focus on spain (ibr 2013)

Focus on: SpainGrant Thornton International Business Report 2013

GDP€1 trillionaproximately

more than47 million

people

in 2012

Fourthlargesteconomyin the eurozone


more than47 million

people

in 2012



more than47 million

people

in 2012



more than47 million

people

in 2012


Focus on: Spain 2

Introduction

Focus on: Spain

Spain is an advanced economy of more than 47 million people. In 2012, its GDP was approximately €1trn (US$1.35trn), making it the 13th largest economy in the world, and the fourth largest in the eurozone.

Drawing on data sources such as the Grant Thornton International Business Report (IBR), the Economist Intelligence Unit (EIU) and the International Monetary Fund (IMF), this short report considers the outlook for the economy, including the expectations of 400 businesses interviewed in Spain, and more than 12,500 globally, over the past 12 months.

José María FernándezManaging partnerGrant Thornton Spain T +34 91 576 39 99 E [email protected] www.grantthornton.es

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Focus on: Spain 3

The Spanish economy has endured a tough few years of economic contraction, rising government debt, harsh fiscal austerity and soaring unemployment.

Focus on: Spain

However there have been more encouraging signs in recent months including the end of the recession, the stabilisation of the labour market, a return to growth in the eurozone – which remains a key export market

• the economy expanded by 0.1% in Q3 from the previous quarter, up from -0.1% in Q2 bringing a two-year recession to and end

• exports increased by 6% in Q2 from Q1 (9.2% year-on-year) whilst imports climbed by 5.9% (3.1% year-on-year)

• strong merchandise trade and tourism helped Spain record a current account surplus of €1.4bn in the first half of 2013, the first time this has been achieved since records began in 1990

• merchandise export earnings rose by 9.4% in January-July compared with a year earlier, with net foreign earnings from tourism up by 4.7%

• the cumulative current-account surplus in the three months to July was €6bn or 0.6% of GDP

• the unemployment rate stood at 25.9% in the third quarter, down from a record 27.2% in the first quarter.

Key Indicators

EconomyExport destinations (2012)

France

France

Germany

Germany

Italy

Italy

Portugal

China

Other

57.4%

16.9%

10.9%

7.7%

7.1%

5.7%

6.8%

12.0%

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Others

Source: Economist Intelligence Unit (2013)

Import originations (2012)

despite considerable efforts to diversify – and a dramatic increase in exports following a painful internal devaluation which should see the current account climb into surplus in 2013.

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Focus on: Spain 4

Focus on: Spain

Despite climbing out of recession in Q3, the Spanish economy is expected to contract by 1.3% in 2013, returning to growth of just 0.2% in 2014. The recovery is expected to be slow and unspectacular with expansion of less than 1% per annum expected in the period 2015-18.

Continuing fiscal austerity, the collapse of house prices and weak domestic demand continue to weigh on growth. The budget balance is forecast to shrink from -7.1% in 2013 to -6.7% in 2014 and back within the EU target range of -3% by 2018. Meanwhile net government debt is forecast to peak at 92% of GDP in 2017. The unemployment rate is expected to remain elevated over the forecast period, peaking at 26% in 2014 before dropping slowly to reach 22% by 2018.

Recent strong export performance is expected to drive growth, with the current account forecast to move into surplus in 2013 and average 1% of GDP in the short to medium-term.

The share of merchandise exports to the EU fell to 63% in 2012, down from 71% in 2008 and further diversification is expected to drive export growth of 2.9% in 2013, slowing slightly to 1.9% in 2014 and 2015. Unemployment and austerity will continue to hold down imports which are expected to contract by 3.9% in 2013 and 0.5% in 2014 before returning to growth of 1.8% in 2015.

Any deterioration in market sentiment in Spain or the wider eurozone is a major downside risk to this forecast. Some of the housing, construction, consumer indebtedness and banking imbalances have been corrected but the outlook remains difficult. House prices remain 35% below their 2007 peak. Around 60% of the funds from the 2012 banking sector bailout remain unused and government borrowing rates have dropped in recent months so the hope is that the economy can avoid a sovereign bailout and the accompanying tough fiscal measures.

Economic outlook

General government net debt (% GDP)

Source: International Monetary Fund (2013)

2008

2013

2018

31%

81%

92%

89%

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62%

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Q1- 2012

Q2- 2012

Q3- 2012

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17%

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Focus on: Spain 5

Business growth prospectsBusiness optimism in Spain improved dramatically in Q3, climbing from -50% to -10%. While this still means that a majority of businesses are pessimistic, this is the most confident Spanish businesses have been since 2008.

The renewed optimism is feeding through into business growth prospects. On average over the past 12 months, net 17% of businesses have indicated an expectation to raise revenues, up from just 3% in 2012. Profitability expectations have averaged just net 2% over the past 12 months but climbed to 14% in Q3, up from 8% in Q2 and 1% in Q1. This is the highest level recorded since the same period in 2011, although it remains well below the eurozone average (26%). Spanish expectations for investing in plant & machinery stood at net 24% in Q3, similar to the eurozone average (25%).

Focus on: Spain

Net percentage of businesses expecting to hire people (next 12 months)

Net percentage of businesses expecting an increase (next 12 months) - Q3 2013

Revenues Profits Investment

5%

10%

0%

-15%

-10%

-5%

-20%

Source: Grant Thornton IBR 2013


Job creation tends to lag recoveries as businesses work through excess capacity and wait for sustained levels of demand before they make long-term investments in people. With overall and youth unemployment at record highs in Spain, there is also some welcome news for job creation from the IBR data. Hiring expectations climbed into positive territory in Q3 following seven straight quarters of negative data. Net 3% of businesses now plan to hire workers over the next 12 months, the highest level since the same period in 2011.

SpainSpain

EurozoneEurozone

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Focus on: Spain 6

Focus on: Spain

Business growth constraintsContinuing economic uncertainty is the greatest constraint on the expansion plans of Spanish businesses. This concern was cited by 56% of business leaders in Q3, down from 67% in Q2. Elsewhere in troubled southern Europe, businesses in Greece (82%) and Italy (58%) are even more concerned.

Percentage of businesses citing factor as a constraint on growth

Shortage of finance

Bureaucracy

Economic uncertainty

Low demand

56%

48%

51%

28%

10%

42%

36%

27%

35%

26%

Lack of skilled workers

Spain

Eurozone

With the banking system still recovering and house prices still a third lower than their 2007 peak, the days of easy credit are well in the past. More than half of Spanish business leaders cite a shortage of finance as a constraint on growth (51%) which is slightly above the southern Europe average (47%) and well above that of the wider eurozone (27%).

Despite improved export performance, domestic demand remains weak and 48% of business leaders cite a lack of orders/reduced demand as constraint on their growth plans. This factor has remained fairly stable over the past two years but the 2013 average (49%) is well above that of 2011 (40%). Just over a third of eurozone businesses (36%) cite a lack of demand as a constraint, although this represents a significant decline from 55% at the height of the financial crisis in 2009.

By contrast, the proportion of businesses citing bureaucracy (28%) and a lack of skilled workers (10%) are well below the eurozone averages. The comparison with Italy, another

struggling economy in southern Europe, is interesting in this regard: 64% of Italian business leaders cite regulations and red tape as a constraint on expansion plans. This is despite Italy having undergone a much less painful adjustment programme, perhaps highlighting the advantage of Spain’s relatively stable government.

Focus on: Spain 7

Focus on: Spain

Net percentage of businesses reporting an increase in people (last 12 months)


A key aspect of the eurozone sovereign debt crisis has been the inability of economies to devalue their currencies to boost the price competitiveness of their goods and services. However, as a consequence of severe austerity measures and low levels of economic activity, economies such as Spain have gone through a painful internal devaluation, lowering wages and selling prices relative to their competitors.

Due to an increase in productivity and a decline in wages, Spain’s unit labour costs dropped by 2.3% in Q2-2013 compared with the same period twelve months previously. Since their 2009 peak, unit labour costs have fallen by 10% in Spain. This compares with Italy where labour costs have risen by almost 5% over the same period.

Falling wages have given businesses the space to lower prices. Over the past four years a majority of Spanish businesses have indicated plans to reduce selling prices. Across 2013, net -11% have indicated an expectation to cut prices. This compares to 11% across the eurozone and 14% in Italy, giving a significant boost to the competitiveness of Spanish output both at home and abroad.

The consequences of this approach are broadly positive in terms of the external sector. The number of exporting businesses in Spain has increased by 28% since 2007. Merchandise exports are up by 20%, with a greater share going outside the EU. The IBR highlights this increasing confidence: net 39% of Spanish businesses

Restoring competitiveness Percentage point difference between Spanish and Italian business expectations

10%

-20%

15%

-15%

20%

-10%

25%

-5%

2007 2008 2009 2010 20122011 2013

5%

-25%

0%

Prices

Spain

Exports

Italy

Eurozone

expect to increase exports over the next 12 months, compared to 26% in Italy and across the eurozone.

The downside of the internal devaluation in Spain has been felt domestically. Over the past 12 months, 18% of businesses in Spain have shed workers – an unhappy trend that has continued since 2009. Over the same period, 4% of businesses in Italy have hired workers, rising to 10% across the eurozone. Tellingly, the unemployment rate is now touching 27% in Spain – more than double the rate in Italy. This rises to 57% of young people in Spain, considerably higher than the rate in Italy (40%).

Falling wages and rising unemployment have reduced the amount of money Spanish people have to spend. The resulting decline in demand for imports has improved the current account balance, but private consumption is expected to decline by 2.9% in 2013. Levels of consumption are expected to pick up thereafter but are still expected to be 3.5% lower in 2018 compared with 2010.

-18%

4%

10%

© 2013 Grant Thornton International Ltd.

‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to theirclients and/or refers to one or more member firms, as the context requires.

Grant Thornton International Ltd (GTIL) and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provideservices to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions.

www.gti.org

CA1311-04

IBR 2013 methodologyThe Grant Thornton International Business Report (IBR) is the leading mid-market business survey in the world, interviewing approximately 3,300 senior executives every quarter in listed and privately-held businesses all over the world. Launched in 1992 in nine European countries, the report now surveys more than 12,500 businesses leaders in 45 economies on an annual basis, providing insights on the economic and commercial issues affecting companies globally.

The data in this report are drawn from interviews with chief executive officers, managing directors, chairmen and other senior decision-makers from all industry sectors in businesses with 100-499 employees.

Q3 data is drawn from 3,300 interviews globally (100 in Spain) conducted in September 2013. 2013 data is drawn from over 12,500 interviews (400 in Spain) conducted between November 2012 and September 2013.

To find out more about IBR, please visit: www.internationalbusinessreport.com.

Dominic KingGrant Thornton International LtdGlobal research managerT +44 (0)207 391 9537E [email protected]

Maria RuizGrant Thornton SpainCommunications, Marketing and BD Director T +34 91 576 39 99 E [email protected]