Spanish economy set to grow 3.1% this year, but will fall to 2.3% in 2017

BBVA bank blames Brexit fallout and uncertainty over polices for slowdown next year

Cristina Delgado
BBVA's Madrid headquarters.
BBVA's Madrid headquarters.EFE

Spain’s economy will register growth of more than 3.1% for 2016, but will manage only 2.3% for next year, largely due to the impact of Brexit and the government’s fiscal policy, says the latest report from BBVA Research.

The forecast for this year is more optimistic than the OECD’s, which predicts 2.8%, while the government’s figure is 2.9%, the same as the Fitch rating agency. Economic think tank Funcas goes for 3%, while the IMF is gloomiest, with 2.6%.

Household spending will continue to drive growth, says the BBVA, fed in part by “improvements to the labor market and borrowing, as well as an expansive fiscal policy and progress in correcting internal imbalances.”

It is becoming necessary to have some certainty as soon as possible about the policies to be implemented in the coming years, warns the BBVA

At the same time, the bank points out that Spain will continue to benefit from the European Central Bank’s bond purchases, and while oil prices are rising, they are still relatively low, all of which will give Spain similar growth rates to 2015, among the highest in the EU.

“If the tendency in the second half of the year continues as expected, growth could reach 3.2%, says Rafael Doménech, BBVA’s head of research at its Developed Economies unit.

But BBVA says that Spain will not be able to sustain growth above 3% for a third year running, and that 2017 will see a slowdown.

“The atmosphere of extreme doubt about economic policies will continue,” warns the BBVA, noting that although the country has not been fined by the EU for failing to meet its deficit target, it must still press ahead with further adjustments this year and the next, as well as implementing changes to fiscal policy.

“It is particularly important to resolve this given the commitment to reduce the deficit to levels of around 3% of GDP by the end of next year,” says BBVA. “It is becoming necessary to have some certainty as soon as possible about the policies to be implemented in the coming years,” its researchers warn.

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This uncertainty about further adjustments will make itself felt in 2017, continues BBVA. “The deficit for 2016 will be reduced by just 0.6 percentage points to 4.4% of GDP, slightly below the new stability objective (4.6%). For 2017, it is expected that the economic cycle will continue to correct the deterioration in public accounts, but within a scenario where there have been no changes to fiscal policy, the deficit will only be reduced to 3.6% of GDP, and will exceed the budget goal of 3.1%,” it adds.

Add to this the fallout from the UK’s decision to leave the European Union and the worsening export outlook, the Spanish economy will be decidedly weaker next year than this.

English version by Nick Lyne.

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