The competitiveness of the Spanish economy: from recent achievements
to medium-term challenges
Spain Investors Day
Pablo Hernández de Cos
Governor
Good evening, ladies and gentlemen.
Allow me to thank the Governing Board of Spain Investors Day and their chair, Benito
Berceruelo, for kindly inviting me to speak to you on the tenth and therefore landmark
anniversary of this annual international forum. Since its first edition, this meeting has
become a showcase affording Spanish companies the advantage of offering a first-hand
view of their position and prospects to foreign investors. I am convinced that the meeting
will, once again, successfully contribute to boosting Spain's image and international
investment in our country.
In my address I shall be analysing the competitiveness of the Spanish economy over this
past ten-year period. For me, there is no better variable than competitiveness for describing
some of the structural changes our economy has undergone in the past decade. It also
allows me to highlight some of the main challenges lying ahead, including those stemming
from the new protectionist tendencies that have arisen in the past two years.
Achievements
In fact, competitiveness symbolises the metamorphosis of our economy in the past decade.
And, as a result, the improvement in the external imbalance is the most visible feature of the
progress made since the crisis in correcting the economy's main macrofinancial
imbalances.
Indeed, the external surpluses posted since 2012 are a strongly distinctive feature when set
against the external deficits that had systematically characterised previous upturns. In this
connection, it is worth offering some figures illustrating the scale of this change. Specifically,
the Spanish economy's current account balance has improved by more than 11 percentage
points (pp) of GDP since the start of the crisis, turning from a deficit of 9.4% of GDP in 2007
to a surplus of around 2% in 2019.
In terms of components, while all captions have contributed positively to this adjustment, of
most note has been the correction of the net balance of non-energy goods and of the
primary and secondary income balance. The contributions of the latter to the improvement
in the total balance in this period were almost 6 pp and 3 pp, respectively. But the energy
goods, tourism and non-tourist services balances have also each contributed about 1 pp.
As suggested, among the key factors behind this correction of the external balance are the
gains in competitiveness achieved in these past ten years. These are estimated to have
contributed both to the increase in the structural level of exports and to their geographical
diversification towards markets with greater growth potential, thereby resulting in a
favourable market-share performance. At the same time, imports have been seen to be
flatter in relation to the rise in final demand, despite the momentum of exports in firms and
sectors with a high import content. That likewise points to an improvement in the
competitiveness of the resident productive sector compared with foreign competitors.
The pick-up in our competitive capacity is highly tangible in terms of Spain's unit labour
costs relative to those of the rest of the euro area. These costs fell by 14% between 2008
and 2019, after rising forcefully during the pre-crisis years. The gains in competitiveness vis-
à-vis the euro area were reflected, in the early stages of the crisis, in heavy job destruction,
and throughout the subsequent period, in wage moderation. Contributing to this were the
successive amendments to the labour market legal framework during the crisis, which
proved to be effective levers for boosting the recovery in employment. Overall, these
developments enabled the competitiveness lost in relation to the other euro area countries
- measured via relative unit labour costs (ULCs) - to be restored. Specifically, while for the
market economy as a whole ULCs growth in Spain from 1999 to 2008 exceeded that
observed in the euro area by 16 pp, the current relative level is 5 pp below that of 1999.
We must add to these improvements the enhanced financing conditions for resident agents
as a whole. Included among these agents are Spanish firms which, from end-2012, saw
their financial costs ease strongly. Also, most particularly, there was a correction to the
differences in the interest rates they had previously to pay compared with their competitors
in the core euro area countries. In this setting, the ECB's clearly expansionary monetary
policy stance, the institutional reforms to the financial governance of the EU, and the
cleanup and restructuring of the national financial sector were all pivotal in significantly reducing
the degree of financial fragmentation in the euro area between 2010 and 2012.
Deleveraging by the non-financial private sector has also notably influenced
competitiveness. This ongoing process is very advanced both in the case of non-financial
corporations and of households. In the case of companies, for instance, the debt/GDP ratio
has fallen by more than 40 pp from its peak, meaning it now stands below the average for
euro area firms.
This has all contributed to goods exports increasing from having accounted for 15% of GDP
in 2009 to approximately 24% in 2019. During this period, export growth has, moreover,
been higher in general terms than that of foreign markets. This has enabled the global trade
share to be maintained, despite the ever-more influential role of the emerging economies in
world trade.
In parallel, there have been significant and permanent increases in the Spanish economy's
export base. This is been in terms of the figures both for total export firms and of those for
firms that regularly export.
As regards the proportion of exporting firms relative to total firms, the attendant growth rates
have been very sharp since 2009. It is small firms (those with fewer than 50 employees) that
have most stepped up their entry into foreign markets, although their contribution to total
exports remains small compared with larger companies.
At the same time, the number of regular exporting firms (i.e. those that sell their products
abroad for four years running or more) has risen in this period by 32%. This increase has
been particularly notable in target markets with high growth potential, such as North Africa,
Asia and North America. The decision by a firm to begin to export entails fixed costs of a
significant magnitude. This would suggest that, once these costs are assumed, the firm
tends to remain in the market chosen. It also points to the fact that the broadening of the
base of exporting firms might be predominantly structural in nature, as attested to by the
fact that the persistent recovery in domestic demand since 2014 does not appear to have
had a negative bearing on the number of regular exporting firms.
The Spanish productive system's greater export orientation has boosted business
investment. The evidence is that exporting firms have higher investment/capital ratios,
whereby the broadening of the export base is estimated to have contributed to the buoyancy
of investment in aggregate terms. As a result, the behaviour of investment during the
recovery has been more favourable than that arising from the course of aggregate demand.
In terms of the financial account, the resident sectors' improved terms of access to external
funding from 2013 enabled the outflow of funds from the rest of the world at the height of
the euro area sovereign debt crisis to be reversed. The progressive normalisation of the euro
area's capital markets, as from the final stretch of 2012, significantly reduced the need for
Spanish credit institutions to finance themselves through the central bank. Subsequently,
the abundant liquidity resulting from the ECB's quantitative easing measures has once again
given rise to net fund outflows in the Spanish economy. These have, however, come about
in a very different way to those resulting from the 2012 balance of payments crisis. Indeed,
net fund outflows are not, as was then the case, the outcome of a worsening in economic
sentiment regarding the Spanish economy. They are rather the result of a redistribution
between institutions and countries of the abundant liquidity injected by the Eurosystem.
As to instruments, the funding raised abroad in the most recent phase has preferentially
taken the form of stable flows, such as foreign direct investment, equity and investment
fund shares, and long-term government debt securities. This composition reveals
international investors' confidence in our economy, to which the structural gains in
competitiveness and the recovery in output and domestic demand have been conducive.
In the specific case of foreign direct investment in Spain, these flows have accounted for
around 2.6% of annual average GDP in the 2013-2019 period. This level is 1 pp of GDP
higher than the average volume of this type of investment during the crisis. In any event,
foreign direct investment in Spain was impacted to a lesser extent than portfolio investment
during the recession, with no divestment recorded in any year, in contrast to what occurred
with portfolio investment. That reveals its greater stability compared with other forms of
international investment. Another notable characteristic of the recent trend of this item is the
decline in the relative weight of these capital inflows in the form of debt liabilities - which
comprise intra-group loans and have scarcely accounted for 12% of the total since 2013,
compared with over 30% during the pre-crisis years (average between 1999 and 2007) -
and the increase in investment in the form of equity. Thus, while in recent years the volume
of foreign direct investment has, in terms of GDP, been around 1.5 pp below that observed
during the pre-crisis expansion, its composition is sounder, since it is less vulnerable to
adverse shocks.
Challenges
The future outlook for the foreign sector will be influenced by protectionist tensions and by
the uncertainty still surrounding the final shape of EU-United Kingdom relations in the wake
of Brexit.
On the evidence available, the protectionist tensions between the United States and China
may be expected to affect global trade flows in two ways: on one hand, a notable direct
impact via the global value chains; and on the other, indirect adverse repercussions via their
effects on global confidence and investment. Logically, the Spanish economy has not been
immune to these developments, which have contributed to explaining the significant
slowdown in our export markets in the past two years and the subsequent deceleration in
exports.
Moreover, the Spanish economy's trade exposure to the United Kingdom is quite significant.
Goods and services exports to the UK account for around 3% of GDP. In the specific case
of tourism-related revenue, the main market is the UK, which accounts for around 20% of
the total. The effects of Brexit have meant that, since 2017, Spanish goods exports to the
UK have faltered, weighed down in particular by consumer durables exports, including cars.
Along with these more conjunctural risk factors, there are others of a more structural nature.
Specifically, despite the notable correction to date in the net international investment debtor
position, it remains very high both in historical terms and in relation to our peers. The
continuous generation of current account surpluses since 2012 to which I referred earlier
has given rise to a cumulative net lending capacity of around 16 pp of GDP. However, the
correction of the external debtor balance built up during the previous expansionary phase
has been somewhat more modest; as a result, in the third quarter of 2019, the net
international investment debtor position still stood at 79.5% of GDP, some 9 pp down on
2012 (though 18 pp down on the mid-2014 peak). In any event, the current level of external
debt is a risk we should not underestimate.
To continue reducing debt vis-à-vis the rest of the world, sustained external surpluses must
be run. And that in turn calls for the maintenance of gains in competitiveness, which
throughout the recovery have been based on the moderation of labour and financial costs
and which, hereafter, should hinge to a greater extent on productivity gains.
Indeed, in the recovery to date, the increases in total factor productivity continue to be
smaller than those in other developed economies. That is in response to numerous
institutional, regulatory and structural factors that public policy should seek to correct.
These factors include certain shortcomings in the labour market - such as excessive
turnover and temporary contracts - and in the education system; scant generation and
dissemination of technological advances; competition-curbing regulatory elements; and the
improvable quality of business management.
In this respect, it should be borne in mind that, during the expansionary phase prior to the
crisis, the loss of competitiveness in terms of the surplus per unit of output was on a similar
scale to that mentioned for ULCs. However, the subsequent correction has been much
smaller, which explains why the current level of the value-added deflator has grown 10 pp
more in Spain than in the euro area as a whole in cumulative terms since the monetary union
began functioning. The design of a regulatory framework more conducive to competition
should allow for a greater contribution of business margins to gains in competitiveness
visà-vis the euro area. In this connection, competition and the contained growth of relative
prices are also needed for sectors that are not externally open, given that the sectors that
produce tradable goods incorporate a high proportion of non-tradable goods and services.
To differing degrees, the factors mentioned are contributing to a situation where Spanish
exports tend to be skewed towards goods of medium and medium-high technological
intensity, with a low share of high-technological-content products, below 10% of the total.
As a result, the sensitivity of exports to price-based competition is high.
Further, redressing public finances should also contribute to a firm and sustained path of
external surpluses. The sectoral breakdown of the net IIP shows how the reduction in our
economy's debtor position has been concentrated in the private sector. Meantime, since
the start of the crisis, general government external debt has increased notably, by 26 pp of
GDP since 2009, to slightly over 50% of GDP. Admittedly, from its peak of 11% of GDP in
2009, the budget deficit has fallen substantially, to around 2.5% of GDP. However, the
structural deficit remains high and public debt has only fallen modestly from its peak,
standing currently at 98% of GDP.
Conclusion
In conclusion, I would stress that in order to give continuity to the current growth phase,
reduce external vulnerability and strengthen the Spanish economy's potential, two vitally
important courses of action should be followed. The first is the need to further redress public
finances, so as to afford budgetary policy room for manoeuvre ahead of any future negative
shocks. Moreover, the fiscal consolidation process should be compatible with an
improvement to the quality of public finances that helps contribute more to the potential
growth of the economy. The second is the resumption of the structural reforms in the factor
and product markets with a view to contributing to better resource allocation and to
improving our economy's competitive capacity.
Thank you.