Spain’s economy

Closing the gap
OECD Observer

Spain’s economy has been performing well, but more needs to be done to foster continuing convergence within the euro area, the latest Spain economic survey warns.

For a decade now, Spain’s performance has been impressive. Growth has been robust at some 2.7% in 2004 and is expected to rise to 3% in 2006, allowing real convergence to occur at a fairly brisk pace. In fact, the gap in Spain’s standard of living compared with the euro area has narrowed, shrinking from 20% below the average to less than 13% from 1995 to 2003.

The gap with the OECD average is narrower still: Spain’s GDP per head was some $24,500 in 2003, compared with an OECD average of just over $26,000, according to revised figures adjusted for differences in purchasing power issued in March 2005. Fiscal consolidation, the fall in interest rates due to the introduction of the single currency, structural reforms pursued since the mid-1990s and a surge in immigration have created a virtuous circle of rapidly rising activity sustained by strong job creation.

But the latest OECD Economic Survey of Spain also points to dark spots. Unemployment, at over 10%, has fallen sharply in recent years, but is still widespread. Productivity gains have also been meagre, and in fact trailed average gains in the euro area by some 0.2 percentage points over 1995-2003. Inflation, though, is relatively high, with the surge in house prices a cause for concern.

In particular, maintaining economic stability and competitiveness while promoting further convergence will be a tough task for policymakers, as this will demand an acceleration in the pace of structural reform, the survey says. Take the inflation differential, which has averaged some 1.2 percentage points per year above the euro area since the creation of monetary union. And in February this year inflation stood at 3.3% in Spain, but 2% for the euro area as a whole (see Databank). The gap is eroding Spain’s competitiveness and must be reduced.

How? One measure is to improve the collective bargaining system and strengthen competition in the sheltered sectors of the economy. The property sector also needs to cool down; house prices have almost doubled in real terms since 1998, and the associated rapid increase in household indebtedness also makes domestic demand more vulnerable to higher interest rates.

Nor can the persistence of the inflation differential be ascribed to mere catching up, the report warns. Demand pressures partly explain the differential, though real wage gains have been moderate. Another reason, the report argues, is high nominal wage increases, which have remained above the euro area average despite lower productivity gains. As a result, even in several sheltered sectors, where demand pressures are stronger and effective competition is still quite weak, businesses have been able to pass on rising labour costs into prices.

Boosting productivity gains would help cure this, while upping the pace of convergence with the euro area at the same time. Productivity has been dragged down for a number of reasons: a large number of low-skilled workers entering the labour market is one, and problems arising in the education and training system are also partly to blame. Spain is lagging in human capital investment and technological development, which is hardly conducive to the emergence of high value-added activities. The government’s objective is to raise performance, and this is to be encouraged, even though the results of such reforms will no doubt take time to be visible. The economy must avoid being locked into a specialisation in relatively low-technology sectors, the survey warns, in particular as it is likely to face growing competition from other countries with lower labour costs.

Although the appreciation of the euro, coupled with the rise in relative labour costs, has weakened price competitiveness in recent years, industrial firms have been able to maintain their market share until 2003 either by reducing margins or, more recently, by adjusting the workforce. This situation, which shows up in a widening dichotomy between developments in the exposed and sheltered sectors of the economy, will be hard to maintain.

Keeping a grip on public finances will also remain a challenge, particularly in view of the very decentralised institutional set-up, and the prospect of population ageing. The policy of balancing the government account in structural terms, which the authorities intend to pursue over the coming years, could result in a slightly expansionary macroeconomic policy stance, the survey says. For 2005, this poses no problem as the output gap–the difference between actual output and potential which can help measure demand-pull pressures–is still slightly negative, while growth will probably be close to potential. Though this projection is a little more pessimistic than that of the authorities, reflecting a somewhat higher oil price assumption, balancing the budget should be feasible because tax receipts are likely to remain buoyant. Looking further ahead, the persistence of low real interest rates and the property boom should keep domestic demand growing swiftly. In other words, fiscal policy should remain prudent.


OECD (2005), OECD Economic Survey of Spain

OECD, Spain Policy Brief

©OECD Observer No 249, May 2005

Economic data

GDP growth: -9.8% Q2/Q1 2020 2020
Consumer price inflation: 1.2% Aug 2020 annual
Trade (G20): -17.7% exp, -16.7% imp, Q2/Q1 2020
Unemployment: 7.4% Aug 2020
Last update: 13 Oct 2020

OECD Observer Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Digital Editions

Don't miss

Most Popular Articles

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2020