Spain

Spanish GDP grew by 2.6% in 2018, down from 3.0% in 2017. Domestic demand remained resilient, supported by a strong labour market and favourable financing conditions. Adverse global trade dynamics resulted in a negative contribution from the external sector. Spain recorded a current account surplus in 2018 for the sixth year in a row. However, the easing of external trade and an oil price recovery halved the current account surplus to 0.9% of GDP in 2018. The international debtor position reached an 11-year low at 77.1% of GDP. Inflation eased to 1.7% from 2.0% in 2017 driven by a lower contribution from both core and non-core components.

Employment growth remained solid at an average of 2.7% in 2018. The unemployment rate fell to 14.5% by year end, about half of its peak in mid-2013, but still remained well above the euro area average. The labour market recovery is not complete as unemployment remains high in some segments of the population, including youth.

The general government deficit dropped to 2.5% of GDP from 3.1% in 2017. Expenditure constraints and the cyclical upswing supported deficit reduction. Looking forward, the rejection of the 2019 draft budgetary plan may limit a faster rebalancing of public finances. The projected economic slowdown will also reduce past cyclical support to the deficit correction given a high structural deficit. Public debt remains high but has been on a declining trend over recent years, and stands at 97.1% of GDP in 2018.

Developments in Italy slightly affected Spain’s government bond market last year, but spillovers proved to be temporary and contained. After peaking at about 1.7% in October, 10-year bond yields rallied to around 1.4% by year-end, and the spread versus Germany ended the year broadly unchanged compared to end-2017. Spain retained good market access and raised €132 billion in medium- and long-term debt in 2018, above its initial €126.3 billion target. On the other hand, Spain reduced its net issuance to €34.3 billion from €40 billion. All major rating agencies upgraded Spain in 2018.

Spanish banks improved profitability and asset quality, helped by the recovery of the economy and the real estate market. This allowed banks to sell a large amount of non-performing assets during 2018. Domestic profitability and NPL ratios improved, edging closer to the euro area average. When including business abroad, Spanish banks have better NPL and return on equity ratios than the euro area. The decrease of the overall credit stock in Spain eased, because credit to households increased in the 2018 third quarter for the first time since the crisis. Banks’ capital buffers are adequate, but capital ratios remain below the euro area average.

Spain created a macro-prudential authority and empowered Spanish financial supervisors with additional macro-prudential tools. The deadline to divest Bankia has been extended until December 2021. The merger of Bankia and Banco Mare Nostrum was completed in January 2018.

Under its Early Warning System, the ESM continued to assess positively Spain’s ability to honour its ESM loan service repayments. In 2018, Spain made an additional three voluntary repayments of €8 ­billion in total, leaving the ESM outstanding loan at €23.7 ­billion. Early repayments give a strong positive signal to the market about the success of the Spanish financial assistance programme and also reinforce the position of the ESM, as a mature institution that successfully supported countries during a crisis. Given high public debt levels, a credible fiscal strategy and stronger reform momentum are key to reducing the vulnerability to adverse shocks going forward.