OECD Economic Outlook May 2019, Country Notes: Spain

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Spain The economy is projected to grow at a robust, but more moderate, pace in 2019 and 2020. Favourable financial conditions and continued solid employment growth will support domestic demand, which will remain the main driver of growth. The contribution of the external sector is projected to remain broadly neutral in the projection period.

The government should stick to its medium-term fiscal targets to ensure a durable reduction of public debt, which remains high. If growth surprises on the upside, all windfall revenues should be used to reduce the debt ratio faster. More effective labour market policies and re-skilling are needed to reduce further unemployment and inequalities. Towards that end, increasing the share of active labour market spending on training and improving co-ordination of social and employment services are key.

Growth remains resilient Driven by domestic demand, economic growth remains robust. Strong job creation, moderate inflation and some recent measures, such as increases in public sector wages, pensions and minimum wages, have boosted real disposable incomes and supported private consumption. Business investment continues to grow, supported by low financing costs and improved profit margins. Export growth has moderated in line with export markets. Labour market conditions continue to improve, with the unemployment rate having now fallen close to 14%.

Spain Domestic demand remains the main driver of growth % 8 6

Inflation and wage growth will pick up gradually

GDP

Headline inflation

Domestic demand

Core inflation¹

Net exports

Nominal wage rate

Y-o-y % changes 4 3

4 2

2 0

0

0

1

-2

0

-4 -1

-6 -8

2008

2010

2012

2014

2016

2018

2014

2016

2018

2020

-2

1. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 105 database.

StatLink 2 https://doi.org/10.1787/888933934926

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019

210 ď ź

Spain: Demand, production and prices 2015

2016

Current prices EUR billion

Spain GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

1 081.2 626.0 208.9 214.7 1 049.7 6.3 1 055.9 356.1 330.9 25.2 _ _ _ _ _ _ _ _ _

2017

2018

2019

2020

Percentage changes, volume (2010 prices)

3.2 2.9 1.0 2.9 2.5 -0.1 2.4 5.2 2.9 0.8

3.0 2.5 1.9 4.8 2.9 0.1 3.0 5.2 5.6 0.1

2.6 2.3 2.1 5.3 2.9 0.1 3.0 2.3 3.5 -0.3

2.2 1.7 1.9 3.8 2.2 0.0 2.2 0.8 0.6 0.1

1.9 1.6 1.6 3.9 2.1 0.0 2.1 3.7 4.3 -0.1

0.3 1.2 1.0 0.9 1.5 -0.3 2.0 1.7 1.0 1.6 0.7 1.2 1.0 1.0 1.5 19.6 17.2 15.3 13.8 12.7 1.8 -0.8 -1.5 -1.4 -1.4 -4.5 -3.1 -2.5 -2.0 -1.3 116.5 114.6 113.5 113.0 111.7 99.0 98.1 97.1 96.5 95.7 2.3 1.8 0.9 0.8 0.7

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 105 database.

StatLink 2 https://doi.org/10.1787/888933935819

Reforms to boost productivity growth and skills should continue While the 2019 budget did not pass the legislative assembly, some of the proposed measures were approved and the fiscal stance will be slightly expansionary in 2019. This will provide support to domestic demand, but there is a need to strengthen structural public finances further, given high levels of public debt. The fiscal deficit is projected to decline to 2% of GDP in 2019, mainly due to favourable macroeconomic conditions.

There is potential for changes in the tax mix that would boost growth and reduce inequalities. Taxation remains tilted towards labour income, which penalises growth and employment. There is room for environmental taxes to address market failures and less distortive value-added taxes. Policies to improve competition and innovation are needed to boost productivity growth and exports. Ensuring the effective implementation of prior structural reforms and addressing the internal fragmentation of product markets requires enhanced co-operation and co-ordination across different levels of government. Innovation support can be made more effective through more widespread ex-post evaluation of programmes and moving towards performance based funding.

Improving lifelong learning policies and better targeting participation on low-qualified adults would increase the adaptability of workers to future skill needs. Providing individualised support to students at risk of failing at an early stage could further lower early school leaving rates and would benefit especially disadvantaged students. Enhancing incentives for the mobility of well-qualified teachers across schools and regions is another way to increase equality of opportunities.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION Š OECD 2019

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The pace of the recovery will moderate Growth is projected to moderate to 2.2% in 2019 and 1.9% in 2020. Job creation will ease, but remain robust, further reducing unemployment. Employment gains and rising real wages will underpin consumption growth. Continued accommodative monetary policy in the euro area should keep boosting private investment. Exports will decelerate in 2019 in line with the growth slowdown in Spain’s main trading partners, but will pick up again in 2020. The contribution of the external sector to growth is projected to remain broadly neutral in the projection period. Inflation will slowly increase as slack dissipates, but remain subdued.

Risks to the outlook include lower-than-projected growth in Europe, Spain's main export destination, which would undermine exports. Private consumption growth could be lower if the pace of job creation slows more than projected or political uncertainty persists, reducing consumer confidence. Conversely, stronger demand from Europe would boost growth more than projected.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019