011 Social security contributions / indirect taxes, 2011

Gin

i coef

fici

ent

of

house

hold

s dis

posa

ble

inco

me,

20

10

Curr

ent

acco

unt

bal

ance

(%

GD

P),

20

07


Helping firms expand, hire and invest

Better product markets regulations and lower red tape costs

-> incentives to increase firm size

Debt restructuring and refinancing: government participation, incentives for M&A and analysis of corporates’ default probability and ratings (big data + BoS?) -> ECB liquidity

Avoid procyclical regulation (smart banking recapitalization avoiding the tightening of credit conditions) and improve responsible

payment culture

Labor productivity and firm size, OECD Source: Boscá, Doménech, Ferri and Varela (2011)

GD

P p

er h

our

work

ed , 2

01

0

Employment share (%) in firms with less than 20 workers, 2006


Helping firms expand, hire and invest

Spain: new credit retail operations (% YoY) Source: BBVA Research based on BoS

The Spanish economy is going through an unavoidable process of debt reduction …

… which is compatible with credit provision for solvent projects

A turning point is already visible, together with an improvement in credit flows to

households and SMEs, which will be strengthened in 1H14

-35%

-25%

-15%

-5%

5%

15%

25%

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

% Y

oY

vari

atio

n

Data Trend

Flows of new credit operations improving


Helping firms expand, hire and invest … and export Spain: effect on exports of adopting best regulatory practices, large corporations (accumulated variation %, 1992-2008) Source: BBVA Research based on Correa-López & Doménech (2014)

Thanks to the process of deregulation in the services sector since 1990, manufacturing

exports are 50% higher

Had international best practices been adopted, exports would have been a further 18% higher

So, there is still scope for continuing to eliminate obstacles which make it difficult for

companies to become more international

0

5

10

15

20

25

No

n-m

etal

min

eral

s

Ch

emic

als

Tex

tile

Food

Pap

er in

dus

try

Ru

bber

& p

last

ics

Bas

ic m

etal

s

Tra

nsp

ort

mat

eria

l

Elec

tric

eq

uip

men

t

Oth

er

man

ufa

ctu

red

goo

ds

Avf. effect: 18%


EMU inflation expectations well below the ECB target …

Eurozone: unemployment rate and inflation Source: Eurostat and BBVA Research

The regression coefficient of the inflation rate on the unemployment rate is equal to 0.125, statistically significant and robust to the exclusion of Cyprus, Greece and Spain.

If 3 pp of higher unemployment explain 0.4 pp lower inflation, inflation expectations are

currently less than 1% -> drag for the recovery

Inflation expectations in swaps and trimmed mean inflation (optimal selection for inflation forecasts for the next 2/3y) slightly below 1%

Inflation above 1% in 2015 in our base scenario and the probability of deflation is low (<10%), but

adverse shocks could increase this probability


… imposing additional costs to the Spanish recovery

Spain: trend inflation (trimmed mean inflation, % y/y) Source BBVA Research based on INE

-2

-1

0

1

2

3

4

5

6

feb-0

4

ago-0

4

feb-0

5

ago-0

5

feb-0

6

ago-0

6

feb-0

7

ago-0

7

feb-0

8

ago-0

8

feb-0

9

ago-0

9

feb-1

0

ago-1

0

feb-1

1

ago-1

1

feb-1

2

ago-1

2

feb-1

3

ago-1

3

feb-1

4

90CI 80CI 60CI

40CI 20CI Optimum trim

Headline (official) Core (official)

Exchange rate appreciation -> costs in terms of external debt reduction

Additional efforts in terms of internal devaluation and the reallocation of factors

across sectors

Additional efforts in terms of the deleveraging process of the private and public sectors


EMU: Financial fragmentation

Financial fragmentation still high

To reduce financial fragmentation the European banking union is crucial, as well as …

… measures to lower funding costs while banks absorb non-profitable loans, changing the

composition of balance sheets with new credit

Interest rates on new bank lending

(to non-financial corporations, less than 1 million €, less than 1 year, %) Source: ECB

2,00

2,50

3,00

3,50

4,00

4,50

5,00

5,50

6,00

6,50

7,00

Oct

.200

8

Feb

.20

09

Jun.2

009

Oct

.200

9

Feb

.20

10

Jun.2

010

Oct

.201

0

Feb

.20

11

Jun.2

011

Oct

.201

1

Feb

.20

12

Jun.2

012

Oct

.201

2

Feb

.20

13

Jun.2

013

Oct

.201

3

Feb

.20

14

Euro Area Germany Spain Italy France


EU: more support for active labor market policies

Spain should almost double Active Labor Market Policies in order to converge to the

OECD pattern, …

… with the help of additional European funds (x4 + conditional on results), …

… increasing efficiency (employment activation policies, public-private partnership, continuous

evaluation, dual vocational training, etc. )

Unemployment rate and expenditure in ALMP Source: BBVA Research based on Andrés and Doménech (2014)

OCDE

AUS

AUT

BEL

CAN CHL

CZE

DEU

DNK

Spain (observed)

EST

FIN

FRA

GBR GRC

HUN

IRL

ISR

ITA

JPN KOR

LUX

MEX

NLD

NOR

NZL

POL PRT

SVK SVN

SWE

USA

Spain (OECD pattern )

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1,8

2,0

0 5 10 15 20

Exp

endi

ture

in A

LMP

in 2

010

(% G

DP

)

Unemployment rate in 2010 (%)

EU funds?


Conclusions

1

2

3

A similar assessment of current economic conditions and the recovery We expect an acceleration in growth in 2014-15

Similar recommendations for a stronger and long-lasting recovery & beyond Growth and employment creation are endogenous to structural reforms

Employment creation as the best way for inclusive growth and welfare improvement -> ambitious, continuous and deeper structural reforms:

•  Labor and product markets policies

•  Efficient public expenditure and fiscal reform (fiscal devaluation)

•  Promote M&A and other measures to increase firm size

•  Long-run policies (do not forget human capital!)

•  Policies at the European level (ECB, banking union, growth and employment, …)

Spain’s Macroeconomic Outlook and Policy Agenda Comments to Spain 2014 Article IV Consultation Concluding Statement of the IMF Mission Rafael Doménech Elcano Royal Institute, Madrid Madrid, 28th of May, 2014

spain’s macroeconomic outlook and policy agenda...spain´s macroeconomic outlook and policy agenda...

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