Economic Outlook: From Fiscal Malaise and Economic Expectations

Spain, 18 May - 15 Jun 2016
Spain’s Uncertain Public Finance Situation ++ Promising Tourism Season 2016++ Spanish Football Expectations UEFA EURO. by José M. Martin-Flores, Manuel Valenciano Marx
Spain’s Uncertain Public Finance Situation

Eurostat has confirmed the concerns many had regarding Spain’s current fiscal deficit: 2015 ended with a negative balance of 5 percent of the GDP, exceeding the deficit target of 4.2 percent previously established. Only Greece, with a deficit of over 7 percent performed worse, while solely Luxembourg, Germany and Estonia managed to obtain a surplus. Fiscal expenditures in Spain have been exceeding revenue to the tune of EUR 55 billion and public debt is close to reaching the dreaded 100 % of GDP threshold.

Economists have been quick to comment the disappointing news. While some have argued that the reason for the out-of-control deficit is the lack of government revenue due to Spain’s low fiscal pressure, the government’s official stance is that persistently low inflation is the source of Spain’s fiscal malaise. While it is true that fiscal pressure – currently standing at approximately 38 % of GDP compared to 47 % in the Eurozone- is generally considered as too low to maintain a working welfare state, lack of inflation might also have played a role. Official sources in the government claim that, if the Commission had been correct in estimating the three-year inflation level, the deficit could have been reduced between 0.7 and 1 percentage points.

Inflation levels in Spain have fluctuated between +0.3 percent and -1 percent between 2013 and 2015. he government has been concerned to hold this level relativly stable: on one hand it wants to remain cooperative vis-a-vis the Commission to gain its leniency and avoid a fine and the other hand the government does not want to alarm voters before the second round of general elections in summer. Especially, it will not admit that it will probably raise taxes in order to meet public finance expectations, it had lowered in the run-up to first round of the general elections.

Many suspect that behind closed doors in Brussels, the interim government has already assured the Commission of new public spending cuts, if the conservative PP win the elections and manage to form a coalition government. In that case, officials in Brussels might be withholding pressure to not interfere with the election results.

Promising Tourism Season 2016

The tourism sector will continue to be one of the biggest contributors to the Spanish GDP in 2016. It is expected to grow by 3.4 percent this season. Nonetheless, the report highlights that given the current political uncertainty in Spain and the geopolitical instability in Europe this figure may vary considerably, being 2.7 % growth the most pessimistic scenario. In terms of employment creation, 81 percent of the companies in the tourism and hospitality sector are expected to increase their staff between May and September. However, these new recruitments will hardly be translated into higher wages. This fact has been confirmed by the recently released EPA (Spanish Labour Force Survey) that highlights that the average salary in the sector will likely remain 39 percent below the overall average salary this year.

Spanish Football Expectations UEFA EURO

June and July are busy months for football fans. 24 European national teams are competing for the European Cup in France this year. Spanish fans have high expectations on their team. Tickets for the first three games have been sold out and a significant presence of Spanish supporters is expected in the streets of Toulouse, Nice and Bordeaux. This is not only because Spain is the defending champion, but also because the team performed well in the qualification matches. Vicente del Bosque, coach of the national team, has smoothly managed the generational transition after previous successes, selecting a group of new players that have brought ‘fresh air’ into the team while keeping its dynamic and attacking flair that has been very successful so far.

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