The “Brick” Returns To GDP

24/12/2014 – El Mundo

The construction sector generates new growth after six years of decline. The “strength” of consumption and investment boosts the economy by 0.6% this year, the largest quarterly increase in the crisis.

Yesterday, the Bank of Spain affirmed the economic upturn of the national economy in its December economic bulletin, confirming that Gross Domestic Product (GDP) will grow by 0.6% in the fourth quarter –the biggest rise since the start of the crisis–, and the year will close with an increase of 1.4%. To achieve renewed economic stability, Spain will rely on the same factors as prior to the crisis: the “strength of private domestic demand” and construction, marking the end of its cutbacks “after six years of contraction.”

Thus, Spain will return to the economic model that allowed significant increases in GDP in the late 1990’s and beginning of the new millenium; years of success that came to an abrupt end when the crisis hit. It is true, as pointed out by the Bank of Spain, that the outlook for the construction sector “shows, in any case, signs of very moderate recovery, not yet free from uncertainties”; however, “the indicators relating to investment point to the end” of a process that has caused the weight of this sector in GDP to fall by more than 50% compared to 2006.

Also, within the labor market, the institution notes that, “In terms of monthly rates, the construction sector will see a notable rise in the rate of job creation.” Furthermore, the document states that “A slight increase is observed in approvals for new residential construction projects.”

As for domestic demand, the institution led by Luis María Linde emphasizes its “strength,” while asserting that it has maintained the “dynamism” thanks in part to “the positive growth in confidence and employment.” The Bank also adds that “household spending has increased in the fourth quarter, both in terms of consumption and in residential investment, which may have experienced a small increase.”

The positive performance in domestic demand stems from the fall in external demand that, during the worst years of the crisis, was one of the few pieces of positive news. In fact, the Bank of Spain said that, “If the forecasts are confirmed, the foreign sector will have contributed negatively to GDP in 2014,” something that had not happened since 2007, i.e., since before the economic turmoil began to be noticeable in Spain.

This dataset comes to agree with the many economists and analysts who in recent months have ensured that the Government has missed a great opportunity to change and modernize the national economic model. In addition, one of the “fundamental bases” of recovery, warns the Bank of Spain, is wage moderation. Therefore, “the return procedures — based on generalized wage increases that extend uniformly to all sectors and companies — would be a step back that could disrupt the recovery of competitiveness of the Spanish economy.”

The December economic bulletin also addresses the decline in the inflation rate, “which has intensified in the fourth quarter, beyond what was expected a few months ago, as a derivation of the acceleration of falling oil prices in the final stretch of the year.” This has led the Bank of Spain to correct its forecast for oil prices, which in July stood above 107 USD for the next year and has now lowered to 68 USD.

To maintain moderation of crude oil, the CPI will continue “in negative territory during the early part of 2015” and the current deflationary rather than disinflationary context will continue, because the organization does not relate at any time this phenomenon with the Spanish economy. It does, however, relate it to the Eurozone, where this circumstance could push the European Central Bank (ECB) to take further unconventional measures in the form of purchases of government debt.

Finally, in terms of employment, the Bank of Spain notes that “employment has increased in 2014 to a rate close to 1%”, although it points out improvement “has focused on temporary employment.”

Original article: El Mundo

Translation by: Aura REE