Rafael Pampillón. Professor. IE Business School
29 June 2015
The industrial production index, the consumer confidence indicator… more and more data is pointing to the fact that Spanish families are starting to notice the economic recovery in their pockets.
A recent Wall Street Journal article headed “Why Spain and Other Eurozone Countries Aren’t Feeling the Recovery” said that Spain is growing but its citizens are not feeling the effects. Our aim here is to use figures to prove that the opposite is true.
Spain’s National Institute of Statistics (INE) recently published the Industrial Production Index for April of this year. The interannual rate of industrial production grew by 1.8%, corrected to allow for seasonal effects. This improvement in industry is due mainly to a greater level of production of durable consumer goods (+3.5%) and equipment (+1.2%). Hence the Industrial Production Index signaled that the economic situation of both families, as evidenced by rising consumption, and businesses is improving.
Effectively, the fact that consumption of durable consumer goods are growing, and in this case at a good rate, is relevant because it is a sector that tends to move in tandem with the economic cycle - the better the economic situation, the greater the demand for durable consumer goods. Moreover, it also means that consumers have confidence in the economy. Hence, when companies and families see the economic outlook as more promising, they decide to buy household appliances, IT goods, cars and furniture (all are durable consumer goods) to replace old ones with more modern versions.
Consumer confidence is growing
These signs of improvement in the production of consumer goods is further born out by the Consumer Confidence Index (CCI) for May, drawn up by CIS, which, on a monthly basis, gauges the perception of Spanish consumers of both the current situation and the outlook for the future. Last week we saw that in May this indicator reached 103.1 points. That is 1.3 points more than in April, and it is the third consecutive month that the CCI has been over 100. The CCI has a scale of 0 to 200 according to which anything over 100 means that consumers have a positive perception, and anything below means that they are feeling negative. With regard to consumers’ expectations, the figures for May also offered a very favorable outlook. Consumers’ confidence in the future economic situation grew over the last 12 months by 17.4%, reaching 114.6 points. This increase in confidence confirms that citizens are feeling the effects of the recovery.
In short, it appears that family consumption is here to stay. What’s more, it is likely to keep growing over the next few years due to an improvement in credit, a reduction in tax, rising employment, increased family wealth, and greater optimism of citizen about the future of the Spanish economy.
More positive outlook for business
As mentioned above, the IPI also shows growth, albeit slower, in the production of equipment. If the greater production of durable consumer goods is a sign of families’ confidence in the future of the economy, more production of equipment shows an improvement in business confidence. Hence, if production rises, and, as is happening now, the installation of machinery, that will also fuel economic growth. Effectively, investment in machinery is a key factor in increasing the production capacity of an economy and a sign that entrepreneurs are optimistic about continued economic recovery.
Furthermore, as confirmed by Markit economist Andrew Harker, Spain’s industrial sector is not only growing – it is doing it at an increasingly faster rate. The fact that the increase in new orders is rising faster than before the start of the economic crisis is particularly important.
Markit’s figures taken from the Purchasing Management Index show that levels of industrial production in May were higher than in April, which drove this indicator higher last month to its highest level since the onset of the crisis – 55.8. Because the number is over 50 it signals the growth of the Spanish industrial sector at an even faster rate than our European partners. In May, the average rate of manufacturing in the Eurozone stood at 52.2 (Germany stood at 51.1 and France at 49.4).
If the industrial sector continues to grow at this rate, it will need to keep increasing investment in equipment. In the last six quarters business investment in equipment has grown at a spectacular annual rate of 9%. The amount of equipment being bought is also rising fast (+6%). Capital assets are a broader concept than equipment, given that the term includes industrial plants, building, machinery, computers and infrastructures like roads, ports, airports. The mission of capital assets (which include equipment) is to raise national production and the productivity of workers.
Rising levels of employment
It is still early days to know how this major rise in investment will affect the economy. Nevertheless, after several years of marked drops in production capacity - in other words, after a fall in the rate of growth of production potential – we are now once again creating production capital. Some economists believe that this greater level of investment is generating not just economic growth but also less unemployment and more jobs. According to the official Survey of Active Population, in the first quarter of 2013 there were 6.3 million unemployed in Spain. Since then this figure has gone down by almost a million (in the first quarter of 2015 there were 5.4 million unemployed). Something similar has occurred with the level of employment. In May of 2013 Spain had 16,367,013 contributors to its social security system, while by May of 2015 levels of contribution had reached 17,221,310 workers. That means that almost a million more workers are feeling the effects of the recovery.
Is employment rising if we measure it in terms of the number of working hours equivalent to full-time Jobs? According to Spain’s National Institute of Statistics, in the last twelve months there was the biggest growth in employment figures in almost eight years, having risen by 460,000. We would of course like to see more sustainable, quality employment that is well paid. But in order for that to happen the Spanish economy has to move toward an economic model that is far more intensive in terms of technology and capital. That means that the workers currently being hired and who will be hired in the future need a high level of education. But in order to attain such a level, the new generations will have to acquire an excellent education, which will also serve to leverage the many work opportunities that there are in other countries.
The difficulty lies in the fact that Spain’s productive model will not be capable of absorbing unskilled workers. According to the Survey of Active Population, of the 5.4 million unemployed, almost 4 million did not finish high school (ESO), or only studied the legal minimum. If the people who make up this segment do not increase their qualifications, they will have enormous difficulties to find a job. The remaining 1.4 million, however, have finished their high school studies, have done some kind of higher education, or have a university degree. In other words they have a skills that will enable them to find qualified work.
In spite of the delicate state of its labor market, Spain’s science and technology system needs to commit to innovation, which would ensure a considerable positive impact on the economy, and durable, long-term growth. It is important that the economy grow, but it is also essential to grow productivity levels in order to be more competitive. The powerful new information technologies of the digitalized 21st century have to increase the productivity of Spain’s workers. Compared to the previous quarter, during the first quarter of 2015, Spanish GDP grew faster than its level of employment, which is proof of the increase in apparent work productivity.
This change in productive model will follow its course if the political changes taking place assure a stable environment for businesses and for foreign investors. As has occurred in other countries (Great Britain, Germany, etc.), as time passes, reform policies will end up producing good results in terms of wellbeing. The result will be an economic recovery and rise in levels of employment that will be increasingly evident in the lives of a greater number of citizens.