Spanish Economy Beats Forecast as Growth at Pre-Crisis Level

Spain’s economy grew at the fastest pace in seven years in the first quarter, putting it on track to outpace its euro-area neighbors as the government forecast sustained growth would keep driving down unemployment.

Gross domestic product rose 0.9 percent from the previous quarter and 2.6 percent on an annual basis, the Madrid-based National Statistics Institute said on Thursday. Unemployment would drop to 15.6 percent in 2018 and public debt would start falling in 2016 as the economy sustains annual growth of about 3 percent, the government said later in an economic forecast.

Economic momentum isn’t yet feeding into the labor market, with unemployment rising for two consecutive quarters as Spain prepares for elections later this year.

Pegging its fortunes to growth and jobs, Prime Minister Mariano Rajoy’s government on Thursday also presented its national stability plan that included a budget deficit target of 0.3 percent of GDP for 2018 from 4.2 percent forecast for this year.

“The expansion of the economic activity has been driven by important structural reforms and strengthened by short-run factors,” including a drop in oil prices, said Geoffrey Minne, an economist at ING Bank. “Not everything is rosy,” he said, citing unemployment and the budget deficit.

Separately, the statistics institute said a slump in consumer prices eased in April. The inflation rate on a European Union-harmonized basis was minus 0.7 percent in April after hitting a record low of minus 1.5 percent in January. On a monthly basis, prices rose 0.7 percent.

Quarterly Growth

The quarterly growth figures announced Thursday exceeded the median forecast of economists for 0.8 percent expansion. Spanish bonds were little changed, with the 10-year yield at 1.47 percent as of 9 p.m. in Madrid. The yield is up from about 1.2 percent at the start of the month.

Spain expects the economy will grow 2.9 percent this year and next and accelerate to grow 3 percent in 2017 and 2018, the government said as it updated its stability plan forecasts.

Economic growth will pull unemployment down to 21.1 percent at the end of this year as 600,000 jobs are created. Annual average unemployment will be 19.8 percent in 2016 and 17.7 percent in 2017.

The government predicts Spain can bring down public debt as a proportion of GDP to 93.2 percent in 2018 from 98.9 percent forecast for this year. The debt-to-GDP ratio will drop to 0.3 percent in 2018 from 4.2 percent targeted this year, the budget ministry said in an e-mailed statement.

Domestic Demand

While there isn’t a breakdown for the latest GDP figures yet, economists said private consumption and domestic demand were probably the main drivers. Rajoy has forecast that Spain will grow 2.9 percent this year, which would make it the fastest-growing economy among major euro-area nations, including Germany. It will maintain that pace in 2016, his government projects.

Hit by a number of scandals and carrying the baggage of austerity, Rajoy is pinning his re-election hopes on the economy. The government has revised its growth projections three times in less than five months.

While the economy is strengthening and there are more new jobs, unemployment remains stubbornly high with more than 5 million people out of work. The rate has tripled to close to 24 percent since 2007 and is more than twice the euro-area average.

A poll published by Cadena Ser on Monday showed Rajoy’s conservative People’s Party on top with 22 percent of the vote. However, the PP would lose its overall majority and would need support from rival parties to stay in office. The Ser poll also showed Podemos, the anti-austerity party, slipping to fourth place after leading in polls for four months.

“On the political front, we remain of the view that the risks are now more contained than six months ago,” said Antonio Garcia Pascual, an economist at Barclays Plc. In the general election, “the likelihood of Podemos leading a government majority or even a government coalition has fallen and is overall small.”

Source: Bloomberg