Luis M Linde: The European and Spanish economic situation
Opening address by Mr Luis M Linde, Governor of the Bank of Spain, at the Annual
Economists' Forum/Consejo General de Economistas, Madrid, 29 May 2014.
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I much appreciate the invitation to participate in this forum and the opportunity to share with
you some brief thoughts on the European and Spanish economic situation.
Following six quarters of negative growth, the euro area economy initiated a mild recovery in
2013 which has since continued. The recovery is essentially being underpinned by the
gradual pick-up in domestic demand, after the strong adjustment it underwent during the
recession.
However, the latest GDP growth figure, for the first quarter of this year, illustrates the
stillfragile and uneven nature of this economic improvement in the euro area.
According to the provisional estimate released by Eurostat, the increase in activity in the euro
area as a whole in 2014 Q1 was 0.2% in quarter-on-quarter terms, below most analysts'
expectations. Note that this rate has been affected by exceptional temporary factors in some
countries. In any event, the mixed nature of the recovery is evident if we compare the strong
momentum the German economy is providing to the area as a whole with the behaviour of
activity in other countries such as France, where it is practically flat, or others still such as
Italy, the Netherlands, Portugal and Finland, where negative figures have been posted.
The ECB and the National Central Banks of the Eurosystem are finalising a new projection
exercise, whose results will be published in early June. That will be the time to assess the
effects that this first-quarter figure and all the new information compiled since the last
exercise may have exerted on the baseline scenario for GDP growth in the coming quarters.
As you know, in any event, the procedural rules for the ECB Governing Council set a brief
period immediately before each of the monetary policy meetings in which the members,
myself among them, must not make any statement that may be interpreted as pre-judging in
any way the outcome of the meeting. You will therefore understand if I abstain from making
any further assessment in relation to this scenario.
In terms of employment, last year also saw a turnaround and the job destruction phase in the
euro area touched bottom in the second quarter. But the still-moderate recovery has not yet
provided for significant improvements in employment levels, meaning that hours worked in
the labour market remain far below the historical average and unemployment rates are at a
high.
On the prices front, sluggish demand and labour market slack are strongly influencing
areawide inflation developments. The growth rate of the Harmonised Index of Consumer Prices
has stood at a level below 1% since October 2013, with figures that have generally tended to
surprise on the downside. As in the case of activity, the results of the projection exercise
under way will allow for calibration of the effects on the current price scenarios and, in
particular, on the risk - flagged by the ECB Council at its recent meetings - that the area
may become immersed in a prolonged period of too-low inflation.
Turning to the Spanish economy, we are all mindful that the crisis that broke in mid-2008 was
of unprecedented depth and extent in our recent history and caused acute losses in activity
and employment. Fortunately, since the second half of 2013, the Spanish economy has
perceptibly been experiencing a recovery, which began with positive, moderate
quarter-onquarter rates of change in GDP as from 2013 Q3 and which has continued in 2014 to date.
This recent improvement in activity rests on a broad set of factors: some, such as the drastic
correction of the external imbalance, have been helping underpin production for some time;
others, such as the progressive normalisation of the financial environment, are more recent.
Here, both the easing of grave uncertainty, which at one point threatened the current
configuration of the euro area, and the restoration of confidence in our banking system
following the restructuring and recapitalisation drive undertaken, which culminated in
January, have proved decisive.
Against this background, the contributions to activity of external demand and national
demand are being re-balanced. National demand is showing a brisker pace of recovery than
initially envisaged, based on the increase in household consumption and investment in
equipment over the past two quarters, and on some slowing in the fiscal adjustment following
the revision of the adjustment path last summer.
In fact, household spending, in a setting of improved confidence resulting largely from the
gradual improvement in the labour market and from some recovery in disposable income, is
showing moderate growth, despite the fact that the necessary reduction of household debt is
still exerting something of a contractionary effect on expenditure. Further, investment in
capital goods is looking buoyant, in light of the improved business climate and increased
investment activity by exporting firms. The contractionary course of residential investment
has slowed, although it remains in negative territory, while the stock of unsold housing
remains high.
The outlook of progressively improving activity is closely linked to labour market
developments, where the benefits of wage moderation and the improved incentives for job
creation driven by the recent labour reform are becoming patent. The latest employment
figures show a continuation of the positive trend discernible since the second half of 2013.
Thus, in recent months, Social Security registrations have continued to increase and the
pace of decline of registered unemployment has stepped up. However, on the first-quarter
figures for 2014, the unemployment rate remains very high, still close to 26% of the labour
force.
The rate of inflation has been posting very moderate figures since autumn last year as a
result of the removal from the index of the base effects linked to fiscal consolidation; certain
temporary factors, such as those relating to energy price developments; and other more
durable factors, relating to the economy's excess capacity, the reduction in unit labour costs
and the relative sluggishness of spending. For the remainder of the year the inflation rate is
expected to hold at low levels, below the euro area average, thereby permitting further
headway in gains in competitiveness with which to entrench a stronger recovery. Low
inflation is conducive to gains in income purchasing power, although the counterpoint to this
is the greater difficulty this adds to further progress in household and corporate deleveraging.
In the more immediate future, the advances made by the Spanish economy augur a firming
of the gradual path of recovery, underpinned by greater confidence, a progressive easing in
financial tensions and a gradual improvement in the labour market. A crucial role will have to
be played here by the re-balancing processes under way in the Spanish economy, especially
the redressing of the private sector's financial position and fiscal consolidation. The
successful culmination of these processes is pivotal for rooting the recovery in domestic and
external confidence and for ensuring the external funding flows that are vital for making
sustained medium-term growth possible.
In sum, for the first time after years of crisis, we can discern the possibility of a gradual and
sustainable recovery, the outcome of the progress made in correcting the imbalances that we
had built up and of the structural reforms undertaken, whose results we are beginning to see.
The task is not complete and much work remains to be done, both in Europe and in Spain.
Hopefully, however, the progressive perception of the improvement achieved will act as a
powerful spur for us to persevere on the road we have taken.