Remarks by Angel Gurría
23 November 2018 - Madrid, Spain
(As prepared for delivery)
Madam Minister, José Luis, ladies and gentlemen:
It is a pleasure to be back at the Foro Nueva Economía to share the OECD’s outlook on the global economy and Spain with you.
This is a very good time to be talking about these matters. As you know, yesterday, together with Minister Calviño, we launched our 2018 Economic Survey of Spain, which fundamentally highlights the strength of the Spanish economy and urges you to continue with your reform drive towards a model of inclusive growth that leaves no one behind. This will be important, as we are witnessing a gradual slowdown in growth, largely as a result of the global situation.
Let me therefore start by sharing our outlook on the international economic environment in which Spain is operating, drawing on our global projections that we updated just two days ago.
The global expansion has peaked. Our estimates indicate that the rate of global GDP growth has started to slow down, falling from 3.7% in 2018 to around 3.5% in 2020.
Although job growth should continue to help underpin domestic demand in the advanced economies in the near term, we project that macroeconomic policies will become less accommodative over time, and headwinds from trade tensions, tighter financial conditions and higher oil prices are set to continue.
Global trade has already started to drop off, with trade restrictions having adverse effects on confidence and investment plans, and global trade growth will be below 4% per annum on average over 2018-20.
Outcomes could be weaker still if downside risks materialise. First, trade tensions remain a source of downside risk to investment. The interconnection of our economies through global value chains means that few countries can escape the costs of stronger trade restrictions on the most common products. We estimate that further tariffs on US-China trade would reduce global GDP by 0.2 percentage points by 2020, and much more in the US and China themselves.
Second, financing conditions have tightened in emerging-market economies (EMEs) this year. Rising interest rates in the United States and a shift in risk sentiment have contributed to sizeable currency depreciations in some economies.
Signs of contagion are contained so far (Argentina, Turkey), but spillovers could be more consequential if a broader deterioration in investor sentiment were to arise. For instance, an increase in the interest rates required by investors by one percentage point in all emerging-market economies could reduce their GDP growth by around 0.5 percentage points over the next two years.
Third, China could face a sharper slowdown in growth on the back of trade tensions and macroeconomic policy choices. This potential slowdown could lower global growth through trade linkages, particularly in Japan, East Asia and commodity exporters.
Finally, the prolonged period of very accommodative monetary policy required to recover from the crisis has seen new financial vulnerabilities develop. Asset valuations are elevated in some markets, including housing, and levels of public and private debt are higher than prior to the crisis in many economies.
All these risks bring policy implications. An immediate need is to reduce uncertainty by arresting the slide towards protectionism through multilateral dialogue. A commitment to fair, open international trade benefiting all citizens is also necessary.
Although the requirements of macroeconomic policy differ from country to country, sufficient fiscal space is necessary to deal with possible negative shocks to the economy. At the same time, we must not allow the reform drive to slow down. On the contrary: the necessary structural reforms to tackle present and future challenges must continue.
Looking at Europe, we project that growth will moderate slowly from 2% in 2018 to 1.6% in 2020. The most important headwinds are from higher uncertainty and weaker external demand.
However, we hope that domestic demand will remain dynamic and will be supported by accommodative monetary policy, solid job growth and favourable financing conditions.
Again, the great challenge revolves around structural change: improving education, strengthening skills, reforming product markets, completing the single market for goods and services, pushing forward with the digital and green transformation and progressing with the banking union are the best guarantees for stronger, more resilient and inclusive growth in Europe.
Government debt and deficits remain high, and, in many countries, larger than prior to the crisis, limiting future room for manoeuvre. As the cycle of expansion continues, European governments should improve their fiscal positions and reduce debt.
Moreover, progress in the euro area in terms of financial resilience has been limited, and future financial volatility and unpredictability in sovereign bond markets could have spillover effects to countries with high debt. So we applaud the efforts by several European governments to promote greater fiscal convergence and strengthen crisis response tools.
This is the complex international environment in which Spain now finds itself. As we said yesterday when we presented the report, the Spanish recovery has surpassed most Euro Area economies in its pace and intensity, with an average growth rate of 3% a year for the past three years. Unemployment has fallen significantly. And the current account has now been in surplus for five years running, signalling that the economy is more competitive.
However, circumstances are changing, and the Spanish economy is still facing major structural challenges. Growth is slowing down: we expect it to be around 2.6% in 2018 and 2.2% in 2019. Although strong job creation and wage growth will support private consumption, household savings are at a historic low. Moreover, the growth moderation in Europe will adversely affect Spanish exports.
On the other hand, we have to ensure that the better macroeconomic results are felt by all citizens. The Survey of Spain focuses on how to increase the size of the cake and how to divide it up better. In so doing, it is crucial to boost productivity growth, but also to reduce inequalities, favouring a model of inclusive growth and a social policy that reaches the most disadvantaged.
With this important objective, yesterday in Congress we were discussing the OECD’s work on inclusive growth, which is an agenda that rises above party differences, and behind which we must all unite for the good of our citizens.
Allow me to highlight three key messages to achieve more inclusive, sustainable growth in Spain.
First, unemployment is extremely high, especially for vulnerable groups, such as youth and the long-term unemployed. Moreover, improving job quality remains a challenge. For instance, the share of temporary workers, which was 27% in 2017, remains high.
Second, a big remaining legacy of the crisis is that fiscal space remains limited, with public debt at around 98% of GDP. As the recovery continues, fiscal policy should concentrate on managing medium-term risks and preparing for future shocks. Spain can get more from prior reforms without additional fiscal costs.
Third, there are major regional disparities in such areas as employment, education and productivity in the business world.
To tackle these challenges, the Economic Survey makes a number of specific recommendations. Let me highlight some of the most important ones.
On the one hand, there is a need to continue boosting the effectiveness of active labour market policies, particularly for those who have been out of work for a long time. The co ordination of employment services needs improvement, and personalised plans should be introduced for each individual. There also needs to be a greater focus on skills acquisition and updating, especially training for low-skilled workers who are at risk of long-term unemployment or of remaining trapped in poorly-paid, low-quality jobs.
The fiscal situation in Spain could, moreover, be improved by making more effective use of the tax and transfer system, which is not as progressive as it should be. In particular, exemptions and reduced rates that erode the tax system’s efficiency should be reviewed, as should the targeting of expenditure on those who need it most.
On the other hand, in order to face up to the challenge of regional disparities, more effective co ordination between regions and the sharing of best practices would help to reduce these differences and promote more sustainable, better-distributed growth.
Ladies and gentlemen:
We are faced with an increasingly complex environment, but we have faith in the capacity of the Spanish economy to navigate these waters. Spain is a dynamic country which has been able to overcome the crisis and learn from it. A country that shares our principles and whose Government understands that the economy must be at the service of its citizens, not the other way around, since there can be no sustainable progress unless it is shared.
Against a background where co operation among countries on key issues for our planet, such as climate change, migration flows and the digital revolution, is increasingly necessary, we are pleased to see that Spain is committed to strong, responsible and efficient multilateralism of the kind promoted by the OECD.
The OECD is counting on Spain in its mission to promote more inclusive social and human globalisation. And we want Spain to know that, in turn, it can count on the OECD. Thank you.