NNota deCE Conjuntura Econòmica

Analysis of the Evolution of the Catalan Economy 2017 Annual Report

Number 100 July 2018

Nota de Conjuntura Econòmica Analysis of the Evolution of the Catalan Economy Number 100. 2017. Annual Report. July 2018 ISSN: 2013-3480

© Government of Catalonia. Ministry of the Vice- Presidency and of the Economy and Finance

This work is subject to an Attribution-NonCommercial- Noderivs Creative Commons license. Licence summary: http://creativecommons.org/licenses/by-nc-nd/3.0 Full license: http://creativecommons.org/licenses/by-nc-nd/ 3.0/legalcode.

Edited by Directorate General for Economic Analysis Rambla Catalunya, 19 08007 Barcelona http://economia.gencat.cat

Produced by Directorate General for Economic Analysis in cooperation with the Directorate-General for Budgets

Closed: 15 July 2018

Graphic design Enric Jardí

To our colleague, Doctor Àngela Fernández Céspedes, for her work in implementing economic analysis at the Generalitat de Catalunya. Nota de Conjuntura Econòmica has been published without interruption since 1993. As she was the driving force behind the first 99 issues, we believe it only right and proper to dedicate Number 100 to her.

Table of contents

Introduction 5 1. World economic situation 8 2. Gross Domestic Product 20 Box 1. Reorientation of the investment pattern and evolution of 38 productivity in the Catalan economy 3. External trade 46 Box 2. Export intensity of the Catalan economy and potential 61 future markets 4. Business trends 65 Box 3. Exporting companies 73 5. The labour market 77 6. The evolution of prices and wages 90 6.1. Prices 90 6.2. Wages and labour costs 100 Box 4. The falling share of earned income in Catalonia 110 7. The monetary, financial and stock market sector 117 Box 5. Finchtech and the financial sector 122 8. The public sector 125 8.1 The administrative public sector of the Government of 125 Catalonia 8.2. The local public sector 131 8.3. Central Government in Catalonia 133 Box 6. Gross disposable household income in the counties and 137 other territorial units Box 7. The Survey on Living Conditions 147 9. Economic indicators 156 10. Social and gender indicators 161

Introduction

Economic results in 2017 reflected the solid growth of the Catalan economy, with GDP continuing to grow intensively (by 3.4%) amid extraordinary institutional tensions and an international context marked by general recovery. The expansion recorded in 2017 was a little more moderate than in the two previous years, but still continued at a higher rate than in either the Spanish economy as a whole (which grew by 3.1%) or the euro area (where growth was 2.4%).

The most adverse scenarios that some institutions and media put forward towards the end of 2017 did not materialise thanks to the pattern that has characterised the recovery: the leading role of industry and the outstanding contribution to growth made by the foreign sector. Although several indicators related to tourism and the retail trade showed a certain decline in the fourth quarter of 2017, this one-off event was not enough to slow down the strong growth of employment, the dynamic performance of industry and the flourishing of export activity. At the same time, a number of companies changed their business addresses, though these movements had merely notarial effects and very little impact on GDP. In short, the Catalan economy continued to maintain very significant growth in the closing months of 2017, clearly exceeding expectations.

The data available for 2018 also indicate that the expansionary phase will be maintained, although economic growth is expected to be a little more moderate: after four years of strong recovery, expansion will be normalised towards a rate more consistent with potential long-term growth. Accordingly the growth forecast for 2018 is 2.9%. This outlook, which is in line with the scenario foreseen for neighbouring economies, considers certain factors that will be less positive than in recent years, such as increasing protectionism on a global scale, the less expansionary tone of monetary policy and rising oil prices.

Since late-2013, the Catalan economy has continued to advance towards a more balanced and sustainable growth model, from the point of view of both supply and demand. The double surplus in external trade (both foreign and with the rest of Spain) and the generalised growth of the major economic sectors, with industry performing particularly strongly, are trends that characterise the recovery phase: in 2017, Catalonia recorded a surplus in goods and services trade equivalent to 12.2% of GDP, including the contribution of foreign trade (6.5 percentage points) and trade with the rest of the State (5.7 points). A strong growth in exports should also be noted.

5 Nota de Conjuntura Econòmica. 100 July 2018

Goods exports rose by 8.7% in 2017, a 20% increase on the figure for 2012. The role of industry should also be highlighted. Industry is a key sector for stimulating innovation and export capacity and improving production processes. In short, it is a vital sector when it comes to laying the foundations for a sustainable growth model. Industry recorded very strong growth (much higher than in the other euro area countries) in the recovery phase, recouping some of the relative weight that this sector had lost during the previous expansionary phase both prior to and during the crisis. As a result, in 2017, the industrial sector accounted for an impressive 19.7% of GDP. The recovery phase was also characterised by intense job creation and an improvement in productivity, all within a context of recovering cost competitiveness thanks to the internal devaluation of salaries.

All this notwithstanding, the new expansionary phase that we are entering in 2018 is faced by certain notable challenges: these include not only some of the negative challenges that have come down to us from the crisis, but also structural challenges and new future challenges. In 2017, the GDP of the Catalan economy returned to pre- crisis figures, although the number of jobs continued to stand at 8.2% below the 2007 level. In addition, in terms of GDP per capita, Catalonia has lost considerable ground compared to the EU. The relative position in 2007 indicated a differential of 26.9 percentage points in favour of Catalonia, a figure which fell to 10.5 percentage points in 2013. Thanks to the recovery, the country’s relative position to the EU has improved partially, rising to 15.5 percentage points. Accordingly, one of the challenges that face us as a society is to establish a more sustainable growth pattern that will enable us to regain some of the ground lost to our immediate neighbours.

The labour market is another area where there is considerable room for improvement. The unemployment rate has fallen substantially, to stand at 12.2% in the first quarter of 2018, and the proportion of long- term unemployed people continues to decrease (down to 46.5%, also in the first quarter of the current year). However, the high unemployment rate among certain groups (young people and non-Community foreign citizens in particular), and wage stagnation (salaries are substantially lower in newly created jobs), are probably the part of the legacy of the crisis that poses the greatest threat to welfare and may also hinder the dynamism of domestic demand. It is therefore necessary to continue creating employment while also ensuring more balanced income growth in an environment that guarantees more stable and higher quality occupation. The challenge of creating quality jobs also has a structural aspect and is, to a large extent, linked to the many dysfunctions of the labour market (seasonality, very short temporary contracts, high turnover and large relative weight of non-voluntary part-time work). The effects of the crisis have also been observed in the

6 Nota de Conjuntura Econòmica. 100 July 2018 results of indicators of relative poverty and inequality, which have not significantly improved during the recovery period. Another imbalance caused by the crisis is the Government of Catalonia’s high public debt, which reflects the persistence and atypical magnitude of the fiscal deficit with the State Administration. This is also a structural challenge, one that threatens the solidity of the Government of Catalonia’s public finances within a context in which, in addition, notable efforts have been made in recent years to reduce the public deficit.

Prominent among the new future challenges are those of strengthening the foreign sector by enhancing Catalonia’s presence in markets with growth potential, and consolidating the expansion of the regular export base, which has already grown significantly in recent years. This strengthening of the foreign sector must be accompanied by promotion of industrial activity, innovation and increased productivity. Efforts to increase efficiency should be based on improving the quality of the factors of production (human capital, reorientation of the investment pattern and improvements in business management) as well as appropriate regulation of the goods, services and commodities markets. In short, these are the challenges that must be resolved if we are to continue our advance towards a more efficient and equitable model of society.

7 Nota de Conjuntura Econòmica. 100 July 2018

1. World economic situation

The world economy accelerated to 3.8% in 2017, its highest rate in the last 6 years

After a slowdown in the growth rate of world GDP in 2016 (to 3.2%), dynamism recovered in 2017, when it rose to 3.8% and economic activity expanded at the highest rate since 2011. This improvement was felt in both the advanced economies (2.3%, 7 decimal points higher than in 2016) and the emerging and developing economies (up 4.8%, 4 decimal points higher than the previous year).

Although economic growth was the highest since 2010 in the advanced economies, the improvement in activity has a strong cyclical component, fostered by monetary policy (which is still expansionary in the euro area and Japan) and by fiscal stimulus in the US. All three regions – euro area, Japan and the US – reported improved growth in 2017. However, potential growth in all three regions continues to be moderate, and no significant improvement is observed.

For their part, the emerging and developing economies grew at a rate of 4.8% in 2017, helped by the recovery in the prices of raw materials and energy. By country, China's growth is particularly notable, as the Chinese economy’s rate of expansion accelerated after a period of moderation beginning in 2011.

Evolution of real GDP (% annual growth) 10

8

6 4 2 0

-2

-4 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018*

Global growth Advanced economies Emerging and developing economies *Forecast (April 2017) Source: IMF.

8 Nota de Conjuntura Econòmica. 100 July 2018

Economic growth forecasts (% of annual change in real GDP) Forecasts

2013 2014 2015 2016 2017 2018 2019 World economy 3.5 3.6 3.5 3.2 3.8 3.9 3.9

Advanced economies 1.3 2.1 2.3 1.7 2.3 2.5 2.2

USA 1.7 2.6 2.9 1.5 2.3 2.9 2.7

Japan 2.0 0.4 1.4 0.9 1.7 1.2 0.9 United Kingdom 2.1 3.1 2.3 1.9 1.8 1.5 1.2 Euro area -0.2 1.3 2.1 1.8 2.4 2.3 2.0 Germany 0.5 1.9 1.7 1.9 2.2 2.3 2.1 France 0.6 0.9 1.1 1.2 1.8 2.0 1.8 Italy -1.7 0.1 1.0 0.9 1.5 1.5 1.2 Spain -1.7 1.4 3.4 3.3 3.1 2.7 2.4 Emerging and 5.1 4.7 4.3 4.4 4.8 4.9 5.1 developing economies China 7.8 7.3 6.9 6.7 6.9 6.6 6.4 India 6.4 7.4 8.2 7.1 6.7 7.4 7.8 Rusia 1.8 0.7 -2.5 -0.2 1.5 1.7 1.5 Latin America 2.9 1.3 0.3 -0.6 1.3 2.0 2.8

Sub-saharan Africa 5.3 5.1 3.4 1.4 2.8 3.4 3.7

Middle East, North 2.6 2.8 2.5 4.9 2.6 3.4 3.7 Africa and Pakistan World trade 3.5 3.8 2.7 2.3 4.9 5.1 4.7 Source: World Economic Outlook, IMF (April 2018), European Comission (May 2018), Ministry of Economy, Industry and Competitiveness (April 2018).

GDP growth in advanced economies (% annual growth) 2.5 2.0

1.5 1.0

0.5 0.0 Advanced Japan United States Euro area United economies Kingdom

2016 2017 Source: IMF and Eurostat.

9 Nota de Conjuntura Econòmica. 100 July 2018

GDP growth in emerging and developing countries (% annual change) 8 7 6

5

4 3 2 1

0 -1 China India Emerging and Latin Russia Sub-saharan Middle East, developing America Africa North Africa economies and Pakistan

2016 2017 Source: IMF.

Forecast growth of 3.9% for both 2018 and 2019

The outlook for 2018 and 2019 is positive at world level. In fact, global growth in 2018 and 2019 is expected to reach 3.9%, one decimal point higher than the figure for 2017. According to the IMF, this will be the result of acceleration in both the advanced and the emerging and developing economies. In 2018, the advanced economies will grow by two decimal points more than the previous year (2.5%), while their expansion will become more moderate in 2019, falling to 2.2%. Meanwhile, the GDP growth rate in the emerging and developing economies will increase by one decimal point to 4.9% this year, rising to 5.1% in 2019. However, uncertainties abound: oil prices are rising more sharply than expected, geopolitical conflicts are increasing and trade tensions seem likely to accentuate protectionist trends. Nonetheless, the forecasts point to widespread economic improvement in the major economies, although this improvement will not be uniform.

Overall, financial markets followed stable and positive trends in 2017. The price of most assets was driven up by investors seeking profitability, positive economic figures, low inflation and abundant liquidity. This led to a rise in most stock market indexes, in both the advanced and emerging economies, with the US performing particularly well. However, a slight increase in volatility has been observed since the start of 2018.

10 Nota de Conjuntura Econòmica. 100 July 2018

The price of oil and other commodities continues to rise

By the end of the year, the price of oil had risen by 22.5% in US dollars in 2017, following the trend set in the previous year. The main cause of this increase was the agreement reached by OPEC and other oil producers (including Russia) to reduce production. Another factor is the increase in demand generated by economic growth. As a result, oil prices closed 2017 at 65 dollars per barrel. This rise in the price in dollars was partially offset by the appreciation of the euro, so that the increase in crude oil prices valued in the European currency was more moderate (9.1%). Oil prices are rising over and above the forecasts because the reduction in production is greater than can be compensated for production in North America using the fracking method. Similar trends continued over the first months of 2018, with oil prices reaching nearly 80 dollars per barrel by the end of June.

Prices of non-energy raw materials fluctuated more in 2017, with a slight drop in the first six months although, overall, the upward trend, which began in 2016, was maintained.

Evolution of oil (Brent) and commodity prices

125 200

100 180

75 160

price Oil

50 140 Commodity price index

25 120 Jan. Jan. Jan. Jan. Jan. May 2013 2014 2015 2016 2017 2018

Dollars per barrel Euros per barrel Non-energy commodity prices index (right axis)

Source: Bank of Spain.

Withdrawn of monetary stimulus in the euro area and the United States at two different speeds

The US Federal Reserve (FED) began 2017 with a benchmark interest rate adjustment interval of 0.5-0.75% following the increase of 25 basic points in December 2016. Over the course of the financial year, three further increases of 25 basic points were made, in March, June and December, to reach a benchmark rate of 1.25-1.5%. At certain points in

11 Nota de Conjuntura Econòmica. 100 July 2018 the year, forecasts pointed to an even more accelerated increase due to the good figures coming out of the labour market. However, due to political uncertainties and moderate inflation, the reviews mentioned were, finally, the only steps taken. Over the first half of the current year, 2018, two more increases of 25 basic points were made, in March and June, and two more reviews are expected this year, despite the uncertainties caused by tensions over trade policy.

On the other hand, the European Central Bank maintained its much more expansionary monetary policy without significant changes in 2017. The official rate stayed at 0% throughout the year, while the deposit facility rate remained steady at -0.4%. Moreover, the ECB also maintained its policy of buying public and private bonds worth 60,000 million euros per month. In this respect, the most significant change that occurred in 2017 was that announcement that, after 1 January 2018, the value of these purchases, which were due to end in September 2018 but are now expected to continue until December, would be halved. Similarly, no interest rates are expected until well into 2019.

The US recovered economic dynamism, reporting growth of 2.3%

The change in the US presidency created uncertainties regarding the economic impact that measures announced would have. According to the GDP growth figure for 2017 (up 2.3%), Donald Trump's policies did not enable the reversal of a slightly negative contribution by external demand since, although exports increased, imports also rose. However, there was an increase in the internal dynamic, especially with regard to non-residential investment, which rose sharply in 2017. It seems, then, that the tax cuts and investment incentives announced served to boost the US economy through business investment. On the other hand, there were no substantial changes in consumption (both public and private) compared to trends in 2016, and consumption remained at around 1.0% in the case of the administration and 2.8% in private consumption.

We should remember that these fiscal reforms were carried out within the context of monetary policy normalisation, with three increases, each of one-quarter of a point, in benchmark interest rates. The gradual hardening of monetary policy is explained by a situation of historic lows in unemployment rates and inflation that progressively returned to target levels. Another factor that made a positive contribution was the agreement reached by the main oil producing countries. This enabled the US to increase its market share and made fracking extraction more profitable.

12 Nota de Conjuntura Econòmica. 100 July 2018

As 2018 unfolds, a number of uncertainties still remain with regard to international trade policy and its impact on specific sectors and regions that may be particularly affected by US protectionist measures and by possible responses by China and the European Union. On this point, it is important to remember that the US recently withdrew from two major trade agreements: the TPP (Trans-Pacific Partnership, which included Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam); and the TTIP (Transatlantic Trade and Investment Partnership, signed between the US and the EU). In spite of this context, the first available data and forecasts for the current year indicate a positive economic dynamic in the US.

Real GDP evolution (% annual change) 4

2

0

-2

-4 I II III IV I II III IV I II III IV I II III IV I II III IV I 2013 2014 2015 2016 2017 2018 Euro area Spain USA Japan

Source: Eurostat, INE, Bureau of Economic Analysis and Cabinet Office of Japan.

The Japanese economy recovered, growing by 1.7%

In 2017, and in line with a period characterised by moderate growth though without this growth following a clear trend, Japan reported its greatest expansion in the last four years (1.7%). This was thanks to a combination of expansionary monetary and fiscal policies, which boosted private domestic demand. However, this momentum is not expected to continue long, due to only moderate growth of potential GDP, and the fact that the growth seen in 2017 was the result, largely, of stimulus policies. Inflation remained steady, at minimum levels (0.5%), in 2017, driving an increase in exports, although imports also rose as a result of economic growth. We should remember that the yen rose against the dollar but fell against the euro. Regarding the future, the forecasts point to a slight moderation in growth rates.

13 Nota de Conjuntura Econòmica. 100 July 2018

China grew by 6.9%, breaking the trend towards moderation seen in previous years, while India grew less than in the last three years (6.7%)

In 2017, Chinese GDP grew by 6.9%, four decimal points higher than the target set by the government. This growth rate represented an increase of two decimal points compared to 2016, when the lowest GDP increase since 1990 was recorded (6.7%), albeit within a context of continuing robust expansion. The 2017 growth is explained by the recovery of both private consumption and external demand. By contrast, investment fell to more moderate levels, although China's commitment to renewable energies (with large investment) should be factored in. At the same time, the investment activity of the Chinese economy was also boosted around the world, and this is something that could have consequences regarding the role played by China globally. Economic activity was also boosted by tax reductions and strong job creation. The outlook for 2018 is for a slight moderation in the growth rate, in line with trends seen in recent years.

For its part, the Indian economy grew by 6.7%, less than the previous three years, following the monetary adjustments made in late-2016 and the fiscal changes introduced in 2017. In 2018, the forecast is for the growth rate to accelerate.

After two years of stagnation, the Latin American economy began to recover

After reporting growth rates of 0.3% in 2015 and -0.6% in 2016, the GDP of Latin America grew by 1.3% in 2017. This upturn is explained by recovering commodities prices, whose low levels had punished Latin American producers particularly. Brazil, the biggest economy in the region, played a leading role in changing the downward trend, reversing negative GDP growth of 3.5% in 2016 to positive growth of 1.0% in 2017 thanks to the recovery of consumption and investment and rising exports. Mexico also made a positive contribution, reporting growth of 2.0% in 2017, though this is nearly one percentage point below the figure set in 2016. The second half of 2017 was marked by uncertainties surrounding the US presidential elections. Argentina and Colombia, two other important economies in the area, also reported GDP growth, while Venezuela sounded the negative note in the region.

The outlook for Latin America in 2018 is good, particularly for the larger economies, which will benefit from rising commodities prices and the dynamic US economy.

14 Nota de Conjuntura Econòmica. 100 July 2018

Recovery in Russia, slight moderation in the Middle East and upturn in Sub-Saharan Africa

After two years of shrinking economic activity, Russia's GDP grew again in 2017 (1.5%), helped by the recovery of energy prices and expansionary monetary policy. On the other hand, affected by agreements on oil production, growth in the economies of the Middle East, North Africa and Pakistan slowed to 2.6% after the sharp rise in 2016. Finally, dynamism returned to Sub-Saharan Africa, which grew by 2.8%.

Growth in the euro area accelerated to 2.4% in 2017

After the moderation observed in 2016 (with a 1.8% increase in GDP), growth in the euro area in 2017 rose to 2.4%, thanks to a recovery felt generally in the region. The expansionary dynamic improved in all the major European economies except Spain. Nevertheless, despite increasing moderation, Spain is still enjoying the highest growth among the continent’s largest economies. In any case, the highest growth rates continued to be generated in the smaller economies of central and eastern Europe.

Evolution of GDP (% annual change) 4

3

2

1

0 Italy France Germany Euro area Spain Catalonia

2016 2017

Source: Eurostat and Idescat.

This upturn in economic activity was combined with continuing moderation in the behaviour of prices: although inflation rose from 0.2% in 2016 to 1.5% in 2017, this increase was largely explained by the rising cost of energy products. In fact, there was a moderate increase in core inflation, from 0.8% in 2016 to 1.1% in 2017. Higher inflation and improved GDP and unemployment indicators, however, led the European Central Bank to begin gradually withdrawing non- conventional monetary stimuli, although monetary policy was still expansionary and continued to drive domestic demand.

15 Nota de Conjuntura Econòmica. 100 July 2018

Another factor that influenced economic development in the euro area was the exchange rate of the euro against the main international currencies. The euro gained against both the US dollar and the Japanese yen in the first three quarters of the year. This state of affairs reduced the price competitiveness of European exports, but at the same time also mitigated the real effect of rising oil prices. Over the closing months of 2017, the euro’s gains against other major currencies came to a halt, and depreciation has been observed during the first months of 2018.

Euro exchange rate 1.4 150

1.3 140

1.2 130 Yen/euro

1.1 120 Dollar/euro

1.0 110 Jan. Jan. Jan. Jan. Jan. May 2013 2014 2015 2016 2017 2018 $/euro Ien/euro

Source: Bank of Spain.

More detailed analysis of GDP growth by country reveals that, in fact, among the larger economies, growth rates increased in 2017 in Germany (2.2%), France (1.8%) and Italy (1.5%), while in the United Kingdom (-1.8%) and Spain (3.1%), the rate was more moderate. Spain and Luxembourg were the only countries in the euro area that grew at a lower rate in 2017 than in 2016.

As regards the countries with the highest GDP growth in 2017, the most outstanding results were found in Ireland (7.8%), Malta (6.6%), Slovenia (5.0%), Estonia (4.9%) and Latvia (4.5%). In fact, all the European economies reported positive growth in 2017, a state of affairs that had not occurred since 2007.

Public finances in the euro area improved, but deficits continued despite economic growth

The state of public accounts in the euro area countries improved in 2017, although an overall government deficit continued to exist. This deficit was the equivalent of 0.9% of GDP, compared to 1.5% in 2016. A sign of this improvement is that the financial results of the public administrations worsened only in three of the nineteen members of the

16 Nota de Conjuntura Econòmica. 100 July 2018 euro area. Nevertheless, it is paradoxical that several states maintained large negative balances despite accumulating several years of economic recovery. In this regard, Spain stands out negatively because, although the country’s GDP grew above the average rate, Spain had the highest public debt to GDP ratio (3.1%), followed by Portugal (3.0%), France (2.6%) and Italy (2.3%). The most outstanding government surpluses were found in Malta (3.9%), Cyprus (1.8%), Luxembourg (1.5%) and Germany (1.3%).

Evolution of GDP and government deficit or surplus

Deficit (-) or surplus (+)

% annual GDP change (% of GDP) 2016 2017 2016 2017 Ireland 5.1 7.8 -0.5 -0.3 Malta 5.2 6.4 1.0 3.9 Slovenia 3.1 5.0 -1.9 0.0 Estonia 2.1 4.9 -0.3 -0.3 Latvia 2.2 4.5 0.1 -0.5 Cyprus 3.4 3.9 0.3 1.8

Lithuania 2.3 3.8 0.3 0.5

Slovakia 3.3 3.4 -2.2 -1.0

Netherlands 2.2 3.2 0.4 1.1 Spain 3.3 3.1 -4.5 -3.1 Austria 1.5 3.0 -1.6 -0.7 Portugal 1.6 2.7 -2.0 -3.0 Finland 2.1 2.6 -1.8 -0.6 Euro area 1.8 2.4 -1.5 -0.9 Luxembourg 3.1 2.3 1.6 1.5 Germany 1.9 2.2 1.0 1.3

France 1.2 2.2 -3.4 -2.6

Belgium 1.4 1.7 -2.5 -1.0

Italy 0.9 1.5 -2.5 -2.3

Greece -0.2 1.4 0.6 0.8 Source: Eurostat.

As regards government bond yield in the euro area, a country-by- country break-down reveals similar trends. The start of the year saw a slight increase in yields in most countries, though this was later corrected. In the case of Germany, which has one of the lowest yields, there was a slight increase, as a result of which the risk premium for Germany fell in most countries. The risk premium continues to improve in Greece, though it remains at a considerable distance from those in the economies discussed in this report. In Spain, although the

17 Nota de Conjuntura Econòmica. 100 July 2018 evolution of government bond interest rates was stable, the risk premium in relation to Germany improved slightly, in line with developments in the other countries.

Interest rate for government bonds with 10 years maturity (%) 7.5 14

6.0 12

4.5 10

3.0 8

1.5 6

0.0 4

-1.5 2 Jan. Jan. Jan. Jan. Jan. Apr. 2013 2014 2015 2016 2017 2018

Germany Spain Ireland Italy Portugal Greece (right axis)

Note: Owing to market closure in Greece, no data is available for July 2015. Source: Bank of Spain.

The Spanish economy grew by 3.1%, two decimal points less than in 2016, but seven points more than the euro area as a whole

After increasing by 3.3% in 2016, Spanish GDP grew by 3.1% in 2017. This moderation is explained by the difficulty of maintaining particularly high growth rates since the economic recovery, which means that the Spanish economy tends towards more sustainable growth, in line with its potential growth. Other factors that contributed to this moderation were rising oil prices and the diminishing effects of expansionary monetary policy. The Spanish economy continued to grow at a higher rate than the euro area as a whole and, especially, the other major European economies. Domestic demand increased its contribution to GDP growth by 2.8 points, thanks to the recovery in public consumption expenditure (1.6%) and gross fixed capital formation (5.0%), while private consumption became slightly more moderate (2.4%). External demand made a positive but reduced contribution (of 3 decimal points), because, although exports continued to grow (5.0%), imports accelerated at a greater rate compared to the previous year (4.7%).

The robust growth of the Spanish economy enabled job creation to continue at high rates (2.8% in full-time equivalent jobs). This increase was slightly lower than in the previous two years, but nevertheless enabled the unemployment rate to fall to 17.2%. This figure is the second-highest in Europe, but it is already far from the unemployment

18 Nota de Conjuntura Econòmica. 100 July 2018 rate during the worst moments of the economic crisis. As for its position in relation to the exterior, the Spanish economy reported lending capacity with respect to the rest of the world of 2.0% of GDP. Regarding the public accounts, a high deficit (3.1%) was maintained in 2017, only slightly lower than that recorded in 2016 (3.3%). The 2017 deficit is explained mainly by the negative balance of the State Administration and Social Security. On the other hand, while remaining at very high levels, public debt fell slightly, to 98.3% of GDP.

In the first quarter of the current year, the Spanish economy maintained a lively dynamic similar to that seen in 2017 (3.0% GDP growth). However, the outlook is for moderation in economic growth to become accentuated over the course of the present year. According to forecasts published by the main competent bodies, Spain’s growth will be between 2.7% and 2.9% in 2018.

Evolution of real GDP of the Spanish economy 4 1.0

3 2 0.5

1 0 0.0

-1 -2 -0.5

-3 -4 -1.0 I II III IV I II III IV I II III IV I II III IV I II III IV I 2013 2014 2015 2016 2017 2018

% quarterly change (right axis) % annual change (left axis)

Source: INE.

19 Nota de Conjuntura Econòmica. 100 July 2018

2. Gross Domestic Product

Since mid-2013, the Catalan economy has maintained a phase of solid growth. In 2017, growth was again significant, reaching 3.4%, although slightly more moderate than the increase seen in the previous two years (a record 3.8% in 2015 and 3.6% in 2016). In any case, expectations have been exceeded and the Catalan economy has grown beyond the expectations described in forecasts. This is particularly evident if we remember that certain institutions and media predicted that there would be an important slowdown in the second half of 2017 due, particularly, to the uncertainty generated by the celebration of a referendum on 1 October 2018 and the events which followed this. Nevertheless, Catalan GDP performed well in all quarters of 2017, with growth of 0.9% in the first three quarters and 0.8% in the fourth. These quarterly rates exceed those achieved, for example, in the second half of 2016.

GDP growth in Catalonia (% of quarterly variation) 1.2

1.0

0.8 0.6

0.4 0.2

0.0 IV I II III IV I II III IV I 2016 2017 2018

Source: Idescat.

Figures for the first quarter of 2018 reveal that Catalan GDP growth continues to be robust, with a quarter-on-quarter increase of 0.8%, the same as in the previous three-month period. The figures available on the second quarter of 2018, although only partial, also show solid growth. However, a rather more constrained tone is detected in some indicators (such as certain tourism indicators, and registered unemployment).

20 Nota de Conjuntura Econòmica. 100 July 2018

From the standpoint of the world economy, several factors made a positive contribution to the performance of the Catalan economy in 2017. Stability in the financial markets, the continuing expansionary tone of monetary policy and international trade expansion, among other factors, drove the world economy to its highest growth rate in six years (3.8%). This also enabled Catalan exports to continue to grow. Moreover, it does not appear that rising oil prices had much impact on the evolution of the Catalan economy in 2017. However, to some extent, continuing oil prices rises in 2018 may begin to generate a negative impact.

GDP evolution (% annual change)

5

4

3 2 1 0 -1 -2 -3 -4 -5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Catalonia Euro area Spain

Source: Idescat, INE and Eurostat.

Per capita GDP recovered to pre-crisis levels in 2017

Thanks to the growth since the recovery, in 2016 GDP returned to pre- crisis levels (2007), in terms of both current and constant prices (in volume). Moreover, per capita GDP returned to 2007 levels at current prices. However, at constant prices, per capita GDP in 2017 was still a little lower than 2007 levels (down 0.4%). This is because the GDP slump during the recession was much greater than population decrease. In fact, population only fell over the 2012-2014 period, and has already begun to grow once more in recent years.

21 Nota de Conjuntura Econòmica. 100 July 2018

Per capita GDP, adjusted for PPP, stood at 15.5% above the EU-28 average, a considerably worse relative position than in 2007

The Catalan economy suffered the effects of the economic crisis more intensely than did the euro area as a whole. However, Catalonia has grown at a higher rate than the euro area since 2014 (with a difference of 5.8%). Nevertheless, over a longer period, beginning in 2007 (the start of the crisis), cumulative GDP growth is higher in the euro area and the EU as a whole than in Catalonia. On the other hand, population growth is lower in both these regions as a whole than in Catalonia. The differences increase when we compare GDP per capita adjusted for purchasing power parity (PPP). In this case, besides the differences in GDP and population growth, relative price levels also intervene. Accordingly, per capita GDP in Catalonia, which was 26.9% above the EU-28 average (adjusted for PPP) in 2007, fell to 10.5% above this average by 2013. Positions have been recovered in the last four years, but the level reached in 2017 (15.5% above the average) is still far from pre-crisis levels.

Evolution of demand components in volume (Index year 2000=100) 180

150

120 90

60 30

0 PIB mp Household Public GFCF (capital GFCF consumption Administrations goods and other (construction) Consumption assets) 2000 2007 2013 2017

Source: Idescat.

Regarding the evolution of the main components of GDP on the demand side, we can note that domestic demand at constant prices continued to be lower than the figure for 2007. This was particularly true of certain components, such as household consumption (5.7% lower than in 2007), and, above all, investment in construction (within gross capital formation). In 2017, the latter component stood at just 52.4% of the figure recorded ten years previously and 74.7% of the volume achieved in 2000. Other components, such as government consumption, although constrained during the crisis years, were higher in 2017 than in 2007 (by 16.3%). Investment in capital goods was the

22 Nota de Conjuntura Econòmica. 100 July 2018 component of domestic demand that grew most from 2000 to 2007 (72.3%) and, therefore, despite the reduction in this type of investment during the post-crisis years, continued to accumulate considerable growth in 2017 compared to the year 2000.

The trade balance of the Catalan economy has improved greatly in recent years thanks to the surplus in foreign trade and in trade with the rest of Spain

Unlike domestic demand, the external balance, or external demand, has grown intensely since 2007. During the years of pre-crisis expansion, external demand made a negative contribution to growth (which was based wholly on an excessive rise in domestic demand) and for this reason the relative weight of the external balance in GDP decreased. However, during the crisis and the recovery period, the external balance has gradually increased its relative weight in GDP, from 3.2% in 2007 to 12.2% in 2017. This increase in the weight of external balance is explained by the fact that a surplus is now generated in the foreign trade balance, while a deficit was recorded over the 2002-2007 period, and that the trade surplus with the rest of the State is also maintained. The external trade surplus in 2007, which represented 3.2% of GDP, was broken down into -5.2% in foreign trade and an 8.3% surplus with the rest of the State, while in 2017 external trade balance (which represented 12.2% of GDP) was divided into a 6.5% surplus in international trade and a 5.7% surplus with the rest of the State. This improved external trade balance is the result of the increased competitiveness achieved in recent years.

External balance on GDP (%, current prices)

14 12.2 12 10 5.7 8 6 4 6.5 2 0 -2

-4

-6

-8 2000 2003 2005 2007 2009 2011 2013 2015 2017

Foreign balance Balance with the rest of Spain External balance Source: Idescat.

23 Nota de Conjuntura Econòmica. 100 July 2018

Rising population has also determined, to a large extent, the trends followed by certain economic aggregates. Population in Catalonia rose by 16.2% from 2000 to 2007 and, despite the crisis, continued to increase until 2011, when the accumulated growth since 2000 was over 20%. As mentioned previously, population only fell during the 2012- 2014 period, and has shown moderate growth since 2015 (it rised by 0.6% in 2017, according to the estimated population at July 1). As we can see, then, population increase in Catalonia over the 2000 to 2017 period was much more intense than in its neighbours: over the same period, population rose in EU-28 by 5%, in the euro area by 6.4% and in Spain by 14.7%, while the population of Catalonia increased by 20.9%.

Evolution of real GDP and employment (base index 2000=100) 140

120 100 80

60 40 20

0 2000 2007 2013 2014 2015 2016 2017

Real GDP Jobs

Source: Idescat.

The growth model in the 2007-2017 period was less labour intensive than in the pre-crisis years; while GDP increased slightly in volume (3.6%), the number of jobs decreased over the period as a whole, by 8.2%. As Table 1 shows, this is explained, in part, by productivity growth. Over the last four years, employment has once more increased at a significant rate, with the result that apparent labour productivity shows a more moderate increase (although this rise is higher than the minimal growth seen in the expansionary period before the crisis).

Internal and external demand were the main economic drivers in 2017

In Catalonia, the recession years were characterised by a slump in domestic demand, while external demand made a significant contribution to growth, although insufficient to compensate for the huge negative contribution made by domestic demand. Over the first

24 Nota de Conjuntura Econòmica. 100 July 2018 two years of economic recovery (2014 and 2015), domestic demand recovered powerfully (especially in 2015), and the contribution made by the foreign balance to growth was greatly reduced, to the point where it actually became negative in 2015. Clearly, the threat existed of a return to pre-crisis patterns based on excessive increase in domestic demand. However, in 2016, GDP showed a clearly more balanced pattern of growth, with a positive contribution from external demand.

GDP evolution and contribution to growth (%) 4

3

2 1 0

-1

-2 -3 -4 1

-5 2001 2003 2005 2007 2009 2011 2013 2015 2017

Internal demand External demand GDP

Source: Idescat

In 2017, this growth pattern, more balanced than in earlier expansionary periods, was largely maintained. Although domestic demand grew slightly more than in 2016 (3.1% compared to 2.7%), this was thanks to accelerating investment in capital goods, while private consumption and investment in construction saw growth similar to or more moderate than in 2016. In terms of contribution to GDP growth, domestic demand accounted for 2.7 points, while external demand continued to make a strongly positive contribution (0.7 points), although this was slightly lower than in 2016.

All the components of domestic demand grew in 2017. The relatively positive tone of confidence of consumers and companies, as well as favourable financial conditions (with ECB monetary policy continuing to be expansionary), all combined to maintain the expansion of private consumption and investment. Notably, private consumption grew at 2.4%, the same rate as in 2016. This growth is closely linked to improved available income, which was boosted by rising occupation, while wages continued to be stagnant. Inflation rose slightly, particularly in the early part of the year, as oil prices accelerated. However, inflation remained moderate over 2017 as a whole, helping

25 Nota de Conjuntura Econòmica. 100 July 2018 to sustain consumption. Despite increasing household consumption in recent years, however, pre-crisis levels have not yet been recovered.

Consumption by the public administrations grew by 2.4% over the year, the same rate as domestic consumption. However, its contribution was much less important, as its relative weight is also much lower. In any case, public administration consumption rose by slightly more than the low increase seen in 2016 (0.9%).

GDP of Catalonia. Demand (% annual change)

2012 2013 2014 2015 2016 2017

Internal demand -5.2 -4.3 2.2 4.8 2.7 3.1 Household consumption expenditure -3.6 -4.8 1.7 3.7 2.4 2.4 Public administrations consumption expenditure -3.6 -2.8 0.0 5.3 0.9 2.4 1 Gross capital formation 2 -11.0 -4.1 5.6 8.0 5.2 5.6 GFCF (capital goods and other assets) -3.3 -1.2 4.8 7.7 4.4 5.4 GFCF (construction) -18.2 -8.5 4.4 4.4 6.4 5.1 External balance 3, 4 1.3 3.0 0.2 -0.4 1.3 0.7 Foreign balance 4 3.1 1.3 -0.7 0.4 0.4 1.0

Exports of goods and services 3.0 3.9 4.8 4.4 4.8 6.3

Imports of goods and services -7.0 0.5 8.0 3.9 4.5 4.4 4 Trade balance with the rest of Spain -1.8 1.7 0.9 -0.8 0.9 -0.3 GDP -3.4 -1.0 2.1 3.8 3.6 3.4 1 Contains consumption expenditure of non-profit institutions serving households. 2 Contains stock variation. 3 Foreign trade balance and balance w ith the rest of Spain. 4 Contribution to GDP grow th.

Strong growth of investment, especially in capital goods

In 2017, gross capital formation enjoyed dynamic growth (5.6%). Investment was the component that has shown the most intense expansion since the economic recovery, driven by the need to renew plant and equipment that had become obsolete during the crisis and to cope with demand recovery. The relatively positive tone of financial conditions was also key to growing investment. As regards the components of gross capital formation, the growth in investment in capital goods accelerated to 5.4%. Investment in construction also rose considerably (5.1%), though slightly less than the previous year (6.4%). Increases were seen, particularly, in investment in residential construction and in public works, where growth was relatively intense, though within rather small absolute magnitudes. Many of these indicators are analysed in greater detail in this chapter, in the section

26 Nota de Conjuntura Econòmica. 100 July 2018 on the evolution of the main productive sectors derived from components of GDP on the supply-side.

In the case of gross capital formation, the effect of foreign direct investment (hereafter, FDI) should also be taken into account. Official figures from the Ministry of Industry, Commerce and Tourism reflect a part of total FDI flows, as they do not include certain concepts that are considered into Balance of Payments statistics at international scale (such as reinvested profits or related financing between companies in the same group). These figures, which are highly volatile structurally, show that, in 2017, Catalonia received FDI of 3,171 million euros, a notable decrease of 38.3% compared to 2016. In 2015 and 2016, we should remember, FDI received had reached record peaks (for the first time since the beginning of the series in 1993, FDI exceeded 5,000 million euros). In other words, the figure for 2017 is not low compared to the average for the series, but is much lower compared to the previous two years, when Catalonia received record amounts of FDI.

Apart from official statistics, another widely used source for FDI projects is the Financial Times FDI Markets database. According to this source, which includes only investment projects that entail an increase in employment or production capacity, in 2017 Catalonia received FDI of 4,924 million euros. If we analyse a series of this data beginning in 2008, the 2017 figure represents the highest investment since 2015. The FDI Markets database also includes the number of jobs generated by this new investment, and in this case the figure is highly positive: 15,632 new jobs were created in thanks to the FDI received, the highest figure in the series beginning in 2008. Moreover, Catalonia occupied third place in Western European regions in terms of employment linked to new FDI, behind only Ireland and South East (UK). Another notable feature is that, within the investment projects received, increasing weight is detected among investments in new centres for technology companies. This type of project tends to imply highly positive externalities for the local system of start-ups as regards the creation of qualified jobs, etc.

GDP evolution (%) and contribution to growth (percentage points) Catalonia Euro area Internal External Internal External GDP demand demand GDP demand demand 2012 -3.4 -4.7 1.3 -0.9 -2.4 1.5 2013 -1.0 -3.9 3.0 -0.3 -0.6 0.4 2014 2.1 1.9 0.2 1.3 1.3 0.1 2015 3.8 4.2 -0.4 2.1 2.0 0.1 2016 3.6 2.4 1.3 1.8 2.2 -0.4

2017 3.4 2.7 0.7 2.4 1.8 0.6

Source: Idescat and Eurostat.

27 Nota de Conjuntura Econòmica. 100 July 2018

GDP evolution and contribution to growth by components of demand (%) 4 3 2

1

0 -1 -2

-3

-4 -5 2011 2012 2013 2014 2015 2016 2017 Household consumption 2 Public administrations consumption1 3 Gross fixed capital formation External trade balance GDP 1Includes non-profit institutions. 2Includes changes in stocks. 3 Includes foreign balance and balance with the rest of Spain. Source: Idescat.

Foreign exports of goods and services grew by 6.3%, the highest increase since 2010

As mentioned previously, external demand also continued to be a source of growth in 2017, making a positive contribution of 0.7% to GDP growth. This trend is explained by the increased competitiveness accumulated in recent years. This has enabled new markets abroad to be opened up and consolidated and, in this way, a more balanced growth model to be established, with a positive contribution from both domestic and external demand. In 2017, the positive contribution of the external balance of trade was explained entirely by the balance of foreign trade (which contributed 1 percentage point), whereas the contribution of trade with the rest of the State was negative (-0.3 percentage points).

Foreign exports of goods and services rose by 6.3% in 2017, the highest growth since 2010. The acceleration in world trade growth drove Catalan exports to become more dynamic as their market share in international transactions improved. Imports of goods and services also rose, by 4.4%, a rate very similar to that seen in 2016 (4.5%). The higher growth in exports compared to imports explains why foreign exchanges made a more significant contribution to economic growth in 2017 (contributing, as mentioned previously one percentage point to economic growth, compared to 0.4 points in each of the two previous years).

28 Nota de Conjuntura Econòmica. 100 July 2018

Nearly all major sectors grew at a sustained rate in 2017

GDP growth by sectors (% annual change)

2012 2013 2014 2015 2016 2017

Agriculture -15.4 6.8 0.9 -2.9 6.1 -3.1

Industry -4.9 -0.8 2.8 5.9 5.0 4.9 Manufacturing industry -5.1 0.3 3.6 4.8 6.4 4.6 Construction -17.7 -10.0 -1.3 2.3 3.2 4.7 Services -1.3 0.1 1.8 2.7 3.1 2.9 GVA -3.3 -0.6 1.9 3.2 3.5 3.3 Net taxes -4.7 -5.5 5.0 10.9 4.7 3.9 GDP -3.4 -1.0 2.1 3.8 3.6 3.4

Source: Idescat.

GVA distribution and real growth (2017)

% annual growth % of total

Agriculture, livestock, forestry and fisheries -3.1 1.0

Industry (mining, manufacturing and energy) 4.9 21.4

Manufacturing 4.6 18.1 Construction 4.7 4.8 Services 2.9 72.7 Comerce; vehicle repair; transport and storage 2.3 25.2 and hotel Information and communication 7.7 3.9

Financial and insurance -2.7 3.6 Real estate activities 1.8 11.2 Professional, scientific, technical and 6.4 10.5 administrative Public administration, education, health and social services 2.7 14.1 Arts, entertainment, entertainment and other services 1.7 4.1 GVA 3.3 100.0

Source: Idescat.

As regards supply, all sectors of activity, except agriculture (which registered a decrease in GVA in volume) reported outstanding growth in 2017. The industrial sector expanded by 4.9%, a rate very similar to that returned in 2016 (5%), and has now accumulated three successive years of intense growth. In construction, growth accelerated to 4.7%, the fastest pace since the crisis (although levels of activity and employment are much lower than those reached before the recession). The service sector also maintained significant growth (2.9%), although

29 Nota de Conjuntura Econòmica. 100 July 2018 slightly lower than the previous year (3.1%). The expansion of services was driven by growing domestic demand, the carry-over effects of industrial activities and the positive dynamic seen in tourism.

Industry accumulates three consecutive years of intense expansion

The industrial sector grew by 4.9% in 2017, expanding at a rate only slightly slower than in 2015 (5.9%) and 2016 (5%). After the loss of relative weight experienced by industry during the stage of economic expansion prior to the crisis, the sector was badly hit by the recession. The intense recovery seen in the last three years has enabled the sector to return to pre-crisis levels of real activity, but employment has still not recovered to those earlier levels.

From the perspective of the last five years, we can see that most industrial subsectors have enjoyed positive Industrial Production Index (IPI) growth, except for paper and graphic arts and the extraction industries. Among the most dynamic branches at this stage in the economic recovery are those related to plastic materials and rubber, other non-metallic mineral products and the textile and clothing industry. More specifically, the branches that saw the most intense IPI growth were textiles, metallurgy and metallic products, while there was a moderate fall in the subsectors of food, transport, and paper and the graphic arts. It should be remembered, however, that the recession severely affected industrial branches and, according to the figures for 2017, the only subsectors that reported more intense activity than before the crisis were pharmaceuticals and food and drink.

Another clear indication of the good performance of Catalan industry since the recovery lies in the fact that, in recent years, the growth of industrial GVA in Catalonia has been higher than that in the euro area as a whole and its main European neighbouring economies. In the last three years, accumulated GVA growth in Catalonia (16.6%) is 7.6 percentage points higher than the euro area average. In particular, industrial GVA grew by 4.9% in Catalonia in 2017, compared to 3% in the euro area.

30 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of Industrial Production (% variation) 2012-2017 2017 General index (IPI) 2.4 3.7 Mining industries -0.3 4.7 Manufacturing industries 2.6 3.6 food and beverage industries 1.8 -1.4 textile, clothing, leather and footwear industries 4.0 9.7

paper, graphic arts and recorded media industries -0.6 -1.1

chemical industries 2.8 4.6

manufacture of pharmaceutical products 2.6 5.6 manufacture of rubber products and plastic materials 4.5 4.5 manufacture of other non metal mineral products 4.5 5.7 metallurgy and the manufacture of metal products 2.7 8.3 electrical, electronic and optical materials and equipment 2.9 4.3 manufacture of machinery and mechanical equipment 1.8 3.2 manufacture of transport material 1.6 -1.1 other manufacturing industries 3.9 8.3

Electrical energy, gas, steam and air conditioning 1.1 3.5

Water supply 2.9 8.2

Source: Idescat.

Industry GVA. 2017 (% real growth)

6 5

4

3 2

1

0 Italy Germany France Euro area Spain Catalonia

Source: Idescat and Eurostat.

One of the most important aspects of Catalan industry is the relative weight of employment in high and medium-high technology manufacturing branches. In Catalonia, manufacturing with high technological content accounted for 1.4% of total employment in 2017, a figure higher than that in the other main European economies (1.1% in the euro area), with the exception of the continent’s industrial driving force, Germany. The same is true of medium-to-high

31 Nota de Conjuntura Econòmica. 100 July 2018 technology content industries, which accounted for 5.6% of employment in Catalonia in 2017, compared to 5.0% in the euro area. Accordingly, in Catalonia the two manufacturing industry blocks with the highest technological content account for 7% of employment, more than in the euro area as a whole (6.1%) and such countries as Italy (6%), France (4.5%) and Spain (4.1%), although behind Germany (9.8%).

Manufacturing employment according to technological content. 2017 (% total employment) 10

8

6

4

2

0 Germany Catalonia Italy Euro area EU-28 France Spain United Kingdom

High-technology manufacturing Medium high-technology manufacturing

Source: Eurostat.

Construction grew by 4.7% in 2017, the highest rate since 2006

One of the most important features in the last recession was the slump in the construction sector following the bursting of the bubble of previous years. The construction sector then suffered a severe reverse (especially in the residential sector, but also in public works) and GVA did not recover positive growth until 2015. In 2017, construction continued to improve, with growth of 4.7%, the highest

Housing market indicators Housing price index Dwellings under Merchanting of dwellings (new dwelling) construction1 2007 111,482 100.0 84,842 2012 43,015 68.3 3,938 2013 45,408 61.4 2,401 2014 47,865 64.2 3,635 2015 55,373 68.3 5,423 2016 66,447 73.7 7,489

2017 76,369 80.0 10,091

1 New dw elling approvals from the College of technical architects. Source: INE and Spanish Ministry of Development.

32 Nota de Conjuntura Econòmica. 100 July 2018 since 2006. It should be noted, however, that the level of activity was still only half of that before the crisis, while the relative weight of the sector in total GVA (4.8% in 2017) has scarcely increased since reaching a record low of 4.7% in 2015. However, it is also true that, before the crisis, the construction sector presented excessive figures (in 2007, its GVA represented 11.6% of the total). In 2017, its economic relative weight in Catalonia (4.8%) was quite close to (in fact, a little lower than) the figure for the euro area (5.1%), and a little lower than that for Spain (5.8% of total GVA).

The recovery of the construction sector was driven mainly by the residential housing segment: the number of dwellings under construction rose, sales of houses increased, and there was a significant rise in prices. Sales of both old and new homes grew (although sales of the latter were more dynamic). For their part, purchase prices rose by around 9% in the case of both old and new homes, increases that demonstrate the strength of the housing market. Rising costs were even more significant in the case of rental housing: according to data published by the Government of Catalonia’s Secretariat for Housing, rents in Catalonia (in terms of price per housing unit, since no data is available on costs per square metre) rose by 9.9%. This reflects a significant acceleration compared to 2015 (3.3%), when the first increase in several years was observed, and 2016 (6.8%).

Evolution of public works tenders (millions of euros) 4,000

3,500 3,000

2,500

2,000 1,500

1,000

500 0 2010 2011 2012 2013 2014 2015 2016 2017

Source: Spanish Ministry of Development.

Turning now to public works, the situation improved slightly in 2017, as shown by the evolution of official tenders in construction, which grew by 44.2%. At current prices, this figure represents a return to levels similar to those seen towards the end of 2014. The increase in

33 Nota de Conjuntura Econòmica. 100 July 2018 tenders in 2017 was concentrated among the territorial administrations, while official tenders in construction by the Central Administration and Social Security fell by 15% (although a certain improvement was seen towards the end of the year). In the first months of 2018, total tenders have continued to rise, but with weaker growth, according to the moving average for the last 12 months (up to April).

The service sector registered again significant growth, increasing by 2.9% in 2017

Services are the sector with the greatest weight in the economy, accounting for 72.7%. This is a heterogeneous sector in which the many different activities are driven by different factors of demand. A key element in the recent evolution of the economy is the development of professional services (partly as intermediate demand of the industrial sector, which is increasingly dependent on the services linked to it) and of services generated by the growth in both private and public consumption (commercial sector, tourism and essential public services: government, education and health).

In 2017, service sector GVA grew in all major branches, except for financial and insurance activities, which continued to follow the downward trend begun in 2009. As a result, this branch shrank by 2.7% in 2017. Commerce, transport and accomodation, which account for 25.2% of GVA, grew by 2.3%. There was restrained growth in real estate activities (1.8%), a result very much in line with the figure for 2016. The GVA of the public administration, education, health and social services, formed mainly by non-market services, grew intensely, reaching 2.7%, a figure similar to the increase reported in 2015 (this growth was slightly more moderate in 2016). However, the greatest relative growth was seen in information and communication activities (7.7%) and in professional, scientific and administrative activities (6.4%). Moreover, this last branch, which accounts for 10.5% of total GVA, has gained relative weight continuously over the course of the current period of economic recovery.

Tourism reached new record highs, especially in terms of expenditure, though certain indicators began to moderate over the second half of the year

Tourism continued its positive evolution in 2017, especially in the first half of the year, although the trend later became moderated. There were 19 million trips of foreign tourists in Catalonia 2017, a figure that marked a new record and growth of 5% compared to the previous year.

34 Nota de Conjuntura Econòmica. 100 July 2018

Tourist expenditure also reached a record 19,152 million euros, an intense increase of 9.6% over 2016. Apart from foreign tourism, tourism from Catalonia also grew considerably (10.8%), unlike tourism from the rest of the State, which decreased a little (-0.5%). Hotel overnight stays grew by 3.4% overall, with overnight stays by foreign tourists increasing by 5.5%; on the other hand, the trend in overnight stays of domestic tourism (from Catalonia and the rest of the State) was largely similar to that seen in 2016, with an increase of just 0.2%.

By country of origin, the leading positions continued to be occupied by France, Germany and the United Kingdom. However, the number of tourists from France decreased by 2.3%, while those from Germany rose by 1.5% and there was a sharp increase in numbers of tourists from the United Kingdom (4.9%). Other key source countries that recorded intense growth in 2017 included the United States (with an increase of 28.7%), Russia (24.5%) and the Netherlands (6.3%). On this point, it should be noted that tourism from the United States has doubled in the last five years.

Evolution of foreign tourism (base index 2012=100 ) 150

140

130

120

110

100 2012 2013 2014 2015 2016 2017 Number of tourists Total expenditure

Source: Ministry of Business and Knowledge.

Touristic demand in Catalonia (2017) Number of tourists Total expenditure % annual Million % annual Millions variation euros variation 1 Catalonia 14.3 10.8 1,697 10.4 Rest of Spain 5.1 -0.5 1,902 2.4 Foreign tourism2 19.0 5.1 19,150 9.6 Total 38.4 6.4 22,749 9.0

1Does not contain visits to ow n residence. 2 Tourists visiting Catalonia as 1st destination in Spain; not including visits to Catalonia as secondary destination. Source: Ministry of Business and Know ledge.

35 Nota de Conjuntura Econòmica. 100 July 2018

Agricultural GVA fell by 3.1% in 2017

GVA in agricultural and fishing sector shrank by 3.1% in volume in 2017, in contrast with the intense growth it had enjoyed in 2016, when it grew by 6.1%. According to Ministry of Agriculture, Livestock, Fisheries and Food estimates, if GVA is considered at current prices (and without including the subsectors of forestry and fishing), this variable showed significant growth in 2017 (unlike the evolution of GVA in volume), thanks to the increase in prices (particularly of livestock farming production), the slight increase in agricultural production, and the decrease in intermediate consumption.

Over the opening months of 2018, the Catalan economy continued to expand, though growth is expected to be a little lower than in the previous year

Economic activity continued to advance in Catalonia over the first months of 2018. In the first quarter, GDP increased by 0.8%, quarter- on-quarter. This figure is the same as for the previous quarter and only one decimal point below that for the first three quarters of 2017. In year-on-year terms, growth was 3.4%, the same figure as for average growth in 2017.

The latest macroeconomic forecasts for Catalonia for the years 2018 and 2019 (published in June 2018) point to a scenario of somewhat more moderate growth. The outlook for the Catalan economy is that growth will be 2.9% in 2018 and 2.5% in 2019, an expansion that continues to be higher than that of most neighbouring economies. As for the Spanish economy as a whole, this scenario of lower growth is explained mainly by the normalisation of the growth rate; after several years of strong expansion, the rate of expansion is gradually converging to a pace more in line with potential or long-term growth. Other factors that also explain this slight moderation in economic growth are expectations of lower growth in international trade (due to the increase in protectionism), higher oil prices and the less expansionary tone of monetary policy.

By component, the outlook for 2018 indicates a slight slowdown in domestic demand. One positive note is that, once more, growth will receive a positive contribution from both domestic demand and the exterior trade balance. This will consolidate a pattern of more balanced economic growth compared to earlier expansionary phases. Employment will continue to rise notably. The annual average unemployment rate is expected to reach 9.7% in 2019, falling below the 10% figure for the first time in eleven years.

36 Nota de Conjuntura Econòmica. 100 July 2018

Macroeconomic forecasts for Catalonia 2017 2018 (f) 2019 (f) GDP % change in volume 3.4 2.9 2.5 GDP Millions of euros 234,651 245,440 256,163 Domestic demand Contribution to the GDP growth 2.7 2.3 1.9 Houshold consumer expenditure % change in volume 2.4 2.2 1.9 Public administration % change in volume 2.4 2.0 1.5 consumer expenditure 1 Gross capital formation 2 % change in volume 5.6 4.4 3.2 External trade balance Contribution to the GDP growth 0.7 0.6 0.6 Foreign trade balance Contribution to the GDP growth 1.0 0.7 0.6 Exports of goods and services % change in volume 6.3 5.3 4.8 Imports of goods and services % change in volume 4.4 4.2 4.0 Balance with the rest of Spain Contribution to the GDP growth -0.3 -0.1 0.0 Jobs created 3 Thousands 96.5 79.9 72.1 Jobs created 3 % change 3.1 2.5 2.2 Estimated unemployment rate Unemployed / active population 13.4 11.4 9.7

(f) Forecast. 1 Includes consumption expenditure of non-profit institutions serving households. 2 Includes stock variation. 3 Full time equivalent jobs. Source: Catalan Government. Ministry of the Vice-presidency and of the Economy and Finance.

37 Nota de Conjuntura Econòmica. 100 July 2018

Box 1. Reorientation of the investment pattern and evolution of productivity in the Catalan economy

Recent studies have observed that, since the year 2000, low capital productivity has been the main source of divergence in the evolution of total factor productivity (hereafter, TFP) in the Spanish economy compared to more dynamic counterparts, such as the US economy. The results for Catalonia also indicate a similar trend, although they also show outstanding capital productivity within the State as a whole.

Prospects for capital productivity depend, to a large extent, on the investment effort, and on the composition of that effort. The most recent figures published show a significant slowdown in the investment effort since the outbreak of the crisis. However, it is also noted that this slowdown is concentrated in assets linked to construction and that, in fact, a reorientation of the investment pattern towards more productive and intangible assets has been seen since 2008. This reorientation is in line with trends in the larger advanced economies. Significant progress has been made already, but there is still room for improvement as regards the effort and composition of investment in intangible assets. In short, this reorientation of the investment pattern is positive for economic growth, although its effects on the capital stock as a whole are limited, given the excessive investment made in real estate assets during the last expansionary stage.

The investment pattern in the current phase of recovery is less dependent on construction assets

Gross capital formation reached its maximum levels in 2007, when it accounted for nearly 30% of GDP, and fell to minimal levels in 2013 (17%). However, this decline was concentrated in assets linked to the construction sector. In fact, comparative figures on the investment effort in capital goods and other assets (the most productive) indicate that the Catalan economy is well positioned and is benefitting from much more stable development. Accordingly, gross capital formation

38 Nota de Conjuntura Econòmica. 100 July 2018

in capital goods and other assets (in % of GDP) stood at 11.4% in 2017, above the figure for both Spain (10.2%) and the euro area (10.5%). However, the figure for the United States (11.5%) is slightly higher than that for Catalonia.

Gross capital formation by components in Gross fixed capital formation in equipment Catalonia assets and other assets in Catalonia and some advanced economies

30 13 25 12

20 11 15 10

10 9

5 8 01 03 05 07 09 11 13 15 17 01 03 05 07 09 11 13 15 17

Gross fixed capital formation and stock variation Catalonia Spain FCF (capital goods and other assets) United States Euro area FCF (construction)

Source: Idescat and AMECO. Source: Idescat.

This change in the investment pattern in the Catalan economy is also reflected in analysis of the evolution of the tangible and intangible components of gross capital formation. However, the ESA-2010 definition of investment in intangible assets is incomplete, making it helpful to use additional sources of information to include all of these assets. That is why this report is based on estimates published in a recent study by the Cotec Foundation and Ivie.

Since 2000, intangible assets included in the measure of GDP (software, R&D and other assets such as mining activities and the acquisition of artistic or literary works) are those showing the highest growth. The performance of intangible assets not included in the measure of GDP (design and new products, advertising, market studies, human capital and organisational structure), examined in greater depth elsewhere in this box, lags behind at some distance. In fact, these assets show a very similar evolution to that of expanded GDP (which includes these assets). Finally, this analysis also confirms the decline in tangible assets since the outbreak of the crisis. In percentage terms of expanded GDP, the relative weight of each asset in 2013 (the date of the latest available figures) is worthy of note: tangible assets accounted for 12.5%, intangible assets included in the measure of GDP represented 2.8%, and intangible assets not included in the measure of GDP, 3.1%.

39 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of gross capital formation in tangible and intangible assets, and expanded GDP in Catalonia (in real terms, base index 2000=100) 200

150

100

50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

CGF in tangible assets CGF in intangible assets included in GDP CGF in intangible assets beyond GDP Expanded GDP Source: BBVA Foundation, Cotec Foundation, Ivie and Idescat. Note: The expanded GDP is obtained based on the estimation of GDP by Idescat and the estimation of intangible assets beyond the GDP of the Cotec-Ivie Foundation.

The investment effort in intangible assets in Catalonia is lower than in the main advanced economies, and different in terms of its composition

In 2010, the investment effort in intangible assets was higher in Catalonia than in the State as a whole, but well below that of the main advanced economies. This investment effort is particularly weak in organisational structure, software, R&D, and human capital, though investment in advertising is a strong point. The differential in the investment effort, and the bias mentioned, may have negative consequences for the dynamics of productivity and economic growth in the medium term.

Nevertheless, the investment pattern over the 1995-2013 period indicated a change in course in the right direction, although significant differences persisted compared to the main advanced economies. Specifically, during this period, the investment effort in intangible assets increased by 1.2% of expanded GDP, an increase noted particularly in R&D and software. The outbreak of the crisis served to strengthen commitment to these latter assets, to the detriment of advertising and the design of new products. However, the latest Idescat figures on internal R&D expenditure as a percentage of GDP suggest still quite noticeable differences. In 2016, R&D expenditure stood at 1.46% of GDP in Catalonia, compared to 2.13% in the euro area as a whole.

40 Nota de Conjuntura Econòmica. 100 July 2018

Investment in intangible assets in Catalonia and some advanced economies. 2010 (% of expanded GDP*) 16

14 1.4 0.2 0.3 0.4 12 3.0 3.4 2.1 1.3 0.3 0.2 10 1.2 2.3 2.6 2.6 3.6 0.3 3.0 1.8 8 2.7 0.2 2.0 0.2 0.2 3.5 3.5 1.3 6 4.2 1.1 1.2 1.0 3.2 3.5 1.3 1.3 1.0 2.4 2.0 4 1.8 1.7 1.2 1.1 1.5 1.1 1.6 1.4 0.3 0.2 0.5 0.9 1.5 0.8 0.7 0.9 0.7 0.2 0.7 0.4 0.2 0.8 0.2 0.2 2 1.7 0.7 0.9 0.6 0.6 0.7 1.2 1.0 0.5 2.0 1.9 1.0 1.4 1.3 1.2 1.2 1.1 1.1 1.1 0 USA Sweden France United Finland Netherlands Germany Catalonia Spain Italy Kingdom

Design and new products Advertising Market studies Human capital Organizational structure Software R & D Other intangible assets *In order to homogenize the data, real estate activities have been discarded (section L) and Administration, health and education activities (sections O-Q). Source: IVIE, Cotec Foundation and INE.

Evolution of investment in intangible assets in Catalonia (% of expanded GDP)

7

6

5

4

3

2

1

0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Design and new products Advertising Market studies Human capital Organizational structure Software R & D Other intangible assets Source: IVIE, Cotec Foundation and Idescat.

Analysis of the investment effort in intangible assets (as a proportion of GVA) also reveals notable differences by branch of economic activity. The activities where the greatest investment was made in intangible assets in 2013 were those related to ICT services, food and drink, transport material, computer, electronic and optical product manufacture, financial and insurance services, professional activities, and education.

41 Nota de Conjuntura Econòmica. 100 July 2018

Differences are also noted in the composition of the investment. For instance, ICT services received large investment in software, while R&D was a major focus of investment in human capital, and the transport material industry invested heavily in design and new products.

Intangible assets innovation by sector in Catalonia. 2013 (% of expanded GDP)

18 16

14

12

10 8

6

4

2

0

TOTAL Transport

Education Metallurgy Construction

industry Food Other services Textile industry Other manufactures Other Extractive industries Extractive

activities estate Real Professional activities Professional Commerce and repair Finance and and insurance Finance Transportation material Electricity, gas and and water gas Electricity, machinery of Manufacture

Agriculture, livestock and fishing Information and communications

Health services andsocial services

Computer, electronic and optical products services drinks and food Accommodation,

arts graphic and paper cork, wood, of Industry Rubber, plastic and other non-metallic materials non-metallic other and plastic Rubber,

defense and Security Social administration, Public

Coke and refiningofpetroleum and chemical industries Design and new products Advertising Market studies Human capital Organizational structure Software R & D Other intangible assets IAI 2000

Source: IVIE, Cotec Foundation and Idescat.

The period from 2000 to 2013 was marked by notable relative increases in investment in the extractive industries, rubber products, plastics and other non-metallic materials, transport material,

42 Nota de Conjuntura Econòmica. 100 July 2018

professional activities, and machinery manufacturing. On the other hand, the investment effort decreased in the chemical and oil industries, and commerce and repair over the same period.

The table below shows the latest official estimates on TFP drawn up by Idescat and the Ministry of the Vice-presidency and of the Economy and Finance, with particular attention to the comparative results and to the evolution of capital productivity. However, before presenting the results, it should be noted that TFP accounts for variations in production that are not explained by either the labour factor or the capital factor. These variations include technological improvements, changes in the organisation of work, and improvements in human capital or to the institutional framework. It should also be stressed that capital productivity is only a partial measure of productivity, one that presents a strong medium- and long-term link with the investment pattern of the economy as a whole.

In 2017, total factor productivity made a large contribution, of 1.2%, to GDP growth

In 2017, the 1.2 percentage points (pps) contribution made by TFP to GDP growth was lower than that made by the factors of production as a whole. This contribution was 2.2% (with labour accounting for 1.5 pps and capital the remaining 0.6 pps). TFP was a significantly higher contributor than in previous years: its average contribution since 2000

Total Factor Productivity by components in Catalonia 2014 2015 2016 2017 GDP (% annual change) 2.1 3.8 3.6 3.4 GDP* 2.1 3.8 3.6 3.3

Contribution to GDP change

by TFP 1.6 2.3 1.2 1.2

by labour 0.5 1.1 1.9 1.5 by capital* 0.0 0.3 0.5 0.6 Production factors labour* 1.0 2.2 3.9 3.1 capital* 0.1 0.7 0.9 1.3 Reference data

Relation capital-labor* -0.9 -1.6 -2.9 -1.8 Apparent productivity

of labour* 1.1 1.5 -0.3 0.3 of capital* 2.0 3.1 2.6 2.0 Source: Idescat and Ministry of the Vice-presidency and of the Economy and Finance. * % of logarithmic variation. 43 Nota de Conjuntura Econòmica. 100 July 2018

is 0.3 pps. Accordingly, this increased contribution served to confirm the positive trend noted since 2010. Since the beginning of the economic recovery, TFP has consistently been a large contributor to GDP growth, accounting for an average of 1.6pps over the 2014-2017 period, the same amount as the contribution made by factors of production as a whole. For its part, the contribution of the capital factor continued to recover gradually, reaching 0.6 pps in 2017 in a trend that began in 2012. Finally, the labour factor was a positive contributor for the fourth consecutive year (1.5 pps in 2017).

During the recovery phase, TFP remained a major contributor in comparative terms

The TFP of Spain as a whole has also been a large contributor over the last four years. However, this contribution is lower than that made by the Catalan economy. The average contribution in the State as a whole over the 2014-2017 period is 1.0pps, making this contribution 0.6 pps lower than that made by the Catalan economy. These differences reflect, by and large, the better performance shown by the labour and capital productivity in Catalonia, which was 0.4 pps higher than the figure for Spain over the 2014-2017 period. Compared to the euro area and the US, the figures also show Catalonia making great advances in labour productivity since 2010. However, the trend since 2000 reveals, overall, a slowdown in TFP growth in Catalonia. As noted previously,

Evolution of the Total Factor Productivity (average of the GDP contribution, in percentage points) 2.0

1.5

1.0 0.5

0.0

-0.5 -1.0

-1.5

-2.0 -2.5 Catalonia Spain Euro area USA

2001-2017 2001-2006 2007-2009 2010-2017 2014-2017 Source: elaboration from Idescat and Ministry of the Vice-presidency and of the Economy and Finance, and AMECO.

44 Nota de Conjuntura Econòmica. 100 July 2018

this reflects the less positive performance of capital productivity in comparative terms (particularly compared to the main advanced economies).

Reorienting the investment pattern: vital for ensuring that the positive TFP dynamic continues

The fact that TFP has grown in a contained way since 2000 is due to the evolution of labour and capital productivity. On the one hand, labour productivity was contained in its growth until the outbreak of the crisis, when it accelerated to end up reaching 22 pps above productivity levels in 2000. On the other hand, we should also note that, by 2013, capital productivity had fallen nearly 19 pps before partially recovering in subsequent years. Even so, levels of capital productivity in 2017 were still more than 10 pps below the figure for 2000. Looking to the future, reorienting investment patterns in the Catalan economy towards more productive tangible and intangible assets is an urgently needed measure.

Evolution of the TFP, the labour productivity and the capital productivity in Catalonia (base index 2000=100) 130

120

110

100

90

80 2000 2003 2005 2007 2009 2011 2013 2015 2017

Total Factor Productivity Capital productivity Labour productivity Source: BBVA Foundation, Cotec Foundation, Ivie and Idescat.

45 Nota de Conjuntura Econòmica. 100 July 2018

3. External trade

Catalonia’s trade surplus in goods and services weighted 12.2% of GDP in 2017

In 2017, the Catalan economy generated a trade surplus in goods and services of 28.529 billion euros, the equivalent of 12.2% of GDP. Of this figure, foreign trade accounted for 6.5%, while trade with the rest of Spain contributed the remaining 5.7%.

Trade of goods and services in Catalonia (% of GDP) 2000 2007 2011 2015 2017 External trade balance 8.0 3.2 8.9 11.5 12.2 foreign TB -4.6 -5.2 2.4 5.7 6.5 TB with the rest of Spain 12.6 8.3 6.5 5.8 5.7 Exports of goods and services - - 62.9 - -

foreign 34.1 30.3 33.2 38.3 39.4

rest of Spain - - 29.7 - -

Imports of goods and services - - 54.0 - - foreign 38.7 35.5 30.8 32.6 32.9 rest of Spain - - 23.2 - - Source: Input - Output Framew ork for Catalonia 2011 and annual macroeconomic accounts (Idescat).

Trade of goods results have become consolidated in recent years, with a surplus that has increased by 4.2% in terms of GDP since 2000. During this period, there has been a very significant improvement in the international trade balance, which has gone from a deficit (-4.6% of GDP in 2000) to a surplus (+6.5% in 2017). In the case of trade with the rest of the State, the trend has taken the opposite direction, with a 12.6% surplus in 2000 shrinking to 5.7% in 2017.

In 2017, Catalonia’s trade surplus was 3 decimal points lower than in 2016. Foreign exports of goods and services grew to represent 39.4% of GDP; imports, on the other hand, remained stable, at 32.9% of GDP.

Despite the slowdown in global growth in 2015 and 2016, Catalonia’s foreign exports of goods and services have increased enormously over the last few years. In 2017, exports continued to grow at rates above

46 Nota de Conjuntura Econòmica. 100 July 2018

6%, and the international trade balance contributed 1% to GDP due to more moderate growth in imports (4.4%). In the case of trade with the rest of Spain, the contribution to GDP growth in Catalonia was negative (-0.3%) in 2017. As a result of all this, the trade balance of the Catalan economy contributed 0.7% overall to GDP growth in 2017.

External trade balance in Catalonia (% of GDP)

15

12 9 6

3 0 -3

-6 2001 2003 2005 2007 2009 2011 2013 2015 2017

External balance Foreign balance Balance with the rest of Spain Source: Idescat.

Trade of goods and services 2012 2013 2014 2015 2016 2017 External trade balance1 1.3 3.0 0.2 -0.4 1.3 0.7 Foreign TB1 3.1 1.3 -0.7 0.4 0.4 1.0 Exports of goods and services2 3.0 3.9 4.8 4.4 4.8 6.3 Imports of goods and services2 -7.0 0.5 8.0 3.9 4.5 4.4 1 TB with the rest of Spain -1.8 1.7 0.9 -0.8 0.9 -0.3

1 Contribution to GDP. 2 Variation in volume.

Source: Idescat.

This trade balance is among the highest in the euro area countries, behind only Luxembourg, Ireland and Malta and ahead of countries such as the Netherlands, Germany and Spain.

The results of Catalonia’s foreign exports of goods and services, particularly over the last two years, can be seen as positive in view of the slowdown in world trade over the same period. World trade shrank from real growth of 2.4% in 2015 to just 1.3% in 2016, although the figure recovered in 2017, rising once more to reach 3.7%.

47 Nota de Conjuntura Econòmica. 100 July 2018

External trade balance in the European framework (% of GDP)

35 32.1 30 25

20 15 12.2 11.6 10 7.7 4.4 5 2.7

0 Ireland Catalonia Netherlands Germany Euro area Spain

Source: Idescat and Eurostat.

The share of foreign exports of goods rose, to the detriment of exports to the rest of Spain

As regards trade in goods, Catalan export activities look more and more towards foreign climes, and in 2017 foreign exports accounted for some 64.5% of total exports. However, this does not mean that exports to the rest of the State fell in absolute terms; between 1998 and 2017, exports to the rest of Spain increased by 7% at current prices, though this growth is much lower than the 161% spike in foreign exports over the same period.

Exports by destination (% of total)

65 59.8 64.5 60 61.3 56.3 55 53.9 52.9 50.0 50 45 40.2 47.1 46.1 43.7 38.7 40 35.5 35 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Foreign Rest of Spain

Source: C-Intereg and Idescat.

48 Nota de Conjuntura Econòmica. 100 July 2018

In 2017, foreign goods exports increased by 8.7% and imports by 8.3% at current prices

Statistics drawn up by Idescat, the Catalan institute of statistics, based on figures published by the AEAT, the Spanish Tax Agency, enable us to analyse the characteristics and trends observed in foreign goods trade flows. Unlike the accounting data provided above, customs figures refer only to exchanges of goods, whose value is reflected in current prices. In this section, in order obtain a broader overview of the performance of Catalonia’s international trade activities, we analyse the evolution of goods flows both in 2017 and over the last five years.

In 2017, Catalonia’s foreign exports of goods increased by 8.7%. This growth, added to that recorded in recent years, means that the current value of exports was around 20% higher in 2017 than in 2012. In real terms, taking as a reference trends in trade prices in the Spanish economy, exports of goods increased by around 8% in 2017. Imports of goods also grew at a similar rate, by 8.3% in nominal terms. In real terms, however, this growth was lower due to the increase in import prices, which rose by around 3.6%. The figures also show that the increase in goods imports at current prices (up by 20.6% since 2012) is similar to that of exports. This result contrasts with the higher growth in exports observed over the years immediately following the economic crisis. From 2009 to 2012, exports grew by 42%, while imports rose by 22%.

Foreign trade of goods (annual % variation, data in current values) 10

5

0

-5 2012 2013 2014 2015 2016 2017

Exports Imports

Source: Idescat and State Tax Agency.

Cost competitiveness and revealed comparative advantage indicators remained largely unchanged in 2017

In 2017, indices of the revealed comparative advantage (indices that

49 Nota de Conjuntura Econòmica. 100 July 2018 measure the evolution of the share in world markets achieved by Catalan manufactured exports) showed different trends according to the region that received the trade. Market shares fell in the EA countries, with a knock-on effect leading to worsening results in all major markets important to Catalan trade. On the other hand, there were improvements in markets in non-EA European countries and the rest of the world.

Index of the revealed competitive position of industry (Base index 1999 = 100) 120

115

110 105

100

95 90

85 2012 2013 2014 2015 2016 2017

Main markets Euro area Rest of Europe Rest of the world

Source: Idescat.

Competitiveness index by unit labor cost and exchange rate (data for the Spanish economy; 1999=100)*

125 120

115 110

105 100 2012 2013 2014 2015 2016 2017

Towards developed economies Towards Euro Area

*An increase implies lower competitiveness. Source: Bank of Spain.

After years of constant improvement in cost competitiveness, indicators showed this trend slowing down in 2015. Compared to EA countries, the competitiveness index (which evaluates competitiveness in terms of relative unit labour costs and exchange rates, with figures published at State scale) remained practically stable in 2017. On the

50 Nota de Conjuntura Econòmica. 100 July 2018 other hand, there was a loss of competitiveness against the developed countries, although, in this case, the appreciation of the euro against the dollar and other currencies played a very important role.

Catalan exports reached record volume in 2017

Exports of goods (millions of euros) 80.000

70.000 60.000 50.000

40.000 30.000 20.000 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Idescat.

Exports to the European Union grew below the rate of total exports in 2017

Trade of goods by geographical areas and countries (annual % variation, current prices) Exports Imports 2012-2017 2017 2012-2017 2017 European Union 25.2 7.2 24.2 3.6 Germany 19.4 2.8 37.5 3.4 France 9.9 7.3 12.8 6.8 Italy 30.4 6.6 13.7 5.5 Portugal 37.9 7.0 6.2 -4.4 United Kingdom 36.3 3.1 16.6 1.7 Rest of Europe -14.6 12.5 0.9 13.8 Switzerland -20.3 6.5 45.1 4.5 North America 54.1 20.7 26.4 2.1 USA 53.8 21.2 24.4 -0.5 Latin America 7.4 7.9 -19.8 18.6 Japan 37.8 5.1 31.2 10.3 China 50.7 17.7 47.4 14.4 Rest of the world 18.8 9.6 16.2 -0.1 Total 20.3 8.7 20.7 8.3

Source: Idescat and State Tax Agency.

In 2017, Catalan exports to European Union countries increased by 7.2%, a figure higher than the growth seen in total exports (8.7%). This result indicates a change in the trend set in recent years, when the

51 Nota de Conjuntura Econòmica. 100 July 2018 expansion of Catalan exports was driven by Community markets. Subsequently, Catalonia’s exports to the EU represented 64.9% of total exports, compared to 62.4% in 2012.

As usual, the geographic distribution of exports reveals significant differences in trade with EU countries. For instance, exports to France (Catalonia’s main customer in the EU) rose by 7.3% in 2017, boosting growth. In the case of Germany, as for the 2012-2017 period as a whole, the increase in exports was considerably lower than the average for EU-28 in 2017. In that of the United Kingdom, growth has been even greater over the last five years, despite the turndown in 2016, due to the Brexit referendum, and more moderate growth in 2017 (3.1%). Outside the EU, relative growth in exports to Japan, China and the United States have been particularly impressive over the last five years.

Trade of goods by geographical areas and countries (2012-2017 % variation) 60 50

40

30 20 10 00

-10

-20 -30

Exports Imports Source: Idescat and State Tax Agency.

In absolute terms, the markets that have been the greatest contributors to the growth in Catalan exports over the last five years are Italy (which accounts for 2.5% of the overall growth, representing 12.3% of the total), and Portugal and Germany (2.2% in both cases). On the other hand, growth in exports to France, the main market for Catalan exports, is more moderate. The increase in exports to the European Union represents 15.7% of the total growth in exports between 2012 and 2017 (that is to say, 77% of export growth). This dynamic contrasts with the years immediately following the crisis when, faced by weak European markets, companies in Catalonia began to focus on exporting to new markets, increasing the market share of Catalan

52 Nota de Conjuntura Econòmica. 100 July 2018 exports in the rest of the world. Over the last five years, exports to non- Community countries have grown by just 12.2%; over the same period, Catalonia’s share in European markets like Switzerland and Russia has fallen, while modest growth has been seen in exports to Latin America as a whole.

Main destinations of exports % of total 2012-2017 Contribution to growth 2012 2017 % change (pp) Germany 11.3 11.2 19.4 2.2 France 17.3 15.8 9.9 1.7 Italy 8.2 8.9 30.4 2.5 Portugal 5.7 6.6 37.9 2.2 United Kingdom 5.0 5.7 36.3 1.8 Switzerland 4.9 3.3 -20.3 -1.0

USA 2.9 3.7 53.8 1.6

Japan 1.0 1.2 37.8 0.4

China 1.7 2.2 50.7 0.9 EU-28 62.4 64.9 25.2 15.7 Rest of the world 37.6 35.1 12.2 4.6 Total exports 100.0 100.0 20.3 20.3

Source: Idescat and State Tax Agency.

Main destinations of imports % of total 2012-2017 Contribution to growth 2012 2017 % change (pp) Germany 15.6 17.7 37.5 5.8 France 9.8 9.2 12.8 1.3 Italy 8.4 7.9 13.7 1.1 Portugal 2.2 1.9 6.2 0.1 United Kingdom 3.1 3.0 16.6 0.5

Switzerland 2.0 2.4 45.1 0.9

USA 3.0 3.4 24.4 0.7

Japan 2.3 2.4 31.2 0.7 China 8.3 10.1 47.4 3.9 EU-28 55.4 57.0 24.2 13.4 Rest of the world 44.6 43.0 16.4 7.3 Total imports 100.0 100.0 20.7 20.7

Source: Idescat and State Tax Agency.

Imports grew slightly more than exports over the 2012-2016 period. Imports from EU-28 countries continued to account for the largest share (57% of the total in 2017), while a pattern very similar to that

53 Nota de Conjuntura Econòmica. 100 July 2018 seen in the case of exports was noted, with extra-Community trade increasing its share of the market. The main market of origin of Catalan imports in 2016 continued to be Germany (17.7%), followed by China and France.

The import dynamic over the 2012-2017 period shows that Germany accounted for 28% of growth, contributing 5.8% out of a total increase of 20.7%. China was also an important contributor to this, accounting for 18.8% of total imports and accounting for 3.9% of import growth.

The energy and metallurgy sectors drove the growth in both imports and exports in 2017

In 2017, the dynamic in the different exporting sectors was rather homogeneous, with the exception of a large increase in energy exports (up by 109.4%), driven by the strong performance of the refined oil product industry. Metallurgical industry exports also increased at a rate higher than the average (11.5%). Moreover, the rate of growth in the main exporting sector in Catalonia, the chemical industry (which accounts for 23.6% of total exports), accelerated to 7.7%. However, a slowdown was seen in exports of motor vehicles (4.2%), which had driven growth in both 2015 and 2016. The dynamic of the last five years shows all the main exporting sectors returning highly positive results, and only metallurgy is notably below average.

Exports and imports by economic sector (current prices)

Exports Imports % of total (2017)

2012- Any 2012- Any 2017 2017 2017 2017 Exports Imports Crop and animal production, hunting, 23.5 -6.8 3.7 2.6 2.2 4.5 fishing and aquaculture Mining, extraction and refined petroleum 82.9 109.4 -35.3 40.3 3.9 8.0 products Food products and beverages 28.9 7.0 22.4 5.5 12.1 7.4 Textiles, manufacture of wearing 27.9 6.5 39.3 4.2 8.2 10.6 apparel, leather and footwear Chemical Industries 20.2 7.7 17.6 6.9 23.6 19.2 Basic metals and metals products 11.1 11.5 28.6 17.4 6.0 5.6 Machinery and equipments 24.7 6.0 33.3 5.2 14.0 16.8 Motor vehicles and other transport 23.3 4.2 66.8 6.0 17.8 16.6 Rest of the branches of activity -4.0 9.5 22.2 8.0 12.2 11.4 Total 20.3 8.7 20.7 8.6 100.0 100.0

Source: Idescat and State Tax Agency.

54 Nota de Conjuntura Econòmica. 100 July 2018

In the case of imports, the most important sectors in 2017 were energy and metallurgy (with growth of 40.3% and 17.4%, respectively). The main importing sector, the chemical industry, which had seen a slowdown in 2016, grew again last year (6.9%). Meanwhile, imports of machinery and motor vehicles increased more moderately (5.2% and 6% respectively). Over the 2012-2017 period as a whole, the most significant relative increases in imports were also seen in the automotive industry and machinery, followed by the textile industry.

Exports by economic sector. 2017 Imports by economic sector. 2017 (% of total) (% of total) 02 04 08 05 12 11 12 07

17 18 08 11

17 14 24 19 06 06

Agriculture Energy products Food and beverages Textile Chemicals Metals Equipment goods Motor vehicles Other activities

Source: Idescat and State Tax Agency.

Exports and imports by economic sector (2012-2017 % variation)

100 80 60

40

20 0 -20 -40

Exports Imports Source: Idescat and State Tax Agency.

55 Nota de Conjuntura Econòmica. 100 July 2018

The highest relative growth in exports and imports was in intermediate goods in 2017

Exports of intermediate goods accounted for 54.5% of the total, with year-on-year growth of 9.6%, driven by the increase in energy exports mentioned previously. Moreover, consumer goods (34.1% of the total) grew in similar fashion (9.3%). Indeed, consumer goods have enjoyed the largest cumulative growth since 2012, thanks to the boom in exports of motor cars. After growing intensely in 2016, exports of capital goods slowed down in 2017 (-0.5%).

Due to the greater relative importance of manufacturing activities in the Catalan economy, imports of intermediate goods account for the largest part in the Catalan import structure (59% in 2016). Imports of consumer goods accounted for 34.41% and imports of capital equipment, 6.9%, in 2017. The import dynamic has evolved in highly similar fashion in all three branches of activity.

Analysis of the contribution to results made by imports in each goods category reveals substantial differences between 2012 and 2017. These changes are due to the increase in domestic demand (especially consumption). Accordingly, consumer goods account largely for the increase in imports seen since 2012, while imports of intermediate goods and capital goods have grown only moderately.

Exports and imports by economic destination of the goods (annual % variation) Exports Imports 2012-2017 2017 2012-2017 2017

Consumer goods 36.9 9.3 50.4 7.3

food, beverages and tobacco 32.2 6.0 31.5 5.8

other consumer goods 38.9 10.7 55.4 7.6 Capital goods 9.6 -0.5 39.7 7.4 machinery and other equipment goods 13.1 1.3 33.2 8.9 transport material and other capital goods 4.1 -3.4 56.7 4.4 Intermediate goods 12.1 9.6 6.8 9.5 agricultural products, forestry and fishery 35.2 1.7 -1.7 7.5 energy and industrial products 11.8 9.7 7.4 9.6 Total 20.3 8.7 20.7 8.6

Source: Idescat and State Tax Agency.

56 Nota de Conjuntura Econòmica. 100 July 2018

Imports by economic destination of the goods

Contribution to growth (pp) % of total

2012-2017 2012 2017 Consumer goods 13.8 27.3 34.1 Capital goods 2.4 6.0 6.9

Intermediate goods 4.5 66.7 59.0

Source: Idescat and State Tax Agency.

Exports of vehicles, the most important factor in the growth of exports in recent years

Breaking down the information by product in order to analyse exports more specifically reveals the importance both of the relative weight of exports of motor vehicles (16.8% in 2017) and the contribution of car exports to total growth since 2012 (3.9 percentage points, around 19.2%). The 2017 ranking of the ten products with the greatest relative weight in Catalan exports (reaching two figures in the TARIC customs classification) shows that pharmaceutical products and fuels have also been outstanding contributors to overall growth in the last five years, each accounting for 2.1 percentage points.

Main exports (annual % variation and contribution to growth) Contribution annual % variation to growth % of total TARIC classification 2017 2012-2017 2012-2017 2012 2017

3.0 23.8 3.9 16.4 16.8 87 Vehicles 39 Plastic materials with manufactures 11.7 13.9 1.0 7.5 7.1 84 Mechanical devices 4.2 15.6 1.1 6.8 6.5 30 Pharmaceuticals 6.0 36.4 2.1 5.6 6.4 85 Electrical machinery and equipment 0.4 16.8 1.0 6.0 5.8 27 Mineral fuels 95.9 63.2 2.1 3.3 4.4 02 Meat and offal 9.3 33.0 1.2 3.8 4.2 29 Organic chemicals -1.1 -4.3 -0.2 3.8 3.0 38 Other chemical products -1.0 38.9 1.0 2.5 2.9 33 Essences 13.4 39.9 0.9 2.3 2.7

Total 8.7 20.3 20.3 100.0 100.0

Source: Idescat and State Tax Agency.

Motor vehicles and machinery are the imports that have grown most in absolute terms in recent years

Among the main imports, the highest contributors to growth between 2012 and 2017 were motor vehicles (8.1 percentage points, 39% of the

57 Nota de Conjuntura Econòmica. 100 July 2018 total) and machinery (2.3 percentage points in the case of electrical material and 2.2 in that of mechanical equipment).

Main imports (annual % variation and contribution to growth) Contribution annual % variation to growth % of total TARIC classification 2017 2012-2017 2012-2017 2012 2017 87 Vehicles 7.4 89.0 8.1 9.1 14.2 84 Mechanical devices 2.1 28.3 2.2 7.9 8.4 27 Mineral fuels 39.0 -34.4 -5.2 15.1 8.2 85 Electrical machinery and equipment 3.4 33.3 2.3 6.8 7.5 29 Organic chemicals 9.7 15.7 1.0 6.3 6.0 39 Plastic materials and manufactures 11.5 27.3 1.3 4.8 5.1 30 Pharmaceuticals 0.4 29.3 1.1 3.8 4.0 62 Clothing and accessories 2.4 47.1 1.4 3.0 3.6 61 Garments and clothing accessories 3.0 30.6 0.9 2.9 3.1 90 Optical and surgical instruments 0.5 37.5 1.0 2.6 2.9 Total 8.6 20.7 20.7 100.0 100.0

Source: Idescat and State Tax Agency.

In 2017, industrial exports with high technological content continued to grow at above-average rates

Industrial exports with higher technological content grew by 9.2% in 2017, a higher rate than for industrial products overall (8.7%). These exports now represent 10.8% of the total. However, exports of goods with medium to low technological content were those that increased most in 2017 (26.7%), due to the huge growth in exports of refined petroleum products. In the case of imports, those with medium to low technological content were also those that grew most (12.4%).

Results from recent years show the strong relative growth of exports with high technological content (which have increased more than all other exports). High technological exports increased by 37.3% between 2012 and 2017. However, the largest contributors to the growth of exports were products with medium-to-high technological content (9.8 percentage points, representing 40% of total growth). In the case of imports, this medium-to-high technological category performed along similar lines, contributing 63.7% to total growth.

58 Nota de Conjuntura Econòmica. 100 July 2018

Exports and imports of industrial products by technological content and groups of products. (annual % variation and contribution to growth) Exports Imports Contribution Contribution annual % variation to growth annual % variation to growth 2017 2012-2017 2012-2017 2017 2012-2017 2012-2017 High technology level 9.2 37.3 3.7 6.7 28.3 3.5 pharmaceutical products 4.7 32.0 2.3 3.5 27.8 1.6 IT, electronic and optical 21.0 54.1 1.5 9.7 27.7 1.8 products others 13.5 -63.3 -0.1 5.7 638.6 0.1 Middle-high technology level 5.1 19.6 9.8 6.1 41.1 17.9 chemical products 9.1 15.8 2.9 8.2 14.3 2.5 material and electronic 2.7 22.0 6.6 4.7 61.6 14.6 equipment; machinery and others 10.1 17.2 0.3 9.5 33.9 0.8 Middle-low technology level 26.7 30.7 4.4 12.4 -5.8 -1.1 rubber and plastic material, non metal mineral products and 11.5 11.8 1.1 14.7 28.5 2.3 metallurgy metal products 3.3 32.0 0.9 10.5 33.2 0.8 others 117.0 91.5 2.5 8.6 -49.4 -4.3 Low technology level 6.5 25.6 6.6 5.0 31.5 7.8 food products, textiles, leather 5.9 24.8 5.9 4.3 28.9 6.4 and shoes, wood and paper others 12.8 34.1 0.7 9.5 53.3 1.4 Total industrial products 8.7 24.5 24.5 6.7 28.1 28.1

Source: Idescat and State Tax Agency.

High -tech exports (% of total industrial exports) 11 11

10

10 09

09 2014 2015 2016 2017 Catalonia Spain Source: Idescat

59 Nota de Conjuntura Econòmica. 100 July 2018

The export sector continues to expand in 2018

The trend for growth in the Catalan export sector also continued over the first few months of 2018. The economic accounts for the first quarter of 2018 show 4.3% growth in exports of goods and services, a rate that reflects a slowdown compared to the high growth seen 2017. Imports grew by 4.6% over the same period, reversing the trend seen in 2017, when exports grew more than imports. The result of all this was a deterioration in the foreign trade balance in the first quarter, when foreign trade contributed just 0.2 percentage points to GDP growth.

As regards trade in goods, the results were along the same lines. Accumulated customs figures up to the first quarter of 2018 show a 3.4% year-on-year increase in exports, making this the best quarter for exports in the historical series. The growth rate for imports was also higher (4.2%).

Finally, another notable event in the first quarter of 2018 was the fall in exports with high technological content (-4.4%). In any case, exports of products with medium-to-high technological content grew at a higher rate (7.3%).

60 Nota de Conjuntura Econòmica. 100 July 2018

Box 2. Export intensity of the Catalan economy and potential future markets

Sandra Jiménez Arteaga, Director of the Strategic and Competitive Intelligence Unit, ACCIÓ-Government of Catalonia

Antoni Fita Catà, Manager of the Strategic and Competitive Intelligence Unit, ACCIÓ-Government of Catalonia

Guillem Estapé Bartrés, Foresight and Risk Analysis Project Manager, ACCIÓ-Government of Catalonia

Catalonia is an economy open to the world, as illustrated by the fact that its degree of openness is higher than the average for the European Union and that of countries of similar size, such as Finland and Denmark.

The economic crisis, which occupied the 2008-2013 period, encouraged a larger number of Catalan companies to open up to foreign markets in response to shrinking domestic demand. However, the most notable trend was the change in attitude and mentality on the part of Catalan businesses, which began to see international activity as a regular activity and not merely a substitute if the domestic market declines.

As a result of this trend towards the internationalisation of the Catalan economy, both exports and the number of regularly exporting companies (those that have exported in each of the last four consecutive years) have reached record figures in Catalonia in recent years. Catalan exports have grown consistently and strongly since 2010, and were worth 70.829 billion euros in 2017. This figure, while still provisional, would mark a milestone, representing a new record for the seventh consecutive year. Moreover, more than 3,000 firms have become regular exporting companies in the last four years in Catalonia, with the total reaching over 17,000 companies in 2017, also a new record, in this case for the fifth consecutive year. This international expansion has strengthened Catalonia’s leadership within the Spanish State as a whole, where it accounts for one-quarter of total

61 Nota de Conjuntura Econòmica.100 July 2018

exports and one-third of the regular exporting companies, demonstrating that Catalonia has a competitive business system and an increasingly internationalised economy.

However, despite the positive trend in exports seen in recent years, it remains to be seen whether Catalonia is benefiting fully from the new dynamic in international markets or whether, on the contrary, it needs to improve its export position in regions and countries that are driving global demand. Responding to this issue is key to ensuring that the rising pace that exports have enjoyed in recent years does not slow down once more in the near future, and that Catalan companies can continue to advance in their processes of international expansion.

Here, one of the indicators most commonly used to evaluate a country’s export position and the intensity of its trade relations with other markets is the Index of Trade or Export Intensity. This index, defined as the ratio between the proportion of exports from one country to a destination and the proportion of world exports to that same destination, enables us to determine if a country exports more or less to a given destination compared to world exports to that same destination. In other words, the index indicates whether a country’s trade relations with a given market are in line with the world average, or are more or less intense.

The Trade Intensity Index also enables the hypothesis about the relevance of the law of gravity in international trade to be put to the test, since trade relations are expected to be more intense with markets that are closest geographically and culturally.

The object of this study was to calculate and analyse the index of export intensity in Catalonia in order to determine the degree of intensity of exports from Catalonia to those regions and countries with the highest global demand and future growth and to verify whether Catalan companies are taking advantage of the opportunities offered by international markets or whether, on the contrary, there is scope for improvement and a need for a greater export presence in certain countries.

The index of export intensity of Catalonia was calculated in relation to nine world regions (European Union, Rest of Europe, North Africa, Sub-Saharan Africa, Middle East, Latin America, North America, Asia and Oceania) and for 120 countries, selected according to their import volume (global demand). For this, the selection criterion employed was that they should have import volume of over five billion dollars, meaning that they together represented practically all global imports in 2016 (96.9%).

62 Nota de Conjuntura Econòmica.100 July 2018

The index of export intensity of Catalonia was compared to that of the five main European economies (Germany, United Kingdom, France, Italy and Spain) and three European countries of more comparable size to Catalonia (Austria, Denmark and Finland). To achieve this, the export intensity indices of these eight countries was calculated for the same regional markets as Catalonia. The comparative analysis with the selected benchmark of European countries that have similar economic structures made it possible to detect potential geographical biases and to determine whether Catalan exports to a region or country are higher or lower than those of European countries, and to recommend markets with potential scope improvement or the need for a greater export within Catalonia’s drive towards internationalisation. To determine those markets in which Catalonia has the greatest scope for improvement or needs to establish greater export presence, the countries with the highest growth prospects over the next five years were identified.

The main conclusions obtained from this study were: Firstly, in line with the hypothesis found in the economic literature concerning the relevance of the gravity model of international trade, the world map showing Catalonia’s export intensity indices reveals that geographical and cultural distance is a key factor in countries' trade relations. The main countries with which Catalonia presented the highest export intensity indices were those of the European Union, the Southern Mediterranean Basin (North Africa, Turkey and part of the Middle East) and some Latin American countries (especially the countries of the Pacific and the Caribbean islands). By contrast, the main countries with which it had the lowest export intensity indices were those of Sub-Saharan Africa, especially East Africa, North America, Asia and Oceania.

Secondly, despite its high export intensity in Europe, Catalonia presents scope for improvement in the Nordic and Baltic countries, Russia and neighbouring countries. Similarly, although Catalonia presented the highest export intensity in Latin America among comparative European countries, there is room for improvement in the two largest Latin American countries: Brazil and Mexico. With respect to the Middle East, it has a considerable challenge in Iran and the United Arab Emirates.

Catalonia needs to intensify its exports to Sub-Saharan Africa, especially in East African countries with the greatest growth prospects such as Ethiopia, Kenya, Tanzania and Mozambique, and in the main importing countries of West Africa, including Nigeria and Ghana.

63 Nota de Conjuntura Econòmica.100 July 2018

Finally, the data reveal Catalonia’s underdeveloped export potential with North America and Asia, two regions that account for almost half of world demand. Thus, Catalonia’s biggest export challenges lie in the United States and Canada and most Asian countries, especially those with the greatest growth prospects (India, China, South Korea, Philippines, Thailand, Indonesia, Vietnam, Malaysia and Bangladesh).

64 Nota de Conjuntura Econòmica.100 July 2018

4. Business trends

Business confidence reached new record high levels in the first half of the year

As in the two previous years, business indicators continued to reflect a positive dynamic in 2017, though the intensity varied according to different periods during the year. Maximum levels of confidence were seen in the first six months, while various economic indicators tended to normalise towards the end of 2017. In the first two quarters of the year, Catalan business expectations reached maximum levels in terms of positive responses that were less negative about business prospects within a context of intense political debate, which did not affect companies negatively, according to indicators of activity and confidence. However, the terrorist attacks of the summer and the police violence during the October 1 referendum had a negative effect on tourism and expectations in the second half of the year. Nevertheless, figures from the first quarter of 2018 indicate a recovery in both the business climate and expectations, thereby reflecting the normalisation of the business environment.

Evolution of the business climate indicator (balance of positive - negative answers, percentatge points) 30

20

10

0

-10

-20

-30

-40 2013 2014 2015 2016 2017 2018 Q1 Q1 Q1 Q1 Q1 Q1

Forecast of business situation for the next quarter Evolution of business situation with respect to the previous quarter

Source: Idescat, Chamber of Commerce of Barcelona and INE.

65 Nota de Conjuntura Econòmica. 100 July 2018

The positive business climate observed throughout 2017 is also reflected in the number of companies filing bankruptcy proceedings, which fell during the year. This decrease became more marked in the closing months compared to the previous year. Over the year as a whole, 772 companies filed for bankruptcy in Catalonia, 15.7% less than the previous year. Although the improved state of the economy is the main reason for this reduction in bankruptcies, there is no direct relationship, as legislative changes in this sphere have enabled greater use of the mechanism as a way of freeing a company from its debts.

Profitability indicators improved in 2017

The most recent figures from the Bank of Spain’s Central Balance Sheet Data Office, for 2017, correspond to the quarterly base, in which larger enterprises are over-represented. This is a small sample and, therefore, the results on the economic and financial situation of Catalan companies are provisional.

Profitability of the Catalan company (%)

14 12

10 8

6 4

2 0 4 2005 2007 2009 2011 2013 2015 2017

1 Ordinary return on equity 2 Ordinary return on net assets 3 Return on nonfinancial assets 1 (Ordinary net profit + interest on borrowed funds) / Equity (%) 2 Ordinary net profit / (Equity + Interest-bearing borrowing) (%) 3 Net operating profit on nonfinancial assets (%) 4 Provisional estimates obtained based on quarterly surveys of the Bank of Spain. Source: Barcelona Chamber of Commerce, Industry, Services and Navigation, from Bank of Spain data.

In 2017, the macroeconomic dynamic was very positive, with all ratios of economic and financial profitability improving, except for the return on net assets. However, it is worth mentioning the trend towards corporate capitalisation, which was observed throughout the year, as well as the fact that the structure of debt with cost improved thanks to the fact that the relative weight of long-term borrowing increased. This

66 Nota de Conjuntura Econòmica. 100 July 2018 improvement in the liabilities structure, together with ECB policy, helped to lower the average cost of financing, increasing the differential between the aggregate profitability of the asset and the average cost of financing.

The degree of internationalisation varied according to company size and sector of activity

Based on Central Balance Sheet Data Office figures for 2016, it is possible to establish a more detailed analysis by company size and sector of activity. In this case, a larger sample is available, because figures from the annual survey can be used. However, the figures are broken down according to the characteristics of the company, and prudence should be used in analysing them.

Regarding the geographic destination of sales, it should be noted that sales abroad accounted for just under half of the total for industry (47.5%), and only 11.4% in the case of services. This clearly illustrates the fact that there is a great difference in the degree of openness from one sector to another. Regarding purchases, the structure is repeated in industry (foreign imports account for 47.7% of the total), while in the case of services there is a more balanced figure (36.6%). This indicates that service companies were more internationalised in terms of purchases than sales in 2016, while the openness of industry was more two-way.

Repeating the analysis by size of company shows that large enterprises had foreign sales that were higher proportionally (35.1%) than those of both medium-sized firms (20.0%) and small companies (9.4%). With regard to imports, the pattern was repeated, but with higher percentages: 46.3% in the case of large enterprises, 31.0% for medium- sized enterprises and 22.8% in the case of small enterprises.

Venture capital increased by 40.1%

In Spain as a whole, Catalonia led the way in terms of number of venture capital investments, with 213 worth a total of 1,040.5 million euros, 40.1% more than in 2016. This improvement conceals the fact that the investments attracted were worth less than those received by the Community of Madrid, the other pole of attraction in Spain, which captured a higher volume from fewer investments. In any case, however, the figures for 2017 are very positive and show the interest generated by the Catalan economy and its companies (especially new and emerging firms). They are also a good indicator of entrepreneurial activity in Catalonia.

67 Nota de Conjuntura Econòmica. 100 July 2018

The number of active companies grew in 2016, and estimates point to further growth in 2017

Between 2008 and 2014, Catalonia lost 49,000 companies with establishments in the autonomous community (a figure that rises to 49,450 if those with their head office in Catalonia are considered). Since then, business trends have been reversed and the stock of active companies has gradually grown, although, at 1 January 2017, only 33,050 companies with establishment had been recovered (32,400 with head office in Catalonia). These figures indicate two preliminary conclusions: firstly, that the number of companies that existed prior to the crisis was not recovered yet during the first years of economic recovery; secondly, that the dynamic followed by companies with head office in Catalonia has been more negative than that of the total of companies with activity in Catalonia. Moreover, unlike those newly created, most of the companies that closed had salaried employees.

Companies with head office in Catalonia by number of wage-earning employees Total with Without 1–9 10–49 50-249 ≥ 250 employees employees Total

Number of companies* 2008 258,862 33,047 5,243 964 298,116 327,904 626,020 2014 230,797 21,592 3,928 820 257,137 319,428 576,565 2017 229,517 23,934 4,546 913 258,910 350,071 608,981 Absolute change 2008-2014 -28,065 -11,455 -1,315 -144 -40,979 -8,476 -49,455 2014-2017 -1,280 2,342 618 93 1,773 30,643 32,416 2016-2017 2,490 1,141 293 80 4,004 8,781 12,785

Relative change (%)

2015-2016 -0.3 4.4 4.0 1.2 0.2 3.4 2.0

2016-2017 1.1 5.0 6.9 9.6 1.6 2.6 2.1 * Data at 1st of January of each year. Source: Idescat, from Central Business Register (DIRCE) from INE. It includes all economic activities, except agriculture and fisheries, public administrative services (including Social Security), community of ow ners' activities and households services.

Official figures at 1 January 2018 are not yet available, but it is possible to analyse the dynamic in 2016 and the stock available at 1 January 2017. At the start of 2017, the number of companies with official headquarters in Catalonia was 608,981, 2.1% more than the previous year. On this point, it should be noted that larger companies were those whose number most increased in 2016. However, it is also true that 57.4% of Catalan companies did not employ salaried workers, and that this percentage has grown in recent years.

68 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of companies with head office in Catalonia* 620,000 3

610,000 2

600,000 1

590,000 0

580,000 -1

570,000 -2 2012 2013 2014 2015 2016 2017

Number of companies (left axis) % annual change (right axis)

* Data at 1st of January of each year. Source: Idescat, from Central Business Register (DIRCE), from INE.

Catalonia performed better than Spain as a whole in 2016 as regards the number of active companies and, accordingly, the autonomous community’s weight in Spain as a whole increased slightly. More specifically, at 1 January 2017, Catalonia was home to 18.6% of companies, by headquarters. This weight increases to 18.9% if companies active in Catalonia but headquartered in another autonomous community are also included. As a result, 1 January 2017, there were 619,490 companies with activity in Catalonia.

Concerning evolution by long periods and by sector of activity, we should remember that industry, which was affected in a particularly intense way by the crisis, and despite the strong growth of its activity, continued to lose companies until 2016, although the last year for which figures are available shows an improvement of 1.9%. The dynamic in terms of number of companies is even worse in the construction sector, where the figures are negative throughout the period, except for a slight increase in 2015. Finally, the service sector performed differently, with increases during both the crisis and the recovery stage.

It will not be after the publication of this report that official figures will be available to enable analysis of the evolution of the number of active companies in 2017. However, based on Social Security figures on businesses established and closed and changes in headquarters between autonomous communities, an approximation can be made about the evolution of the number of companies in Catalonia in 2017. As indicated in the table devoted to the business demography in Catalonia in 2017 in Economic Report 98, the most likely result is that the number of companies with activity will have increased slightly, while the number of companies with head office in Catalonia decreased.

69 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of companies with establishment in Catalonia by sector of activity (Number, except % of annual variation when indicated) Industry Construction Services Total Number of companies* 2008 49,398 118,002 468,045 635,445 2014 37,977 74,908 473,558 586,443 2017 37,267 73,689 508,534 619,490 Absolute change

2008-2014 -11,421 -43,094 5,513 -49,002

2014-2017 -710 -1,219 34,976 33,047

2016-2017 699 -620 12,899 12,978 Relative change (%) 2015-2016 -1.7 0.6 2.5 2.0 2016-2017 1.9 -0.8 2.6 2.1 * Data at 1st of January of each year. Source: Idescat, from Central Business Register (DIRCE) from INE. It includes all economic activities, except agriculture and fisheries, public administrative services (including Social Security), Community of ow ners' activities and households services.

Figures on the creation and dissolution of mercantile companies indicate that 2017 was the best year since the outbreak of the economic crisis, with the sole exception of 2016, which was especially positive. According to the figures on the creation and dissolution of companies compiled by the Central Mercantile Register, Catalonia ended 2017 with 16,939 mercantile companies more than at the beginning of the year. However, net creation was 15% lower than the increase seen in 2016. The figures for the first months of 2018 indicate that net creation continues to follow a fairly positive trend, but that levels remain lower than in the previous two years, which were particularly positive.

For its part, the Association of Property Registrars published figures on changes in business address, noting that 2,536 businesses had transferred their head office from Catalonia to another autonomous community, while 548 had transferred their business address in the opposite direction. Accordingly, the result was a decrease of 1,988 in the number of companies with headquarters in Catalonia. According to the same source of information, this trend was maintained during the first months of 2018. On this point, it should be noted that the State approved Royal Decree Law 15/2017, enabling a company’s board of directors to change its head office address without the approval of the proprietors.

Finally, Social Security figures indicate that, in 2017, the number of tax contribution accounts in Catalonia increased by 0.7%, and that the number of active companies remained unchanged. Based on this data, the Observatory on Employment and the Production Model (Ministry

70 Nota de Conjuntura Econòmica. 100 July 2018 of Labour, Social Affairs and Families) estimated that the number of companies with activity in Catalonia increased by 0.8% in 2017. Moreover, estimates for the first quarter of the current year, 2018, are also positive.

Entrepreneurial activity improved in terms of both quantity and quality in 2017

Every year, the Global Entrepreneurship Monitor (GEM) presents the Total Entrepreneurship Activity Index (TEA), which measures the percentage of the adult population (18-64 years of age) involved in early-stage entrepreneurship activities and in possession of at least part of the business capital. According to the TEA, the entrepreneurship rate in Catalonia was 8.0% in 2017, above both the Spanish and European averages (6.2% and 7.9%, respectively). This positive performance was driven, mainly, by taking an opportunity, which is considered a more attractive motive than need or lack of alternatives. In fact, taking advantage of opportunities to generate more income or become independent remained the main reason behind entrepreneurial activity in Catalonia.

Catalonia continued to have high business density in a setting dominated by small enterprises

High levels of entrepreneurial activity generate high business density. Comparative figures at European level, from 2015, indicate that there were 85.3 companies per 1,000 inhabitants in Catalonia that year, one of the highest figures among the major European economies. This fact, however, should be seen within a context in which small companies have considerable weight. This is a circumstance that affects the country's economic structure and competitiveness, since, despite the fact that small businesses can be competitive thanks to their capacity for adaptation and specialisation, enterprises that achieve a certain scale tend to present better economic and financial ratios.

In this context of the preponderance of small businesses, PIMEC, the Employers’ Association of Small and Medium Enterprises of Catalonia, estimates that Catalan SMEs accounted for 99.8% of all companies with premises in 2016. According to these estimates, excluding Public Administration, compulsory Social Security and Defence, SMEs generated 69.9% of employment and 61.7% of Gross Value Added (GVA).

Besides its business stock, Catalonia is characterised by relatively high rotation, which is the result of the dynamism and entrepreneurship discussed above and also, possibly, of the shortcomings on the part of

71 Nota de Conjuntura Econòmica. 100 July 2018 these people when it comes to launching a business project. Accordingly, it is observed that, in 2015, gross company creation and destruction was relatively high, although at levels similar to those in Spain as a whole and in other European countries studied.

Business density and Total early-stage Entrepreneurial Activity (TEA) rate in selected countries

Catalonia Spain Germany France Italy Netherlands Companies per 85.3 75.0 42.3 67.6 72.6 89.7 1,000 people (2015) Company birth rate 9.9 9.5 7.1 9.5 7.5 10.1 (2015) Company death rate 8.0 8.1 7.5 5.2 8.7 6.2 (2015) Total Entrepreneurial 8.0 6.2 8.1 3.9 4.3 9.9 Activity (TEA) (2017) Source: Global Entrepreneurship Monitor , INE and Eurostat.

72 Nota de Conjuntura Econòmica. 100 July 2018

Box 3. Exporting companies

Growth has been constant in exports since the slump in international trade in 2009. As a result, exports of Catalan goods have increased by 20.3% since 2012: in other words, exports have increased over the last five years at an average annual rate of 3.8%, at current prices. The improvement in export activity, which partially cushioned the effects of falling domestic demand, has been consolidated thanks to the improved competitiveness achieved in recent years and to increasing trends towards internationalisation.

Business internationalisation has generated two different phenomena: firstly, a broadening of the export base, that is to say, an increase in the number of exporting companies (known as the extensive margin); and, secondly, a larger volume of exports per company (known as the intensive margin).

Exporting companies are classified into different categories according to the regularity and volume of their exports. For instance, a company that exports without interruption for a minimum of four consecutive years is considered a regularly exporting company. The data on exports, compiled by the Spanish Institute for Foreign Trade (ICEX), enable evaluation of the Catalan exporting system in 2017, demonstrating the progress made in recent years.

The number of exporting companies in 2017 was: • 46,651 total exporting companies (582 more than in 2012) • 17,091 companies that export regularly (3,281 more than in 2012)

The number of companies whose exports were worth 50,000 euros or more in 2017 was: • 12,430 total exporting companies (393 more than in 2012 and 1,208 more than in 2005) • 7,625 companies that export regularly (1,144 more than in 2012 and 741 more than in 2005) • 4,805 companies that export, but not regularly (751 fewer than in 2012 but 467 more than in 2005)

From the historical perspective it is observed that, during the years of economic expansion, marked by intense domestic demand, the number of exporting companies increased in terms of companies that export but not regularly as a result of the creation of companies. On the other hand, during the crisis, the number of exporting companies fell. After

73 Nota de Conjuntura Econòmica. 100 July 2018

the recession, with domestic demand still very weak but external demand recovering, the number of companies who saw exporting as a way of selling their products began to grow. This internationalisation has gradually been consolidated, to the point where, in recent years, the number of companies with annual exports worth at least 50,000 euros has remained fairly stable, while the number of companies that export regularly has grown intensely.

Number of exporting companies (regularly and not regularly)* 8,000

7,000

6,000 5,000

4,000 3,000

2,000

1,000

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Number of regular exporting companies Number of non-regular exporting companies

*Companies exporting less than 50,000 euros are not included. Source: ICEX.

The last decade and a half has been characterised by an internationalisation of the Catalan economy, with a growing volume of exports every year (with the sole exception of in 2009, during the global economic crisis). Breaking down exports by the number of companies that export and the unit value of exports reveals the contribution made by the two basic components, the extensive margin and the intensive margin, respectively. The exercise presented as follows has been conducted on companies that export a volume equal to or greater than 50,000 euros per year1.

Until 2012, export growth was explained by increases in the volume exported by regularly exporting companies. However, since 2013, the contribution made by the number of exporting companies has

1 In 2017, these companies accounted for 26.6% of exporting companies, but the volume of their exports represented 99.7% of the total.

74 Nota de Conjuntura Econòmica. 100 July 2018

increased. This is mainly due to rising numbers of regularly exporting companies, many of which decided to commit to internationalisation during the crisis years. In the specific case of 2017, two points should be stressed: firstly, that exports grew at their highest rate since 2011; and, secondly, that the main contributor to this growth was the exporting intensity of regularly exporting companies, whose number is also growing.

1 Contribution to the growth of exports of goods (percentage points, except exports of goods as % annual change) 20 15

10 5

0

-5 -10

-15 -20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Intensive margin. Non-regular exporting companies Extensive margin. Non-regular exporting companies Intensive margin. Regular exporting companies Extensive margin. Regular exporting companies Exports of goods (annual change, %)

1 Companies exporting less than 50,000 euros are not included. 2 Contribution to the growth of export of goods that stems from the variation on the average exported value. 3 Contribution to the growth of export of goods that stems from the variation on the number of exporting companies. Source: Ministry of the Vice-presidency and of Economy and Finance, from ICEX.

This dynamic confirms the consolidation of the internationalisation of the Catalan economy, although we should note that exports are concentrated among a small number of companies, as evidenced by the fact that the 2.1% of the companies that export most account for 80.5% of the total value of exports.

Business internationalisation is closely linked to innovation. According to the results of the 2017 Barometer of Innovation in Catalonia, 52.8% of innovative companies export, compared to only 23.4% in the case of companies that do not innovate. Taking into account only industrial companies, the percentage of innovative companies that export represents 86.7% of the total. The Innovation Barometer also shows an increase in the number of companies that allocate resources to R&D or introduce new technologies.

75 Nota de Conjuntura Econòmica. 100 July 2018

Exporting profile of innovative and non-innovative companies (2017) (% of companies) 100

80 47.2

60 76.6

40 52.8 20 23.4

0 Innovating companies Non-innovating companies

Exporting Non-exporting Source: Barometer of innovation in Catalonia 2017, Government of Catalonia.

76 Nota de Conjuntura Econòmica. 100 July 2018

5. The labour market

In 2017, results in the labour market continued highly positive

In 2017, the Catalan economy continued to enjoy strong growth in employment, making this the fourth consecutive year of recovery in terms of job creation since the slump caused by the crisis. The number of Social Security affiliations increased by 3.8% in 2017 (a figure very similar to the 3.7% increase recorded in 2016), while employment, according to the EPA labour force survey, grew by 2.9%. According to figures published in the EPA survey, the growth in employment was lower than in 2016 (3.4%), but this increase is probably more consistent with the evolution of economic activity. In absolute terms (and by annual average), the number of Social Security registrations increased by 117,764 in 2017, while the number of people employed, according to the EPA, increased by 91,400. We should also note that Social Security registrations grew more intensely in the first half of the year, with the rate of increase moderating slightly in the second half. Finally, December closed with year-on-year growth of 3.3%.

Employment dynamics (% annual change) 4 2

0

-2

-4

-6 2012 2013 2014 2015 2016 2017

Employment in Catalonia (EPA) Social Security affiliations in Catalonia

Employment in Spain (EPA)

Social Security affiliations in Spain

Source: Idescat, INE and Spanish Ministry of Employment and Social Security.

The synthesis statistics published by Idescat also confirm this dynamic of strong employment creation in 2017. According to Idescat annual economic accounts figures, the number of jobs rose by 3% in 2017,

77 Nota de Conjuntura Econòmica. 100 July 2018 higher growth than in the previous year (2.6%). However, despite the improvement in recent years, the volume of employment has not returned yet to that existed before the outbreak of the crisis. As a result, while GDP recovered to pre-recession levels in 2016, the number of jobs remains 8.2% below the 2007 figure.

GDP and labour market dynamics (Index, 2007=100) 105 100

95

90 85

80

75 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

GDP in volume Jobs

Source: Idescat.

Employment grew in all major sectors of activity in 2017, with relative growth particularly intense in construction (6.0%) and services (3.8%)

By sector, the data on Social Security affiliation show that, for the third consecutive years, jobs were created in all the major sectors of activity. As in recent years, most job creation (accounting for nearly 80% of new Social Security affiliation) was in the service sector, due to its great relative weight in the economy generally. In relative terms, construction led the way in growth in number of registrations in 2017 (6.0%), followed by services (3.8%, with a similar dynamic in both market and non-market services), industry (2.9%) and agriculture (1.9%). It should be noted that although Social Security affiliation in construction have grown at an annual rate of over 4.5% for the last three years, employment levels in the sector are still quite low (below the number of affiliates recorded in 2011).

By branches of activity, the data on Social Security affiliation show that, in 2017, jobs were generated in most industrial and service sector branches. In absolute terms, the leading industrial sectors in terms of increased registrations were food and drink, and the manufacture of metallic products. In relative terms, the industrial activities that saw the highest increases in registrations were the repair and installation of machinery, the manufacture of other transport material, and the

78 Nota de Conjuntura Econòmica. 100 July 2018 leather and footwear industry. In the service sector, the activities with the greatest increases were food and drink services, wholesale and retail trade, programming and consulting activities, and business management activities. Very few branches reported negative evolution, but we may mention the fall in Social Security affiliation among domestic personnel, financial services, and computer repair services, all three branches of the service sector.

Evolution of Social Security affiliations in Catalonia by main sectors (% annual change) 7.5

5.0

2.5 0.0 -2.5

-5.0 -7.5 -10.0

-12.5

-15.0 -17.5 Jan. Jan. Jan. Jan. Jan. Jan. May 2012 2013 2014 2015 2016 2017 2018

Industry Construction Services Source: Ministry of Employment and Social Security.

Salaried employment accounted for all the jobs created in 2017, while self-employed persons decreased by 0.4%

As regards the characteristics of the jobs generated in 2017, the EPA survey shows the strength of salaried employment (which grew by 3.5%), while the number of self-employed persons decreased by 0.4% (after three years of growth, this type of employment had already given signs of stagnation in 2016). Results for the other statistical source of reference for unsalaried work, affiliations of self-employed workers, also indicate slower growth for this type of employment in recent years. However, unlike the EPA, this source still showed positive growth (an increase of 0.7%). At the same time, number of part-time workers increased by 3.8% and full-time work by 2.7%, meaning that the proportion of part-time employment was practically unchanged since 2016 (rising by one decimal point to account for 14.3% of total employment). On the other hand, it should be remembered that, unlike

79 Nota de Conjuntura Econòmica. 100 July 2018 the case in other European countries, a very large proportion of part- time work here is involuntary: in 2017, 51.1% of part-time employees in Catalonia worked part-time because they could not find a full-time job. This percentage is slightly lower than in 2016 (54.7%) and for Spain as a whole (58% in 2017).

Change in number of workers (Thousands people)

200

150 100

50

0 -50

-100

-150 -200

-250

-300 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Employees with permanent contract Employees with temporary contract No employees Source: Idescat.

Employment with indefinite contracts grew at the highest rate since 2007 (by 3%), but temporary work and labour turnover remained at very high levels

Another positive note in 2017 is that employment with unlimited contract increased by 3%, the highest rate since 2007 (in 2016 this category of employment had grown by 2.2%). The growth in the number of temporary employees slowed down significantly: in 2016, the number had risen by 12.3%, but in 2017 the rate of increase moderated to 5.5%. In net terms, 93,800 new salaried jobs were created in 2017, 67.2% of them occupied by permanent employees and 32.8% by temporary workers. However, the more intense relative growth in temporary jobs (compared with indefinite jobs) caused a small increase in the rate of temporary work, which rose from 21.2% in 2016 to 21.6% in 2017. Here we should remember that the rate of temporary work reached peak levels before the crisis (standing at over 26% in 2006) before falling after the outbreak of the recession (when

80 Nota de Conjuntura Econòmica. 100 July 2018 temporary jobs were destroyed more intensively), rising slightly again with the economic recovery. In Spain as a whole, the weigth of temporary employment rate – which is higher than in Catalonia – rose to 26.7% in 2017, the highest level since 2008. On the other hand, the temporary employment rate in the euro area is much lower (16.1%).

Distribution of the growth of employees by type of contract, 2013-2017 (%) 100

80 33.6 48.0 56.8 60

40 66.4 52.0 20 43.2

0 Catalonia Spain Euro area

Permanent Temporary

Source: Idescat and Eurostat.

Labour market indicators in Catalonia and Spain Fourth First quarter quarter 2015 2016 2017 2017 2018 Catalonia Active population (% annual change) -0.6 -0.1 0.1 0.9 -0.3

Employed population (% annual change) 1.5 3.4 2.9 3.5 3.3

Employees with permanent contract -0.2 2.2 3.0 4.4 2.8

Employees with temporary contract 8.7 12.3 5.5 2.9 3.7 Unemployed population (% annual change) -9.1 -15.6 -14.6 -14.2 -20.5 Activity rate (16-64 years) (%) 78.9 78.8 78.6 78.6 77.7 Women 74.3 74.9 74.6 74.5 75.0 Men 83.5 82.8 82.6 82.5 82.3 Employment rate (16-64 years) (%) 64.2 66.4 68.0 68.6 68.1 Women 59.8 62.1 63.8 62.6 62.7 Men 68.5 70.7 72.2 71.0 70.5

Unemployment rate (%) 18.6 15.7 13.4 12.6 12.2

16-24 years population 42.3 34.3 30.4 28.9 29.5

Temporary rate (%) 19.6 21.2 21.6 21.6 20.9 Proportion of part-time jobs (%) 13.9 14.2 14.3 14.0 14.2 (continued on next page)

81 Nota de Conjuntura Econòmica. 100 July 2018

(continued)

Fourth First quarter quarter 2015 2016 2017 2017 2018 Spain Active population (% annual change) -0.1 -0.4 -0.4 0.1 -0.1 Employed population (% annual change) 3.0 2.7 2.6 2.6 2.4

Unemployed population (% annual change) -9.9 -11.4 -12.6 -11.1 -10.8

Activity rate (16-64 years) (%) 75.5 75.4 75.1 75.1 74.7

Employment rate (16-64 years) (%) 58.7 60.5 62.1 62.6 62.1 Unemployment rate (%) 22.1 19.6 17.2 16.5 16.7 Source: Active Population Survey (EPA) from INE.

Figures from the Catalan Ministry of Labour, Social Affairs and Families on the number of contracts show once more that, apart from the high weight of temporary employment, the turnover in job contracts is worryingly high: more than half of the temporary contracts signed in 2017 (53%) had a maximum duration of 3 months, and one- third (32%) were of very short duration (seven days or less). Moreover, contracts through temporary work agencies grew by 11.2% in 2017 and have risen by double-digit growth in the last two years. As a result, these companies’ market share increased for the fifth consecutive year, and they now manage 21.3% of the total contracts registered (for example, this figure stood at 17.5% in 2012).

The activity rate fell to 78.6%, still a very high level despite reaching its lowest point since 2010

The economic crisis in Catalonia also affected the evolution of population, and there was a slight fall in the 2013-2015 period. However, there has been a slight recovery since 2016, and by the end of 2017 the Catalan population had reached a record 7,534,813 according to the latest Idescat estimates, dated 1 January 2018. EPA figures also reflect this trend, showing the population aged 16 years and over rising by 0.6%, having returned to positive growth the previous year (0.4%). On the other hand, after decreasing for five consecutive years, the labour force was practically stagnant, rising by just 0.1%. Despite this change in trends among the labour force, the rate of activity in the 16- 64 year age group fell by two decimal points to 78.6%, as population grew at a higher pace than the increase in the labour force. Accordingly, the activity rate continues to show relatively high levels, despite reaching its lowest point since 2010. In any case, high levels of participation in the labour market continue to be a characteristic of the Catalan economy, one that persisted even at times when the effects of the crisis were being felt most severely.

82 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of population and active population (% annual change) 3.0

2.0

1.0

0.0

-1.0 -2.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Population over 16 years Population 16-64 years Active population 16-64 years

Source: Active Population Survey (EPA) from INE.

By gender, the activity rate among women from 16 to 64 years was 74.6% in 2017, while the figure for men in the same age group was 82.6%. Compared to 2010, there has been a gradual decline in the activity rate among men, while that for women has risen significantly (it stood at 71.7% in 2010). By age group, there was a drop in the activity rate among that with the highest activity (people aged from 25 to 44 years). Parallel to this, the activity rate for the 16-24 year age group rose by over one percentage point, to 43.2%, the first increase since constant decline began in 2005.

The employment rate increased to 68%, a rate higher than the euro area average

Since 2014, the employment rate in Catalonia has gradually recovered thanks to intense job creation. In 2017, the employment rate among the population aged 16-64 rose by 1.6 points to 68%. This figure is, however, still 4.4 points lower than the record, which was reached in 2007. General improvement was observed in 2017, in terms of both gender and age groups. The employment rate stood at 72.2% among men and 63.8% among women. By age group, it should be noted that, in 2017, the employment rate among groups over the age of 35 was equal to or higher than before the crisis. However, despite the improvement seen in recent years, employment rates were still much lower among the two younger age groups. In particular, the employment rate among the 16-24 year group improved to 30.1% in 2017 (compared to 27.5% in 2016), but was still far from the level achieved ten years ago, when it was close to 50%. However, this high

83 Nota de Conjuntura Econòmica. 100 July 2018 level of youth employment also generated a negative side: many young people left education those years, attracted by the intense creation of unskilled work, with the result that early school leaving shot up.

The 15-64 year age group is taken to compare employment rates in Catalonia with those in the euro area, as this is the segment used by Eurostat. In 2017, the employment rate among 15 to 64 year-olds in Catalonia was 66.9%, higher than the euro area average (66.3%) for the first time since the crisis. Accordingly, the higher unemployment rate in Catalonia than in the euro area is not explained by lower relative employment in the autonomous community, but by the fact that, among the population that does not work (the remaining 33.1% in Catalonia and 33.7% in the euro area), there is a higher proportion in Catalonia that want to work but cannot (10.5% compared to 6.8% in the EMU). On the other hand, the percentage of the population that states that they are not active is lower in Catalonia (22.7%, compared to 26.9% in the EMU).

Distribution of people in the working age (15-64 years old), 2017 (%) 100 22.7 26.9 80 10.5 6.8 60

40 66.9 66.3

20

0 Catalonia Euro area

% of employed (employment rate) % of unemployed % of inactive

Source: compilation based on data from Idescat and Eurostat.

The unemployment rate fell to 13.4% in 2017, its lowest in nine years

According to the EPA survey, the number of unemployed population fell by 14.6%, the equivalent of 86.4 thousand few people without jobs, in 2017. This decrease was the result of job creation (91.5 thousand more people employed) and, parallel this, a small increase in the labour force, which grew by 5,000 people). In other words, most of the new jobs generated were taken by unemployed people (86,400 out of 91,500 newly employed people) and only a small proportion went to people entering the labour force.

84 Nota de Conjuntura Econòmica. 100 July 2018

The decrease in the unemployed population since 2014 has led to a gradual fall in unemployment rates since the highest level of 23.1% was reached in 2013. In 2017, the unemployment rate stood at 13.4% (2.3 points lower than 2016).

Evolution of unemployment rate (% of unemployed / active population) 30 25

20 15

10 5

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Catalonia Spain Euro area Source: Idescat, INE and Eurostat.

Despite a certain improvement, unemployment rates continued to be very high in some groups, such as people aged 16 to 24 (30.4%) and non-EU foreign citizens (26.2%)

By group, the improvement in the unemployment rate in 2017 was also felt across the board. The unemployment rate among women fell by 2.5 percentage points to 14.4%, while that among men was reduced by 2.1 percentage points to 12.5%. The rate among young people aged 16 to 24 (the age group with the highest unemployment rate) fell from 34.3% in 2016 to 30.4% in 2017, thanks to rising employment rates among this group. Unemployment rates were much lower among all the other groups: for those from 25 to 54 years, it was 11.8%, and for those from 55 to 64, 13.9%. On the other hand, the unemployment rate among the non-EU foreign population continued to be high (26.2%), despite falling by around four decimal points in each of the last two years. By level of studies, the unemployment rate among people with higher education was 7.3%, much lower than the average (13.4%). Despite improving greatly in 2017, the unemployment rate among people who has at the most a compulsory secondary education level (20.3%) was considerably higher than the average. Finally, compared to the euro area, the greatest differences were among young people and the non- EU foreign population. In both groups, the unemployment rate was substantially higher in Catalonia than in the euro area.

85 Nota de Conjuntura Econòmica. 100 July 2018

Unemployment rate of some population groups (%)

Catalonia Euro area

2016-2017 2016 2017 2017 (pp.)

Total 15.7 13.4 -2.3 9.1 Sex Men 14.6 12.5 -2.1 8.7 Women 16.9 14.4 -2.5 9.5 Age From 15 to 24 years 34.3 30.4 -3.9 18.8 From 25 to 54 years 14.2 11.8 -2.4 8.6 From 55 to 64 years 15.2 13.9 -1.3 6.8

Educational attainment

Until lower secondary education 23.3 20.3 -3.0 16.5

Upper secondary education 16.5 14.1 -2.4 8.1

Higher education 8.7 7.3 -1.4 5.4 Unemployment rate of foreign 30.2 26.2 -4.0 17.7 population (outside EU-28)

Source: Idescat and INE.

One of the indicators that became significantly worse during the crisis was long-term unemployment (the proportion of the population that have been looking for work for more than a year). As the unemployment rate shot up, the proportion of long-term unemployed people also grew. However, this group has been gradually decreasing in number since 2014, and its proportional share in total unemployment has also fallen since 2015. In 2017, the proportion of long-term unemployed fell to 50.3%, its most moderate level since 2011 (the figure stood at 56.9% in 2016). As for unemployment of very long duration – the population that has been looking for work for more than two years – this figure also fell, in this case to 34.9% (compared to 41.2% in 2016).

The unemployed are a vulnerable group in terms of income and, in fact, the percentage of unemployed people who received benefits or subsidies fell to 26.1% in 2017, according to EPA (compared to 27% in 2016). This is the lowest percentage since 2005. Although the decrease in long-term unemployment explains part of this decrease in benefits coverage, the fall in this figure also suggests that many people find themselves in such precarious employment conditions as to prevent them from generating rights to receive unemployment benefit.

86 Nota de Conjuntura Econòmica. 100 July 2018

Long -term unemployment 70 600

60 500 50 400

40 300 30 200 20 10 100 (Thousandspeople)

total over unemployed) (% of 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Unemployed population since 1-2 years (right axis) Unemployed population since over 2 years (right axis) % Long-term (1-2 years) unemployment (left axis) % Very long-term (over 2 years) unemployment (left axis) Source: Idescat and INE.

The unemployment rate in Spain fell to 17.2%, but is still the second-highest in the euro area (where the average unemployment rate is 9.1%)

In the State as a whole, the unemployed population also fell, for the fourth consecutive year, thanks to job creation and, also, to a decrease in the labour force. The Spanish unemployment rate fell from 19.6% in 2016 to 17.2% in 2017. By autonomous community, the lowest unemployment rates were in Navarre (10.2%), the Basque Country (11.3%) and Aragon (11.7%), while the highest were in Extremadura (26.2%), Andalusia (25.5%) and the Canary Islands (23.5%). In the euro area, the unemployment rate fell to 9.1%, its lowest level since 2008. The improvement was felt generally, with unemployment rates descending in all euro area countries. However, there were huge differences between countries: the highest unemployment rates continued to be in Greece (21.5%) and Spain (17.2%), while the lowest were in Germany (3.8%), Malta (4%) and the Netherlands (4.8%).

Registered unemployment fell by 11.1%

In 2017, registered unemployment continued to fall, declining by 11.1% in annual average, although this decrease was lower than that seen in 2016 (11.9%). In the second half of the year, the pace at which this figure decreased became more moderate. Registered unemployment usually grows during the closing months of the year, but this increase was felt more intensely in 2017. As a result the year-on-year fall in

87 Nota de Conjuntura Econòmica. 100 July 2018 registered unemployment became more moderate, and the year closed in December with a year-on-year decrease of 7.9%. It could also be possible that the launch of guaranteed citizen income in September, with the requirement of registering with the public employment service, slightly influenced this decline in the rate at which registered unemployment fell. In Spain, registered unemployment fell by 8% in 2017, decreasing at a lower rate than in Catalonia, above all due to better performance than the State average during the first half of the year.

Evolution of registered unemployment (% annual change) 15

10

5 0

-5 -10

-15 Jan. Jan. Jan. Jan. Jan. Jan. May 2012 2013 2014 2015 2016 2017 2018

Catalonia Spain

Source: Public Employment Offices.

The labour market continues to show positive signals in the opening months of 2018

The information available for 2018 so far shows that employment has continued to grow, but at a slightly more moderate rate than in 2017. Social Security registration data are those that illustrate this trend most clearly. It is therefore significant that the growth of Social Security affiliation, measured as a monthly average, had slowed down to 3% year-on-year in May. This is, clearly, significant growth, but is nevertheless lower than the rate seen in the previous two years, which was closer to 3.7%. The EPA survey also detects a certain moderation, but less clearly than in the case of Social Security affiliations: according to EPA, employment grew by 3.3% year-on-year in the first quarter of 2018, that is to say, at a slower rate than in the fourth quarter of 2017, when a 3.5% increase was recorded. However, this growth in employment was higher than the year-on-year increases reported for the first half of 2017. In the first quarter of 2018, the unemployment rate was 12.2%, the lowest rate since the economic crisis began. Finally, the fall in registered unemployment has also become more moderate,

88 Nota de Conjuntura Econòmica. 100 July 2018 with a 6.9% year-on-year decrease in the first five months of the present year. This rate is considerably lower than the decreases of over 10% recorded in each of the last three years.

89 Nota de Conjuntura Econòmica. 100 July 2018

6. The evolution of prices and wages

6.1. The evolution of prices

Inflation was moderate in 2017, although the inflation rate was higher than in 2016

Annual inflation in 2017 was 2.2% a higher figure than in the four previous years. Nevertheless, the year can be broken down into two different stages: the first, from January to April, when the consumer price index ranged between 3.1% and 2.5% year-on-year; and the rest

Evolution of the index of consumer prices by type of consumption group (% annual rate of change)

All items Food alcoholic and non- beverages Alcoholic beverages and tobacco Clothing and footwear Housing, energy and water Household equipment Health Transport Communications Recreation and culture Education Restaurants and hotels Other goods and services Catalonia 2012 2.9 2.5 5.9 0.4 4.9 1.5 7.3 5.1 -3.4 1.1 6.6 1.5 2.7 2013 1.7 0.0 6.1 0.2 1.7 1.7 5.1 -0.1 -4.3 1.3 10.5 0.9 2.7

2014 0.1 0.1 1.2 0.2 1.7 -0.1 0.7 -1.1 -6.1 -0.7 0.9 0.5 1.6

2015 -0.2 1.8 1.1 0.4 -1.5 0.2 0.1 -4.5 -1.8 0.1 1.3 1.0 2.0

2016 0.1 1.7 0.4 0.7 -3.6 1.0 0.2 -2.0 2.5 -0.6 1.1 1.3 2.0 2017 2.2 1.7 1.6 0.6 3.2 0.3 1.2 4.7 1.2 1.6 0.9 2.2 1.5 December 2017 1.2 2.1 1.4 0.6 0.8 -0.2 1.7 2.7 0.1 -0.8 0.5 1.7 1.2 Spain 2012 2.4 2.3 5.9 0.3 5.1 0.9 3.5 4.8 -3.4 0.7 4.8 0.9 2.3 2013 1.4 2.8 6.1 0.0 0.9 0.9 6.9 0.4 -4.2 0.7 8.1 0.5 2.1 2014 -0.2 -0.3 1.4 0.1 1.3 -0.5 0.1 -0.9 -6.1 -1.4 1.8 0.5 1.0 2015 -0.5 1.2 1.4 0.3 -2.1 -0.2 0.1 -4.5 -1.8 -0.4 1.1 0.8 1.6 2016 -0.2 1.4 0.5 0.6 -4.2 0.2 -0.2 -2.1 2.6 -1.0 0.6 1.1 1.6

2017 2.0 1.2 1.7 0.5 3.9 -0.4 0.7 4.2 1.3 1.1 0.9 1.9 0.9 .December 2017 1.1 1.7 1.7 0.5 1.3 -0.5 0.4 1.9 0.2 -0.6 0.7 1.9 0.7 Source: INE.

90 Nota de Conjuntura Econòmica. 100 July 2018 of the year, beginning in May, when prices rose progressively and more moderately, with year-on-year rates of between 2.1% and the 1.2% recorded in December.

Inflation remained moderate over the first months of 2018, but is beginning to show signs of increasing once more due to rising oil prices.

Broadly speaking, inflation was higher than in previous years in Catalonia in 2017, largely due to the spike in oil prices. In fact, core inflation, which stood at 1.3% and whose index excludes the behaviour of prices of more volatile components, such as petroleum products, followed a more moderate and stable pattern than core inflation. Ultimately, consumer prices followed a constrained line of behaviour thanks to certain factors, such as the moderation of labour costs, which stagnated somewhat, and trends in private consumption, which continued to grow intensely, but without the excesses seen during other phases of economic expansion. The revaluation of the euro and the break with some indexing formulas linked to past inflation rates also contributed to this more contained trend. However, it should be noted that inflation remained higher than the growth in labour costs, which led to a loss of purchasing power on the part of workers, as well as pensioners (pensions rose by just 0.25%).

Inflation and core inflation evolution (% average annual rate) 4.0

2.0

0.0

-2.0 Jan. Jan. Jan. Jan. Apr. 2014 2015 2016 2017 2018

Inflation (CPI)

Core inflation (all items excluding energy and unprocessed food)

Source: INE.

Rising oil costs push CPI up As previously mentioned, the evolution of consumer prices in 2017 was closely linked to oil prices, although evaluation should also take into account such factors as the moderation seen in labour costs, which

91 Nota de Conjuntura Econòmica. 100 July 2018 helped to keep inflation low. Accordingly, then, due to the fact that oil prices fell to relatively low levels in the early months of 2016, this comparative effect places year-on-year growth in oil prices during the first half of 2017 at rates that reached over 80% at certain moments.

Inflation and international oil price evolution in Catalonia 100 3.5 80

60 2.5 40 1.5 20

0 .5

-20 -.5 -40

-60 -1.5 Jan. Jan. Jan. Apr. 2015 2016 2017 2018

Brent barrel price variation (%) (left axis) CPI (right axis) Source: Bank of Spain.

As regards the evolution of oil prices, these rose gradually during the second half of 2017 to reach 65 dollars per barrel in December. New price rises came into effect during the early months of 2018, with the barrel standing at 72 dollars in April, its highest level since 2014. In principle, therefore, the appreciation of the euro helped to lessen the effects of rising oil prices. However, we should also remember that oil prices affect the Catalan Consumer Price Index (CPI) more intensely than the European index.

The prices of all expenditure groups rose, though moderately

In 2017, most expenditure groups in the general CPI reflected moderate price increases, though transport – a group closely linked to oil trends – was affected by a relatively high increase of 4.7%. The other group where prices rose significantly in 2017 was housing (3.2%). This was due, above all, to rising costs of in the category that includes heating, electricity and water. Electricity prices rose by an average of 6.3% in Catalonia in 2017 (in 2016, prices in this category fell by 3.6%). This upward trend was influenced by increases in both electricity prices (which are highly sensitive to increases in oil prices) and water rates. Hotels, cafés and restaurants were the group with the third-

92 Nota de Conjuntura Econòmica. 100 July 2018 largest price rise, but the increase had the same intensity as the general index (2.2% year-on-year), resulting in an increase of 9 decimal points compared to the price rise for this group in 2016.

Price rises were highly moderate in all the other groups, ranging from 1.7% in the food group to 0.3% in household furnishings. The trend followed by the communications group was particularly revealing. After several consecutive years of decline, 2016 finally saw prices rising in the group, by 2.5%, a trend that was confirmed in 2017, when the increase was 1.2%.

As regards the contributions of the groups to year-on-year price growth in 2017 (2.2%), the transport group was the biggest contributor, accounting for 0.65% of the total. In Spain as a whole, though, this group contributed slightly less (0.62%). On the other hand, the housing group, which also includes water and electricity prices, was the second-largest contributor in both Spain and Catalonia, although in Spain this contribution (0.52%) was slightly higher than in Catalonia (0.47%). The third-biggest contributing group was food, in which there was a notable difference between Spain (0.24%) and Catalonia (0.34%), due to the fact that food prices rose more in Catalonia than in Spain. This higher price rise was partly caused by the entry into force in Catalonia of a tax on sugary drinks in May 2017.

Core inflation followed a more moderate trend than the general CPI in 2017, standing at 1.3%

In 2017, core inflation stood at 1.3%, two decimal points higher than the figure for the previous year. Despite this slight increase, core inflation was contained throughout the year. In a new development, however, after almost three years in which core inflation was higher than core inflation, the trend changed in December 2016. This was when, for the first time, core inflation (1.4%) fell below core inflation (1.9%). The trend continued throughout 2017 and the opening months of 2018 (with the exception of January).

The component that explains the differences between the two rates is that of energy products, in which prices rose by 8.0% in 2017, 15.7 percentage points higher than in 2016. This group includes oil and fuel prices, as well as the price of electricity which, as already mentioned, was also key in the upward trend seen in the CPI. Among other factors, the fall in hydroelectric production due to the drought, the effects of the system for setting electricity prices and the rise in oil prices themselves are the factors behind this large spike in prices.

93 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of core inflation and components (% annual change) 2.5

1.5

0.5

-0.5 Jan. Jan. Jan. Jan. Apr. 2014 2015 2016 2017 2018

Core inflation Processed food Non-energy industrial goods Services Source: INE.

Evolution of the index of consumer prices by special groups (% annual rate of change) Core inflation (all-items excluding energy and unprocessed food) Processed food, Non-energy alcoholic industrial beverages Unprocessed 1 Total Services goods and tobacco food Energy Catalonia

2012 2.1 2.0 1.6 3.3 2.1 9.0 2013 1.9 1.9 1.1 3.2 3.2 -0.3 2014 0.4 0.4 0.1 0.6 -0.7 -1.1 2015 0.9 1.0 0.5 1.2 2.9 -8.8 2016 1.1 1.2 0.9 1.1 2.4 -8.3 2017 1.3 1.8 0.4 1.1 2.8 8.0 December 2017 0.9 1.1 -0.1 1.6 2.9 2.9 Spain

2012 1.6 1.5 0.8 3.1 2.3 8.9

2013 1.4 1.4 0.6 3.1 3.6 0.0

2014 0.0 0.1 -0.4 0.4 -1.2 -0.8 2015 0.6 0.7 0.3 0.9 1.8 -9.0 2016 0.8 1.1 0.5 0.8 2.3 -8.6 2017 1.1 1.6 0.2 0.7 2.6 8.0 December 2017 0.8 1.3 -0.3 1.2 2.8 2.6

1Including fuel prices and electricity, gas and heat prices. Source: INE.

94 Nota de Conjuntura Econòmica. 100 July 2018

Of the three special expenditure groups included in the calculation of core inflation, that of services accelerated by six decimal points compared to 2016 (1.8%), largely due to the higher increase of hotel, café and restaurant prices. Price growth in the group that includes industrial goods without energy products slowed down by five decimal points compared to the previous year (0.4%), while prices in the processed food, beverages and tobacco group remained the same (1.1%). With regard to this last group, a clear acceleration in prices began to be seen in the second half of the year, coinciding with the entry into force of the tax on sugary drinks.

After three years of negative inflation, prices rose by 2.0% in Spain in 2017

Inflation in Spain was 2.0% in 2017, a significant figure in view of the fact that inflation was negative every year from 2014 to 2016. Rising energy prices also affected the Spanish CPI. For its part, underlying inflation rose moderately, by 1.1% year-on-year, three decimal points higher than in 2016. As regards the Consumer Price Index of the autonomous communities, Catalonia was the community with the highest inflation (2.2%). At the other end of the scale, the autonomous community with the lowest CPI increase was Navarre (1.6%).

Inflation differential of Catalonia compared to Spain and euro area (percentage points) 1.5

1.0

0.5

0.0

-0.5

-1.0 Jan. Jan. Jan. Jan. Apr. 2014 2015 2016 2017 2018

Inflation differential with Spain Core inflation differential with Spain Inflation differential with the euro area Core inflation differential with the euro area

Source: INE.

The inflation differential between Catalonia and Spain remained highly stable throughout 2017. In terms of annual average, inflation was 0.2% higher in Catalonia than in the State as a whole. The greatest

95 Nota de Conjuntura Econòmica. 100 July 2018 differences were in household furnishings (in which the inflation differential was 0.7 percentage points) and “others” (with a differential of 0.6 points). By subgroup, significant differentials were found in both household textile items (2.6 points) and hospital services (1.2 points).

Finally, inflation was higher in Spain than in Catalonia in three expenditure groups: housing (with a differential of 7 decimal points); alcoholic beverages and tobacco (in which inflation was 0.1% higher in Spain); and communications (where there was a differential of 0.1 percentage points).

Inflation recovers, albeit slowly, in the EMU

Having reached minimum levels in 2015, inflation in the EMU returned to positive figures in September 2016, a state of affairs that continued throughout 2017. However, generally speaking, inflation in the EMU was more contained than in both Catalonia and Spain as a whole. Maximum inflation was recorded in February 2017 (2.0%), and the rate gradually slowed down to stand at 1.4% in December. In general, inflation was moderate over the first months of 2018 (1.2% year-on-year in April). However, a spike in inflation is expected in the future due to rising oil prices. In the euro area, the Harmonised Index of Consumer Prices increased by an annual average of 1.5%. It is notable that, from late-2013 to late-2016, inflation in the euro area was nearly always above the rate in Catalonia. Subsequently, however, the situation was reversed, and euro area inflation was nearly always below the Catalan rate. As oil has a larger relative weight in the price index in Catalonia, variations caused by changing oil prices have greater impact in Catalonia than in the euro area.

Core inflation in the euro area also remained relatively low throughout 2017, with an annual rate of 1.1%.

In the euro area countries, price moderation was the general trend until 2016. However, in 2017, harmonised price indexes in the Baltic countries rose to levels over 2.5%: inflation reached 3.7% in Estonia and Lithuania and 2.9% in Latvia. The lowest harmonised price index rates in 2017 were recorded in Ireland (0.3%), Cyprus (0.7%) and Finland (0.8%).

In 2017, inflation in Catalonia (2.2%) was higher, in annual average terms, than in the euro area (1.5%). This reversed the situation seen the previous year, when inflation was lower than in the euro area as a whole. As mentioned previously, this state of affairs is explained by the larger impact of changing oil prices on the Catalan (and Spanish) inflation rate. This is made clear by reference to trends in core

96 Nota de Conjuntura Econòmica. 100 July 2018 inflation, which excludes oil prices, and was also higher in Catalonia (except in December 2017 and January 2018), although, in this case, the difference was smaller.

Prices evolution in Catalonia, Spain and the euro area (% annual change)

5 4

3

2

1

-1 -2 Jan. Jan. Jan. Jan. Apr. 2014 2015 2016 2017 2018

Catalonia Spain (HCPI) Euro area (HICP) Source: INE.

Industrial prices grew by 4.3% year-on-year in 2017

Industrial prices evolution (% annual change) 9.0

7.0 5.0 3.0

1.0 -1.0 -3.0

-5.0 -7.0 Jan. Jan. Jan. Jan. Apr. 2014 2015 2016 2017 2018

Catalonia Spain Euro area

Source: INE and Eurostat.

The industrial producer price index (IPPI) showed negative year-on- year rates for three consecutive years between 2014 and 2016. However, January 2017 saw a surge in the IPPI growth rate (6.9%) as a

97 Nota de Conjuntura Econòmica. 100 July 2018 consequence of the increase in oil prices, although this eased off during the rest of the year. In annual average terms, the year-on-year increase for Catalan IPPI was 4.3% in 2017. The most significant price increase was within the energy group (13.0%), well ahead of intermediate goods (3.1%), consumer goods (1.7%) and capital goods (0.6%). Industrial prices in Spain as a whole rose by 4.4%, a decimal point higher than in Catalonia. The increases were greater in Spain than in Catalonia for all groups, with the exception of energy, where prices rose by 10.4%, 2.6 percentage points below the Catalan figure. In the euro area, the annual average growth of the IPPI was a more moderate 3.1%.

In 2017, the GDP deflator increased by 1.0%, its highest rise since 2008; this was largely due to the impulse it received from the gross operating surplus

In 2017, the GDP deflator recorded a slight increase (1.0%), after a period of very moderate rates between 2009 and 2016 when average annual growth was 0.4%. On the other hand, average annual growth was 3.7% each year during the period between 2000 and 2008. All the main sectors of activity saw positive growth for the deflator in 2017. The industrial sector rose by 1.2% after a fall in 2016, while the construction sector witnessed a moderate increase (1.4%) and has now accumulated three years of positive growth following the sharp decline in prices during the economic crisis. In the case of services, the deflator increased by 0.8%, slightly below the growth rate for 2016 (1.0%). Finally, we would also highlight the significant growth of the price deflator for the agrarian sector (12.7%) although this is not all that unusual given the volatility of prices in this sector.

GDP deflator by main branches of activity (% annual change) 10

8 6

4 2

0

-2

-4

-6 2001 2003 2005 2007 2009 2011 2013 2015 2017

GDP deflactor Industry Construction Services

Source: Idescat.

98 Nota de Conjuntura Econòmica. 100 July 2018

The growth of the private consumption deflator is one of the more noteworthy demand components and it now stands at 2.1% after three years of almost-zero growth. This would suggest that private consumption is continuing its path of recovery, and that part of this strength has started to switch to price formation following several years of stagnation. Another interesting aspect is the increase in the gross fixed capital formation deflator (3.3%) and the deflator for imports, which, in spite of a moderate increase (2.4%), recorded its highest growth since 2012. This reflects the rise in oil prices, which could not be fully offset by the appreciation of the euro.

The behaviour of the deflator also can also be viewed from an income perspective by breaking down the GVA deflator into the components of unit labour costs (ULC) and those of the gross operating surplus (GOS). The GVA deflator (which, unlike GDP, does not include net taxes on products) grew by 0.8% in 2017. Before the recession, the strong growth in prices (measured by the GVA deflator) was the result of large contributions from both ULC and the GOS. On the other hand, with the onset of the crisis, the ULC reversed this trend and started to make a negative contribution to the growth in prices. Accordingly, much of the price restraint of recent years stemmed from the fall in unit labour costs, which was the result of the stagnation (and in some years, decline) in wages and the improvement in apparent labour productivity. The GOS has not just played a moderating role; it has also made a significant contribution to the growth in prices over the past two years. If we look at 2017 in particular, we can see that ULC made a far lower negative contribution than other years (almost null), while the GOS continued to make a significant contribution, just as it had in 2016.

GDP deflator and contribution to growth by income components (%) 5

4

3

2

1

0 -1

-2 2001 2003 2005 2007 2009 2011 2013 2015 2017

Unit labour cost (ULC) Gross operating surplus (GOS) Net taxes on products GDP deflator Source: based on Idescat data.

99 Nota de Conjuntura Econòmica. 100 July 2018

In Spain, the GDP deflator grew by 1%, which was the same as the increase registered in Catalonia. As in the Catalan case, there was an acceleration in the private consumption deflator (1.4%, the highest rise since 2012) while the import deflator also rose (4.4%) because of the hike in oil prices.

Meanwhile, the variation of the deflator in the euro area (1.1%) was slightly higher than the growth recorded in 2016 (0.8%), but lower than that of 2015 (1.4%). Accordingly, the evolution recorded in 2017 was very similar to the Catalan case.

6.2. The evolution of wages and labour costs

Labour costs fell by 0.3% in 2017 against a backdrop of the moderate recovery of inflation

The average labour cost per worker and month registered a 0.3% decline in 2017 within the context of a moderate recovery of inflation (which saw a rise of 2.2%). This dynamic led to a decline in workers’ purchasing power. Accordingly, the economic recovery, which started in mid-2013, is still not reflected in wages. Nevertheless, the most recent data for first quarter of 2018 show an upturn in the labour cost per worker and month, which has risen 3.0%. This increase has not

Evolution of monthly labour cost per worker in Catalonia and Spain (% annual change)

5

3 1

-1

-3

-5 I III I III I III I III I III I III I III I III I 2010 2011 2012 2013 2014 2015 2016 2017 2018

Labour cost in Catalonia Labour cost in Spain Inflation in Catalonia

Source: Quarterly Labour Cost Survey (INE).

100 Nota de Conjuntura Econòmica. 100 July 2018 been widespread, but rather it has been centred on the services sector, and information and communication activities, trade and real estate in particular.

Labour costs for Spain as a whole rose 0.2% in 2017, although it should be pointed out that there were major differences between autonomous communities, ranging from decreases of 1.9% in Murcia and 1.3% in Castile and Leon to growth of 3.6% in Navarre and 2.2% in Castile-La Mancha and the Balearic Islands.

Monthly labour cost per worker in autonomous communities 2017 (% annual change) Navarre 3.6 Castile-La Mancha 2.2 Balearic Islands 2.2 Galicia 1.8 Valencia 1.7 Asturias 1.3 Rioja 0.6 Cantabria 0.5 Aragon 0.5 Basque Country 0.5 Canary Islands 0.4 Spanish average 0.2 Madrid -0.1 Catalonia -0.3 Andalusia -0.4 Extremadura -0.8 Castile and Leon -1.3 Murcia -1.9

Source: Quarterly Labour Cost Survey (INE).

Among the components making up labour costs, in Catalonia, the part corresponding to salary and wage costs (75% of the total) fell by 0.3% in 2017. However, this variation was the consequence of a 0.2% rise in ordinary wage costs and a fall of 3.0% in extraordinary wage costs (which cover both extraordinary payments and arrears). In Spain, wage costs increased by 0.1%, with ordinary wage costs rising by 0.2% and extraordinary wage costs falling by 0.2%.

The development of non-wage labour costs (which account for 25% of all labour costs, and which include social security contributions and other non-wage payments) remained quite stable in 2017, registering a fall of 0.4% in Catalonia and an increase of 0.5% in the Spanish State as a whole.

Conversely, the number of hours actually worked by each worker remained steady in Catalonia, while for Spain as a whole it increased by 0.1%. This stability meant that the evolution of the labour cost per

101 Nota de Conjuntura Econòmica. 100 July 2018 hour worked was very similar to that of the labour cost per worker and month. In Catalonia the hourly labour cost fell by 0.2% whereas in Spain it rose slightly (0.1%).

Wage and labour costs Annual data (% annual change) Cost per hour of Monthly cost per worker effective work 2016 2017 2016 2017 Catalonia Total labour cost 0.1 -0.3 0.5 -0.2 Wage cost 0.0 -0.3 0.4 -0.1 Ordinary wage cost -0.2 0.2 0.2 0.2 Extraordinary wage cost 1.1 -3.0 1.0 -2.1

Non-wage labour cost 0.3 -0.4 0.8 -0.4

Agreed hours -0.3 0.1 - -

Hours of effective work -0.4 0.0 - - Spain Total labour cost -0.4 0.2 -0.1 0.1 Wage cost -0.3 0.1 0.1 0.0 Ordinary wage cost -0.2 0.2 0.2 0.0 Extraordinary wage cost -0.5 -0.2 -0.5 0.2 Non-wage labour cost -0.8 0.5 -0.5 0.3 Agreed hours -0.2 0.1 - - Hours of effective work -0.3 0.1 - -

Source: Quarterly Labour Cost Survey (INE).

Labour costs and ordinary wage costs by main sectors Annual data (% annual change)

Catalonia Spain 2016 2017 2016 2017 Monthly labour costs per worker Total 0.1 -0.3 -0.4 0.2 Industry -0.3 0.3 0.4 0.7 Construction 2.5 -0.9 -1.7 -0.6 Services 0.1 -0.3 -0.4 0.2

Monthly ordinary wage costs per worker

Total -0.2 0.2 -0.2 0.2

Industry 0.0 0.7 0.2 0.6 Construction 1.8 -0.2 -1.4 0.0 Services -0.3 0.2 -0.2 0.1 Source: Quarterly Labour Cost Survey (INE).

102 Nota de Conjuntura Econòmica. 100 July 2018

Labour costs displayed a pattern of wage restraint which extended to all sectors, and construction in particular, following the upturn of 2016. In Spain as a whole, the trend also reflected the reasonably stable behaviour experienced in all sectors. There was a similar pattern of restraint in ordinary wage costs.

The average wage increase negotiated in 2017 was 1.51%, above the increase agreed in 2016

The wage increases negotiated in 2017 raised the average to 1.51%, their highest level since 2011, notwithstanding the failure of the unions and employers' associations to reach an agreement to establish the wage increase recommendation within the framework of the 3rd Agreement on Employment and Collective Bargaining for the years 2015-2017. The wage rates reached were increased by 1.55% in agreements at a sectorial level and 1.03% in company-level agreements. As in previous years, wage maintenance clauses only played a token role as the revised variation was identical to the variation initially agreed upon.

In 2017, the number of workers in Catalonia covered by collective bargaining fell by 29.7% compared to 2016, especially those in sectoral bargaining field, although we only have provisional data available for 2017. In Spain as a whole, the decline in the number of workers covered by collective bargaining in 2017 (10.7%) was less pronounced than in Catalonia, though the impact was greater in company-level agreements.

Agreed wage increases in Catalonia by bargaining type (% annual change) Collective Covered Agreed wage agreements workers increase (%) From January to December 2016 * Company agreement 547 104,358 0.91 Sectoral agreement 117 1,496,048 1.09

Total 664 1,600,406 1.08

From January to December 2017 * **

Company agreement 436 86,066 1.03 Sectoral agreement 96 1,038,391 1.55 Total 532 1,124,457 1.51 * Data include the updates derived from revision clauses. ** Provisional data. Source: Spanish Ministry of Employment and Social Security.

103 Nota de Conjuntura Econòmica. 100 July 2018

With regard to 2018, the increases agreed up to June show a slight recovery in salary levels of up to 1.61%, and it is hoped that this trend will intensify during the rest of the year and bring salaries close to the levels recommended in the 4th Agreement on Employment and Collective Bargaining for the years 2018-2020. This agreement, signed by unions and employers’ associations on 5th July last, recommends a fixed wage increase of around 2% for each year and a variable increase of 1% linked to productivity, results, absenteeism and other indicators. The pact also recommends gradually increasing the minimum wage established in the agreements to 14,000 euros per annum, which would significantly increase wages in some sectors, especially services. The agreement also provides for the introduction of salary review mechanisms into the agreements and it also deals with some of the measures that employers’ associations and trade unions need to discuss with the central government. The main measures targeted by the Agreement are improving the regulation of Article 42 of the Workers’ Statute in order to prevent precarious labour conditions in subcontracted activities and developing measures that foster the preservation of employment throughout the economic cycle through the use of internal flexibility mechanisms. The remaining measures focus on aspects such as updating the agreements, professional training, absenteeism, retirement pensions and gender equality.

Evolution of the labour cost and contributions of its components (% annual change, and contributions) 6

5

4 3

2 1

0 -1

-2 -3 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Agreed wages Non-wage cost Wage drift Labour cost (%)

Source: elaboration based on INE and Spanish Ministry of Employment and Social Security.

On the other hand, the data on labour costs and wage settlements allows us to estimate the contribution of the wage drift, which indicates the part of wage increases that cannot be explained by collective

104 Nota de Conjuntura Econòmica. 100 July 2018 bargaining. So, we can see how the factors included under the drift concept offset the agreed wage increase during the period 2012-2014. Negotiated wages and the drift both rose in 2015, although the drift offset the increase in negotiated wages once again over the course of 2016 and 2017. This year’s annual report from the Bank of Spain suggests that the negative contribution of the drift mainly encompasses the lowest pay level of those entering the labour market for the first time.

Unit labour costs continue the trend in recovering cost competitiveness compared to the euro area since the outbreak of the economic crisis

Since the outbreak of the economic crisis, the Catalan economy has embarked on a process marked by a recovery of cost competitiveness with the implementation of an adjustment in unit labour costs. It must be borne in mind that, between 2000 and 2008, the development of the unit labour costs was markedly expansive in relation to the euro area economies, to the extent that it accumulated a differential of 18 points in relation to its position in 2000. The adjustment for the period between 2008 and 2016 was also very acute, marked mainly by wage restraint as well as the recovery of apparent productivity. Thus, in 2016 the nominal unit labour cost was only 3.8 points above the position for 2000.

Evolution of the nominal unit labour cost and its components, Catalonia relative to euro area (Index, 2000=100) 120

115

110

105

100

95 2000 2002 2004 2006 2008 2010 2012 2014 2016 Nominal unit labour cost Compensation per employee worked hour Gross value added per employee worked hour (constant prices) Source: elaboration based on INE and Eurostat.

105 Nota de Conjuntura Econòmica. 100 July 2018

The adjustment of annual wages in real terms between 2008 and 2016 has had several edges to it and these include price trends, time worked and changes to the job structure of the economy

The restraint in wages between 2008 and 2016 can be clearly seen in the evolution of the real average gross annual wage, which fell by 5.3%. This adjustment mainly reflects the unfavourable dynamics of consumer prices between 2010 and 2013, and the downward adjustment of the time worked during the period 2009-2015. The evolution of the hourly pay rate corrected for the composition effect also pushed the annual average salary downwards, albeit in an increasingly gentler and less widespread fashion over the years. Finally, the role of the composition effect is also worth mentioning here as it placed significant upward pressure on the average gross annual wage between 2008 and 2016. During the early years of the recession, this effect mainly resulted in the destruction of low-wage jobs. However, the composition effect suggests that the opposite has been the case since the start of the recovery, with the exception of 2014, in other words, it has mainly affected the creation of jobs with higher than average pay. This recent trend might be mirroring a recovery of the industrial sector, which, despite showing a more

Evolution of the real annual gross wage and its components (% annual change) 6

4

2

0

-2

-4

-6 2009 2010 2011 2012 2013 2014 2015 2016 Wage per hour corrected of the composition effect Composition effect Working time effect Prices effect Real annual gross average wage

Note: The wage per hour corrected of the composition effect is obtained from the Labour Price Index (INE). The working time effect is estimated with the growth differential between annual gross average wage and hourly gross average wage from the Annual Structure of Earnings Survey. The composition effect is estimated with the growth differential between hourly gross average wage and wage per hour corrected of the composition effect, and reflects the effects on average wage derived from changes in the productive structure. The prices effect reflects CPI growth. Source: elaboration based on Idescat and INE.

106 Nota de Conjuntura Econòmica. 100 July 2018 modest rhythm of job creation than services and construction, is a sector in which salaries are higher than average. Moreover, this positive composition effect is not incompatible with a decline in the hourly wage rate corrected for the composition effect, in other words, a decline in the hourly rate for a representative sample of jobs for the whole of the Catalan economy. This is the situation reflected in the Labour Cost Index for 2016 (which fell by 1.5%).

Wage inequalities have narrowed with the economic recovery, although the effects of the recession are still patent, especially in the lowest income groups

A wage analysis based on the distribution of wages and salaries by deciles offers us a more precise view of how wage adjustments have occurred in recent years and it also lets us see which wage strata have been most affected. The analysis starts with the information on salaries from the main job of workers included in the Labour Force Survey. These data hint at a slight recovery during the period 2014-2016, but there is still a long way to go if the effects caused by the recession are to be reverted. However, the recovery in wages only occurs in the lower part of the distribution, and then only partially so. During the period between 2008 and 2016, the average salary of workers in decile 1 fell by 17.9%, while salaries in the middle to high part of the distribution

Evolution of the real average wage by deciles for full-time workers, 2008-2016 (% change) 15

10 5

0

-5 -10

-15

-20 -25

-30 1 2 3 4 5 6 7 8 9 10

2008-2014 2014-2016 2008-2016 Note: Deciles refer to the nine values that divide the wage distribution into ten equal parts. The values in the x axis indicate each one of these ten equal parts. Thus, the 1st decile reffers to the 10 % of working people with lower wages. The wage reffers to the monthly average wage of the main job of each one of the ten parts. Source: elaboration based on Labour Force Survey (INE).

107 Nota de Conjuntura Econòmica. 100 July 2018 underwent the least change, with variations very close to 0. Finally, it is worth mentioning the 7.7% fall in the decile with the highest salaries, where the wage dynamics were the least favourable during the recovery.

Wage-gap ratios have improved over the last two years, although inequality levels are still much higher than they were in 2008. In 2016, the average gross annual wage for Decile 9 (D9) was 5.1 times that of the wage for Decile 1 (D1). However, it should be pointed out that these differences are more pronounced in the case of women, where the D9/D1 ratio is 5.2, compared to a ratio of 4.3 for men. The increase in inequalities between 2008 and 2016 reflects a broadening of the differences in the lower part of the earnings distribution.

Over the forthcoming years, it will be necessary to closely monitor the effects of the increase in the minimum wage in Spain as a whole, and these wage-gap indicators in particular. An 8% increase in the minimum wage was approved in early 2017, and we need to add a 4% increase to this for 2018. Increases established for 2019 and 2020 could bring the minimum wage up to 14 monthly payments of 850 euros by 2020. These increases are dependent upon reaching certain levels of GDP growth and on attaining a fixed median of affiliations to the Social Security system.

Decomposition of the D9/D1 ratio between D9/D5 and D5/D1 ratios in Catalonia Years 2008, 2014 and 2016 2008 2014 2016 D9/D1 ratio = 4.4 D9/D1 ratio = 5.4 D9/D1 ratio = 5.1

57.2% 56.6% 48.2% 51.8% 42.8% 43.4%

D9/D5 D5/D1 Nota: The quotients compare the annual gross wage of the indicated percentiles. Source: elaboration based on the Annual Structure of Earnings Survey (Idescat).

In 2015, the gender pay gap was lower in Catalonia than it was in Spain and the euro area

Gender is one of the variables that impacts most on wages. According to official European Union criteria, the pay gap between men and women was 13.9% in 2015, lower than the rate for Spain (14.2%) and the euro area (16.7%). Catalonia has made significant progress in this indicator since 2010 and the improvement there has been much higher than it has been in Spain and the euro area.

108 Nota de Conjuntura Econòmica. 100 July 2018

The gender pay gap in Catalonia, Spain and the euro area. Per hour worked 2010 2014 2015 Catalonia 18.4 16.5 13.9 Spain 16.2 14.9 14.2 Euro area 17.0 16.9 16.7 Note: The gender pay gap is defined as percentage of the difference betw een male hourly gross w age and female hourly gross w age over the male hourly gross w age. Source: Idescat and Eurostat.

109 Nota de Conjuntura Econòmica. 100 July 2018

Box 4.The fall in labour income share in Catalonia *

Within a context of growing inequalities in the advanced nations, distributional aspects have become important once more. The labour income share is one of the main indicators of distribution of income; it measures the relative weight of incomes received by people for work done compared to income in the whole economy.

Ideas about the importance of the functional distribution of income are not new. As far back as 1817, David Ricardo considered that determining the laws that regulate income distribution between classes was the main concern of political economics. Between 1930 and 1960, Michal Kalecki developed much of his work on the distribution of income. Regarding the specific behaviour of labour income, in the first half of the 20th century Arthur Bowley observed that in the UK economy its share was constant. Years later, this insight would become known as Bowley's Law. In 1939, John Maynard Keynes described this as one of the most surprising and, at the same time, well-documented facts about the economy. In 1957, Nicholas Kaldor also noted a constant long-term share between labour and capital income in his “stylised facts” about economic growth. Along the same lines, many works on accounting growth based on Cobb-Douglas’s neoclassical theory of production commonly use the form that implies perfect competition. This simplifies calculations and, among other things, implies that the share between labour and capital income remains constant.

However, in recent years, empirical evidence has begun to question this assumption, reopening the debate. It is pointed out that, in advanced economies, labour income share has fallen since around roughly since 1980. In economies with lower per capita GDP levels, the trend is not so clear or common, but a downward trend is also noted in the labour income share.

* This table is taken from the research paper entitled “La participació de les rendes del treball a Catalunya” [The fall in labour income share in Catalonia], by Guillem Castells as part of the post-graduate course on Economics and Philosophical-Political Analysis of Contemporary Capitalism at the University of Barcelona.

110 Nota de Conjuntura Econòmica. 100 July 2018

A second important piece of evidence worth mentioning is that, in wage distribution, the people worse affected are those in the lower part, while those in the upper income echelons receive an ever-larger slice of the cake. Accordingly, if the labour income share is calculated while excluding part of the higher salaries, such as the 1% or 5% of highest-paid people, the drop in the labour income share becomes even more pronounced.

At aggregate level, the drop in the labour income share may indicate an increase in labour productivity that is higher than average salary growth, although this relationship tends to be more complex. It is also observed that, in times of recession, the labour income share stops falling or even grows, mainly due to the greater initial volatility of business investment and profits compared to wages, although this relationship is not always fulfilled and can be considerably more complex.

One of the main implications of the fall in the labour income share is an increase in the capital income share. In national accounting, capital income, under the concept of gross operating surplus, encompasses consumption of fixed capital (amortisation) and all revenues generated in the production process that do not remunerate labour activities (mainly interests, business profits and property income).

The indicator links labour income to income generated in the economy. National accounts, however, only provide data on the remuneration of salaried employees, including both earnings in cash and in kind received by salaried workers and social contributions made by companies. As a result, the concept of wage income, not labour income, is often used. The labour and capital income received by non-salaried workers, such as self-employed workers, are included in the concept of gross mixed income, although the income received by most of these people can be considered to be generated by work activities. In many cases gross mixed income is presented along with gross operating surplus. To obtain total labour income, an adjustment is usually made that allocates the average wage of salaried employees from the economy to non-salaried workers. A more rigorous approach is based on making the same adjustment, but differentiating by sector or territory. The disaggregated a sector into homogeneous production branches and the higher the salary rate, the better the results generated by this adjustment. Accordingly, depending on the level of disaggregation used to make the estimate, different types of adjustment can be identified: aggregate adjustment, sector adjustment or adjustment by sectoral branches, for example.

111 Nota de Conjuntura Econòmica. 100 July 2018

The second part of the indicator, income generated in the economy, can take several forms. In some cases, Gross Domestic Product is used, in others Gross Value Added. The figures presented here were calculated by linking labour income to the Gross Value Added at basic and current prices, in this way excluding net taxes on products.

To analyse the case of Catalonia, the labour income share over the 2000-2017 period was calculated using data from the Annual Economic Accounts for Catalonia, drawn up by Idescat, and the Regional Accounting for Spain, drawn up by INE. In both cases, an initial adjustment is made at aggregate level, and a second estimate is present with adjustment at a more disaggregated level. In the Idescat figures, non-salaried labour income was estimated by branches, that is to say, using the average wage and the number of full-time equivalent jobs in each sectoral branch. In the case of the INE figures, the average wage and number of hours worked in each sector was used.

Evolution of the labour income share in Catalonia, 2000-2017 (%) 67 66

65 64 63

62

61 60 59

58 57 2000 2003 2005 2007 2009 2011 2013 2015 2017 Idescat - Branches adjust. Idescat - Aggregate adjust. INE - Sectoral adjust. INE - Aggregate adjust. Note: Ratio between the labour income and the gross value added at basic and current prices. Source: elaboration based on Idescat and INE.

Although the two statistical sources present significant differences in levels, they coincide in highlighting a slightly downward trend. In both cases, the aggregate adjustment produces levels slightly higher than adjustment by sector or branch, suggesting that it is appropriate to make the adjustment using disaggregated data. The estimated labour income share according to Idescat data adjusted by sectoral branch shows a fall of 2 percentage points over the 2000-2015 period, while the INE data adjusted by sector shows a decrease of 3.6 decimal points between 2000 and 2016.

112 Nota de Conjuntura Econòmica. 100 July 2018

Changes in the labour income share in Catalonia, 2000-2017 (percentage points) 2000 - 2006 - 2008 - 2014 - 2000 - 2000 - 2006 2008 2014 2017 2015 2017 Idescat -0.35 1.51 -3.66 0.50* -2.00 -2.00* Branches adjust. Idescat -0.64 1.55 -3.76 -1.46 -2.42 -4.31 Aggregate adjust. INE -1.92 1.49 -3.20 0.00** -2.97 -3.63** Sectoral adjust. INE -2.38 1.49 -3.30 -0.11** -3.59 -4.30** Aggregate adjust.

* Data available until 2015. ** Data available until 2016. Source: elaboration based on Idescat and INE.

During the pre-crisis expansionary period, it is observed that the labour income share falls slightly, although the Idescat data show a decrease close to zero. With the outbreak of the crisis, in 2007 and 2008, the share increases. After 2009, however, a fall is observed that lasts until 2014 and coincides with the period in which wage devaluation is more intense. During this period, the fall in wages seems to be the main factor in the sharp reduction in the labour income share. During the period of macroeconomic recovery that began in 2014, the data available show a slight increase in the share in 2015, but this falls once more in subsequent years.

For a longer-term perspective, the BD.MORES regional database on the Spanish economy is used. This database, which is managed by the Ministry of Finance and the Civil Service’s Directorate General for Budgets, links historical series formulated by the Regional Accounting for Spain. The data include adjustment of non-salaried workers’ incomes to the maximum level of disaggregation possible. A clearly downward trend is observed since 1980. Over the 1980-2012 period, the labour income share has fallen by 11.9 percentage points.

The figures from the BD.MORES database also enable a comparison to be made between Catalonia and Spain. In 1980, the labour income share in Catalonia was significantly higher than in Spain (70.7%, compared to 65.5% in Spain). However, over the whole period, a more intense decrease is seen in Catalonia compared to the share in Spain, to the point where the two trends converge. In 2012, the share was very similar, 58.8% in Catalonia compared to 58.5% in Spain. This means that, since 1980, the labour income share has fallen by 11.9% in Catalonia and 7% in Spain.

113 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of the labour income share in Catalonia and Spain, 1980-2012 (%) 74 72

70

68 66

64 62

60

58 1980 1984 1988 1992 1996 2000 2004 2008 2012 Catalonia Spain

Note: Ratio between the labour income and the gross value added at basic and current prices. The 2010 and 2011 are provisional data, and the 2012 is advanced data. Source: elaboration based on Spanish Ministry of Finance and Civil Service.

An additional limitation in the indicator is the greater difficulty in measuring income generated or the share of the factors in the public sector compared to the private sector. This means that, in some cases, the labour income share is observed only in the business sector or in one particular sector. The BD.MORES database enables us to differentiate data on market services from non-market services. It reveals the different trends followed since the end of the 1980s. In 2012, the labour income share in market services had fallen by 23.3 percentage points compared to 1980, while in non-market services this decrease was just 3.1 percentage points. The share in the industrial and construction sectors also follows a downward trend, but in this case the decline is less intense than that in market services.

The decreasing trend in the labour income share in many of the world's economies has led to discussion of the possible causes in recent years. Initially, it was argued that the main factor was technology as reflected in the change in relative prices between labour and capital. However, recently the evidence also appears to point to other factors playing an important role and lead to a loss of worker bargaining power. These include globalisation; the process of financialisation (the process by which financial motives, markets, players and institutions have increased in importance since the late-1970s); and the weakening of the welfare state.

114 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of the labour income share in Catalonia by main sectors, 1980- 2012 (%) 100

90

80

70

60

50 1980 1984 1988 1992 1996 2000 2004 2008 2012

Industry Construction Market services Non-market services* * Non-market services include: Public administration, non-market education, non-market social and health services, other social activities and other non-market services, and domestic service. Note: Ratio between the labour income and the gross value added at a basic and current prices. The 2010 and 2011 are provisional data, and the 2012 is advanced data. Source: elaboration based on Spanish Ministry of Finance and Civil Service.

It is also important to consider the possible economic impacts of the falling labour income share. These potential impacts are described in summary form as follows:

• Increased income inequality, especially when the fall in share is concentrated in the lower part of wage distribution, since income from work activities represents a large part of this group’s income. Moreover, high concentration of capital income can drive an increase in inequalities, with all the consequent negative effect on economic growth associated with this. There is increasingly more evidence to suggest this loss of efficiency in the entire economy. In addition, the polarisation of income can lead to less sustainable growth.

• Restrictions on household consumption, as working people generally have less income to consume. This decline in household consumption is not compensated by the increase in capital income, as working people have a higher marginal propensity to consumption than people who receive income from capital. Public spending can also decrease as revenues fall due to diminishing private income and consumption. The effect is lower public investment in infrastructure and social protection, and fewer resources for public services like health, education and so on.

115 Nota de Conjuntura Econòmica. 100 July 2018

• The decrease in expenditure on private consumption can endanger business investment due to forecasts of insufficient demand. However, the increase in capital income, specifically profits, could drive new investment.

• Attempts are made to palliate the fall in aggregate demand by increasing credit or promoting net exports, despite the disadvantages that these measures can generate. Firstly, because increasing credit can add to financial instability and, secondly, due to the risks inherent in implementing strategy that is not consistent, if it is adopted widely, within a monetary zone such as that of the euro area. In other words, if most countries pursue a net increase in exports, demand in the monetary area can become depressed, if compensation is not found in the shape of demand from the rest of the world.

116 Nota de Conjuntura Econòmica. 100 July 2018

7.

The monetary, financial and stock market sector

The ECB maintained its expansionary monetary policy throughout 2017 and plans to put an end to its asset purchase policy in December 2018. Interest rate rises are not expected until the latter half of 2019.

In 2017, the ECB kept its interest rates at minimum levels and extended its asset purchase policy, although at only half of the monthly volume of the previous year. This expansionary monetary policy kept financing conditions within the Spanish economy at very favourable levels with historically low financing costs.

At the meeting held on June 14, the ECB decided to hold interest rates unchanged at 0.00% for main financing operations, 0.25% for marginal lending facilities and -0.40% for deposit facilities. With regards to the asset buying policy, a decision was made to extend it until year-end for half of the current amount; that is, 15 billion euros per month. According to the ECB’s outlook, the first rate increases are not expected to be applied until the latter half of 2019.

The Spanish economy’s debt stock increased in 2017, although this increase became more moderate in the first quarter of 2018

In 2017, the Spanish economy’s total debt stock grew by 1.3%, and in the first quarter of 2018 growth slowed to 1.0%. Hence, debt stock continues to progress as it has done since 2015. By institutional sectors, the debt stock of non-financial corporations grew by 0.4% in 2017, while that of households fell by 0.6%. In the first quarter of 2018, the total debt stock of non-financial corporations fell again by 0.6%, while the drop in household debt, which recorded a 0.4% decrease, continued to slow. With regard to public administrations, there was a new 3.4% increase in debt stock.

With respect to financial instruments, of note were loans to non- financial corporations, which fell by 0.5%, and foreign loans which fell by 0.1%, while share financing grew by 7.5%. Rates in the first quarter of 2018 were -1.3%, -0.2% and 2.6%, respectively.

117 Nota de Conjuntura Econòmica. 100 July 2018

Funding to non-financial sectors of the Spanish economy (% of annual variation) Non-financial Households and Private sector (Non-financial Public corporations NPISHs corporations and households) administrations Total

2014 -3.7 -3.6 -3.7 6.4 -0.1

2015 -0.4 -2.1 -1.2 3.1 0.5 2016 -0.4 -1.3 -0.8 3.1 0.7 2017 0.4 -0.6 0.0 3.4 1.3 2018 1 -0.6 -0.4 -0.5 3.2 1.0

1 Data referring to March. Source: Bank of Spain.

The relocation of the head offices of some companies and the resulting statistical effects favoured decreases in credit and deposit stocks in 2017

In 2017, the year ended with an 8.1% fall in private credit in Catalonia compared to the previous year. The fall in the Spanish credit stock was 1.9%. However, it must be noted that the significant decline in Catalonia can be attributed to the statistical effects of the relocations of corporate head offices at year-end 2017. Autonomous community assignments by financial institutions were based on the location of the debtor’s head office. If this changes during the year, loans will be recorded at the location of the new head office.

Evolution of the stock of credit of diposit entities (% of annual variation) Catalonia Spain

Total Credit Private Credit1 Credit to PA2 Total Credit Private Credit Credit to PA2

2014 -6.4 -7.6 15.6 -3.1 -4.6 23.6

2015 -4.7 -4.3 -10.8 -4.4 -4.0 -9.5

2016 -10.7 -10.4 -16.4 -4.0 -4.1 -2.1 1st quarter 2017 -5.5 -4.5 -20.3 -2.7 -2.4 -7.7 2nd quarter 2017 -1.6 -0.3 -21.3 -3.7 -3.0 -12.6 3rd quarter 2017 0.1 1.2 -17.8 -3.1 -2.4 -12.1 4th quarter 2017 -8.3 -8.1 -11.7 -2.5 -1.9 -11.4

1 The fall registered in 2016 is due to a statistical effect on the booking of credit betw een financial and non-financial sectors. The fall in the fourth quarter of 2017 is explained by the statistical effect of the relocation of the registered office of some companies outside Catalonia. 2 PA stands for Public Administration. Source: Bank of Spain. Private sector bank deposits by residents of Catalonia fell by 17.3%, while at the State level they rose by 0.5%. As in the case of loans, deposits also experienced the statistical effects associated with head office relocations. The regional assignments carried out by financial intuitions are based on the registered address of the bank branches

118 Nota de Conjuntura Econòmica. 100 July 2018 where deposits are recorded. For this reason, if a customer transfers their deposits to a bank branch located outside Catalonia, that deposit is no longer statistically recorded in Catalonia and will instead be recorded in the autonomous community where the recipient bank branch is located.

Breakdown of the evolution of deposits in Catalonia (billion euros) 200 180

160 140 120

100 80 60

40 20 - II IV II IV II IV II IV 2014 2015 2016 2017 Assets sold under repurchase agreement Time deposits

Demand and savings deposits

Note: The Bank of Spain includes the assets sold under repurchase agreement since June 2017. Source: Bank of Spain.

Equity markets closed the year posting significant profits and started in 2018 with high levels of volatility

The year 2017 was characterised by a very low levels of volatility and overall gains in most stock exchanges. The improvement in worldwide macroeconomic outlook and in business profitability, as well as the high liquidity resulting mainly from the asset purchase policies of central banks, led to growth in all indices. The strength of the euro did not slow stock market improvements or, in particular, indexes such as Germany’s DAX, which is noted for the presence of exporting companies. The Eurostoxx-50 index ended the year with increases of 6.5%, while the IBEX-35 showed growth of 7.4% (which showed a very good start to the year, while the latter half was severely affected by political events in Catalonia), and the German DAX grew by 12.5%. In our case, the Barcelona Global-100 index gained 7.3%. Monetary normalisation in the United States did not slow American indexes, which were influenced by sharp gains by companies in the

119 Nota de Conjuntura Econòmica. 100 July 2018 technology sector. These indices also reported significant profits, including the 19.4% posted by S&P-500 and Nasdaq Composite’s 28.2%, both which can be considered as representative of the sector.

Main stock market index performances (annual performance data accumulated to the end of each period) 2017 2018 2nd 3rd 4th 1st Accumulated to quarter quarter quarter quarter 31st of May Barcelona Global 1001 Spain 11.0 10.5 7.3 -3.6 -6.6 Euro Stoxx 50 Eurozone 4.6 9.2 6.5 -4.1 -2.8

CAC 40 France 5.3 9.6 9.3 -2.7 1.6

Dax Xetra 30 Germany 7.4 11.7 12.5 -6.4 -2.4 FTSE 100 UK 2.4 3.2 7.6 -8.2 -0.1 FTSE MIB 40 Italy 7.0 18.0 13.6 2.6 -0.3 IBEX 35 Spain 11.7 11.0 7.4 -4.4 -5.8

Dow Jones Industrial Av USA 8.0 13.4 25.1 -2.5 -1.2

S&P 500 USA 8.2 12.5 19.4 -1.2 1.2 Nasdaq Comp. USA 14.1 20.7 28.2 2.3 7.8 Nikkei 225 Japan 4.8 6.5 19.1 -5.8 -2.5

1The BCN Global-100 index includes the 100 most traded securities on the Barcelona Stock Exchange and adds, in addition to the

shares included in the IBEX 35 and BCN MID-50 indices, the shares of the most traded companies until reaching the figure of 100 securities. Source: Bloomberg and Barcelona Stock Exchange.

The current year 2018 began with significant volatility due to rising US debt yields attributable to inflationary expectations, protectionist US trade policies, warlike tensions in the Middle East and, since late April, political uncertainty in Spain related to the Socialist Party’s motion for censure of the Popular Party, and the attempt by two Italian political parties to enact a government measure that would modify the country’s economic relations with the rest of Europe.

As a consequence of the foregoing, most European indices were reporting negative results by the end of May. In Europe, Eurostoxx-50 fell by 2.8%, and the German DAX posted a 2.4% decline. However, those reporting the biggest losses were Barcelona Global 100 (-6.6%) and IBEX-35 (-5.8%). In the United States, results for technology sector were positive, with Nasdaq posting a 7.8% increase. Results for other indices were mixed, with S&P 500 reporting a 1.2% gain and the Industrial Dow Jones posting a loss by the same percentage. For its part, Japan’s Nikkei 225 index accumulated losses of 2.5%.

120 Nota de Conjuntura Econòmica. 100 July 2018

The trading volume of Barcelona Stock Exchange accounted for 26% of the total for Spanish stock markets

The trading volume of Barcelona Stock Exchange had experienced declines in recent years, although it recovered strongly in 2017. One of the main reasons for the decreased securities trading has been the decline in Catalonia’s public debt market. This is due to the change in the structure of the Catalan government’s debt portfolio. In recent years, there has been a gradual decline in outstanding debt in the form of securities and an increase in outstanding debt in loans and lines of credit, mainly derived from new financing mechanisms created by the Autonomous Liquidity Fund (FLA). Hence, the importance of equities. Having previously accounted for the majority of securities trading, they are now in a situation of almost complete dominance: while equity securities accounted for 83% of total trading in 2014, in 2017 they accounted for 98.9%.

Effective volume of trading in Barcelona Stock Exchange Million euros Type of security 2014 2015 2016 2017 1T 2018 Treasury bills 34,857.6 22,594.3 3,716.5 1,852.4 151.5 Bonds 1,397.0 160.8 591.0 43.6 0.0

Stocks1 176,570.2 182,919.3 142,045.9 166,409.8 35,888.9

Investment Funds 970.6 485.9 635.8 110.5

Warrants 194.8 179.2 101.9 35.1 Rights 3,025.5 1,335.1 687.1 107.8 Second Market 0.1 0.4 0.3 0.1 Total 212,824.8 209,865.4 148,354.0 169,730.8 36,293.8 1 In 2014 the value of stocks traded include the value of funds, w arrants, rights and second market. Source: Barcelona Stock Exchange.

The percentage of all Spanish stock exchange trading volume represented by the Barcelona Stock Exchange was 26.1% in 2017, 2.9 percentage points higher than the previous year’s figure.

Trading during the first quarter of 2018 was 14% lower than during the same period the previous year. Equities already make up 99.6% of the total trading volume, while the volume that the Barcelona Stock Exchange represents with respect to the total for all stock exchange trading in Spain as a whole is 24.8%.

121 Nota de Conjuntura Econòmica. 100 July 2018

Box 5. Finchtech and the financial sector

Catalan Finance Institute (Institut Català de Finances, ICF)

Barcelona has become one of the main European technology hubs in recent years. It is now the fifth leading European city in terms of its number of tech start-ups, after London, Paris, Berlin and Dublin. According to data from the Digital Startup Ecosystem Overview published by the Mobile World Capital Foundation, this translates into the presence of some 1,100 emerging technological companies, which comprise 34% of those in the Spanish market. Furthermore, these companies have substantial investment attraction capacity: in 2017, of all capital invested in such companies in Spain, 58% went to Barcelona totalling 453 million euros. Factors such as the presence of a robust business environment, a competitive cost structure, events such as the Mobile World Congress and 4 Years From Now, and initiatives such as the Barcelona Tech City (cluster promoted by a public-private initiative of 600 digital and technological sector partner companies), among others, have created the conditions for an ecosystem that is conducive to businesses of this type.

Within the emerging technological companies, and from the point of view of the financial sector, the emergence of the fintech (financial technology company) phenomenon has taken on particular significance and ushered in a paradigm shift in the traditional business model. According to the report Fintech, innovación al servicio del cliente [Fintech: innovation at the service of the client], drawn up by the Funcas Financial Digitisation Observatory in cooperation with the KPMG consultancy firm, this segment presently includes more than 300 companies throughout Spain, produces a turnover of more than 100 million euros and employs more than 3,500 people. Its range of activities is varied and encompasses services to either replace or complement those of the traditional financial sector, including the following:

• Asset advisory and management services: investment networks, investment advisory and management companies and trading platforms. • Personal finance: financial product comparators, with which users may select the most advantageous products based on their profiles, in addition to personal financial optimisation services

122 Nota de Conjuntura Econòmica. 100 July 2018

such as financial aggregators, which enable the financial data of all entities to be comprehensively viewed. • Financing: granting of loans and other types of financing, with special attention to segments that tend to be low priority for traditional entities because they are unprofitable or considered as high risk. This would include neobanks and challenger banks, 100% digital institutions that interface with customers exclusively through smartphones and social networks, as well as crowdlending and crowdfunding platforms. • Transactional/currency services, offering lower fees charged to clients compared to traditional banking. • Electronic payment services promoted by the new PSD2 European digital payment regulations.

These new platforms have advantages over traditional banking, mainly linked to quickness that new technologies provide in an environment where innovation is put at the service of customers. As an example, the possibility of fully performing customer identification and access procedures digitally or the granting of pre-approved loans will enable users to obtain financing with a shorter waiting periods and substantially reduced documentation requirements. This translates into an improved customer experience, which undoubtedly constitutes one of the advantages of financial technology companies (fintechs). They also favour a much reduced cost structure. The fact that most of the sector’s companies have fewer than fifteen employees makes it possible for them to pass lower prices on to customers.

One of the most significant challenges faced by these new financial service providers is obtaining financing. In spite of the positive investment figures over the past year, obtaining investor support continues to be one of the main worries within the sector. In this regard, the services of business angels, venture builders, accelerators and other related actors is important. The ICF group, in accordance with its mission to complement the private sector in the financing of Catalan businesses, has several lines of financing that target innovative companies during all of their stages. The group achieves this through its business activities, investments in venture capital funds (valued at 157 million euros at year-end 2017) as well as through direct investment in emerging companies which, during the same period, totalled 12.4 million euros, 9.1 million of which in the technology sector.

Besides the search for financing, expanding the customer base (even though, in some cases, the opportunity to capture market niches is sought, competing with the databases available to the traditional financial sector is no easy matter) and gaining customer confidence are

123 Nota de Conjuntura Econòmica. 100 July 2018

among the challenges faced by this sector. To address these challenges – without ignoring significant factors such as the need for more regulation, which must necessarily be adapted to the specific nature of fintech companies, and finding the right balance in a world of fast- moving developments and cybersecurity – the data indicate a clear and growing commitment to cooperation with traditional financial institutions.

Thus, while, in their day, fintech companies were considered as an alternative to the previously existing business model and actors, the current trend is perfectly in line with the need for digital disruption that is focused on the efforts of financial institutions – along with the adaptation to the changing regulatory environment and the optimisation of profitability – in an environment of low interest rates and the deleveraging of the economy. Although this cooperation is not immune to complications inherent to the coexistence of two cultural and management models that oppose each other in many respects, the combination of innovation and customer focus, along with experience, a customer base and the ability to provide traditional financial sector financing, gives fintech companies the potential to create value for all of the stakeholders involved. This, in turn, will enable financial technology companies to continue to operate as tools for transformation and growth within the financial sector.

124 Nota de Conjuntura Econòmica. 100 July 2018

8. The public sector

8.1. The Administrative Public Sector of the Government of Catalonia

The accounts of the administrative public sector of the Government of Catalonia, the Institut Català de la Salut (ICS, that stands for Catalan Health Institute)and the autonomous government agencies: that is, all agencies that have a limited budget. The Catalan Health Institute has also been incorporated, although it is a public agency subject to private law and therefore does not form part of the administrative public sector. Furthermore, the information presented here excludes the revenue and transfer expenses of the central government to local entities and the European Agricultural Guarantee Fund, because the Catalan government only carries out payment functions.

The 2017 budgets were published in Act 4/2017, of 28 March, on the Government of Catalonia’s 2017 budget. Until that time, the budget had been governed by means of an extension in accordance with Decree 331/2016, of 20 December, which established the criteria for enacting an extension of the Catalan government’s 2015 budget until the 2017 budget entered into force.

The Catalan government’s deficit fell below target levels

The Government of Catalonia’s public accounts for 2017 recorded a deficit of 1.243 billion euros, equivalent to 0.56% of GDP. This figure falls within the limit of 0.6% of GDP established by the Ministry of Public Finance and Administration. The deficit amount fell 37% from the previous year. The main correction factor was the increase in non- financial revenue (7.8%). It should also be noted that European System of Accounts (ESA) adjustments improved compared to the previous year, mainly due to the accrued interest adjustment.

125 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of the non-financial result and the deficit in the administrative public sector of the Catalan Government 2016-2017. (Millions of euros) 2016 2017 Non-financial revenue 22,387 24,143 Non-financial expenditure 24,073 25,255 Non-financial result -1,686 -1,112 Ajustments ESA (1) -288 -131

Capital contribution to administrative units -603 -656

Financial capacity of the enterprise 628 731

Interests -207 -35 Displaced expenditure change -157 -170 Other adjustments 51 -1 Deficit according to ESA -1,974 -1,243 % GDP -0.92 -0.56

(1) European system of accounts. Source: General Comptroller of the Catalan Government.

The main negative adjustments included through the application of the ESA methodology in 2017 were capital contributions to administrative units. The application of the accrual criteria to interest on the Autonomous Fund liquidity (FLA) resulted in fewer adjustments than were made in 2016, while the change in displaced costs was slightly more negative. Results from companies led to a positive adjustment, which was higher than for 2016.

ESA deficit evolution of the Government of Catalonia

2010 2011 2012 2013 2014 2015 2016 2017 00

-01 -0.6

-01 -0.9

-02

-02 -2.2 -03 -2.3 -2.7 % GDP -03 -2.9 -04 -04 -4.1 -05 -4.5 -05

Source: General State Comptroller (IGAE)

126 Nota de Conjuntura Econòmica. 100 July 2018

Advances from the financing model and the settlements of the financing model increased

In 2017, the non-financial settled revenue in the administrative public sector of the Government of Catalonia amounted to 24.143 billion euros, 7.8% higher than the previous year’s figure. This increase is mainly attributable to the 6.4% increase in financing system settlements, and to a lesser extent to the 23% increase in the amount the financing system’s outstanding settlements.

The bulk of the Catalan government’s budget revenues are advances to the financing system, which account for 70.3% of non-financial revenue. Advances on the autonomous portion of personal income tax increased by 7.7%, while those on VAT increased by 9.3%. The advance of the adequacy fund decreased by 2.5%, while the Government of Catalonia’s contribution to the guarantee fund for basic public services grew by 16.1%.

Revenue from transferred taxes increased by 10.7%, mainly due to increases in the property transfer and certified legal documents tax (17.9%), which reflect the dynamics of the property market, as well as the impact of higher tax rates. Revenue from the equity tax increased by 3.2%, while transport taxes increased by 23% (as a result of an increase in vehicle registrations and the average share), while gaming tax revenue rose by 3.9%. Meanwhile, revenue from inheritance and gift taxes decreased by 1.3%, and the autonomic portion of the hydrocarbon tax remained stable.

Revenue from other minor taxes grew by 11.8%, as an effect of opposing developments of different figures. Contributions from the tax on vacant homes were 60.2% higher than the previous year, mainly because Act 4/2016, of 23 December, on Measures to Protect the Right to Housing of People at Risk of Housing Exclusion increased the number of municipalities defined as having a strong and accredited demand for housing, where the tax is collected. The new bottled sweetened beverage tax raised 23 million euros.

Revenue from the tax on stays in tourist accommodation establishments rose by 10.2%, mainly due to the increase in the rates applicable to homes used as tourist accommodation and cruise passengers whose stays last fewer than twelve hours. Meanwhile, there were decreases in revenue from the taxes on credit institution deposits (-20.6%) and large commercial establishments (-3.5%). The tax on content provision by electronic communications services providers recorded negative figures because revenue collected for this tax was returned before the Constitutional Court declared the tax null and void. Finally, 12 million euros in environmental taxes were collected.

127 Nota de Conjuntura Econòmica. 100 July 2018

Non-financial revenues of the administrative public se ctor of the Catalan Government. Budget outcomes (Milions of euros) Change % change 2017 2016/2017 2016/2017

Advance payments of the financing model 16,963 1,020 6.4

Income Tax 8,349 596 7.7 VAT 6,478 554 9.3 Taxes specific consumption 2,366 23 1.0 Overall Sufficiency Fund 729 -19 -2.5

Guarantee fund for fundamental public services -959 -133 -16.1

Financing model settlements 1,755 328 23.0 Transferred taxes 3,461 333 10.7 Inheritance and donations taxes 459 -6 -1.3 Wealth tax 511 16 3.2 Property transfer and documented legal acts tax 1,948 296 17.9

Tax on certain means of transport 95 18 23.0 Autonomous tax on hydrocarbons 215 1 0.4 Gambling taxes 232 9 3.9 Other taxes 149 16 11.8 Tax on large commercial establishments 15 -1 -3.5

Tax on stays in tourist accommodation establishments 52 5 10.2 Tax on bank deposits 57 -15 -20.6 Tax on the provision of content -27 -46 -248.8 Tax on the production of electric energy of nuclear origin 7 7 -- Tax on the emission of gases and particles into the atmosphere produced by industry 1 0 -5.1 Tax on the emission of nitrogen oxides into the atmosphere produced by commercial aviation 3 0 6.4 Tax on the empty housing 18 7 60.2

Tax on packed sugared drinks 23 23 --

Rest of taxes and other income 793 147 22.8 (1) Current transfers 841 -14 -1.6 Capital transfers 114 -77 -40.3 Property incomes 60 -2 -3.7 Disposal of real investments 9 5 130.5

Non-financial revenue 24,143 1,757 7.8

(1) Excluding the transfers linked to the financing model. Source: General Comptroller of the Catalan Government.

Other taxes and revenues increased by 22.8%, mainly due to accounting differences for the provision of health services by ICS to CatSalut, which have made the figures stated in this item higher than those from the previous year.

128 Nota de Conjuntura Econòmica. 100 July 2018

Current transfers that are not part of the financing model decreased slightly, while capital transfers fell by 40.3%. This trend is attributable to declines in transfers from EU entities in 2017, which did not include those from the European Social Fund or the ERDF, in contrast to the previous year.

Equity income decreased by 3.7% in 2017, while the disposal of real investments contributed 130.5% more than it had the previous year due to income from the sale of buildings, in spite of the fact that the overall amount was relatively modest.

In 2017 financial revenue amounted to 8.61 billion euros, a 12.4% decrease over the previous year.

Income from financial operations of administrative public sector of the Catalan Government. Bugdet outcomes (Millions of euros)

Change % change 2017 2016/2017 2016/2017

Financial assets 198 -71 -26.4 Financial liabilities 8,412 -1,151 -12.0 Financial revenue 8,610 -1,222 -12.4 Source: General Comptroller of the Catalan Government.

Non-financial expenses increased by 4.9%, although the increase is lower in accrual terms

In order to analyse the Government of Catalonia’s expenses in 2017, the data corresponding to budget liquidation are presented first. We then present accrued expenses, in order to homogeneously compare the actual evolution of these expenses.

Total liabilities recognised for non-financial operations by the administrative public sector for 2017 stood at 25.255 billion euros, a figure 4.9% higher than that of 2016.

An item by item breakdown shows that the expenses for employee remuneration increased by 4.3%. This growth includes a remuneration increase of 1% for all public employees and the payment of part of an extra payment not made in 2012. The increase in this item is due to the increase teaching staff employees, to the concurrence of the increase in provisions for the 2016-2017 academic year and the growth of the provisions for the 2017-2018 academic term. In regards to this group, it is also necessary to consider the increase in social security costs that involve the reinstatement of retirement benefits (new contracts include Social Security costs – previously covered under the MUFACE scheme

129 Nota de Conjuntura Econòmica. 100 July 2018

– at a lower rate). Another factor driving the increase in personnel costs is the increase in the equivalent staff for continuous ICS care, and substitutions of this personnel. Similarly, overtime hours worked by members of the Catalan police force and fire service have also risen.

Current expenditures on goods and services rose by 4.1%. The main factor that explains this situation is the increased spending on health agreements by CatSalut due to rises in fees, service procurement and hospital medication costs for outpatient use, as well as expenses recorded in the accounts of previous years. Increases were also noted in the costs of ICS supplies and social agreements.

Interest and expenditures on debt formalisation grew by 35.9%. In terms of cash status, measures implemented by the State to limit the cost of FLA related debt by reducing the interest rate from 1% to 0% ended, leading to higher interest costs. It is also necessary to take into account the increase in the Government of Catalonia’s total debt volume.

Current transfers increased by 5.6% compared to 2016. The most significant increase was found in pharmacy expenses. Social benefits for families, expenditures on educational agreements and transfers to universities also rose in order to incorporate salary increases and the partial return of extra payments. In other areas, transfers to regional educational councils to finance transport, dining and school services increased, while the Governance branch saw an increase in the PUOSC.

Real estate investment rose by 5.9%. In addition, total capital transfers fell by 15.6% compared to 2016, with differences varying according to particular entries and entities.

In order to analyse the real evolution of expenses across both years, adjusted expenses in accrual terms are shown below. This adjustment comprises, on the one hand, adding expenditures not yet recorded (for future years), and on the other excluding the expenditures recorded during the year from previous financial years. Overall, accrued expense rose by 3.7% in 2017. Therefore, it was less than the increase in liabilities recognised this year. The category of financial expenses in terms of accrual grew by 4.6%, a rate well below the growth of the recognised liabilities, as a result of adjusting the application of the 0% interest rate to the FLA transactions. Growth in terms of earnings was lower than in the case of the liabilities recognized in the chapters of the purchase of goods and services, with an increase of 2.7%, and of the current transfers, with an increase of 4.6%. Meanwhile, real investment grew by a higher rate of 27.2%.

130 Nota de Conjuntura Econòmica. 100 July 2018

Adjusted non-financial expenses of the administrative public sector of the Catalan Government. (Millions of euros) Change % change 2017 2016/2017 2016/2017 Personnel expenses 7,465 299 4.2 Purchase of goods and services 8,346 216 2.7

Financial expenses 826 36 4.6

Current transfers 7,699 337 4.6

Contingency fund 0 -3 -100.0 Real investment 477 102 27.2 Capital transfers 531 -78 -12.8 Non-financial expenditure 25,343 909 3.7 Source: General Comptroller of the Catalan Government.

With regard to financial expenses, the variation in financial assets decreased by 0.6%, as a counter-effect to decreases and increases in a diverse range of transactions. Financial liabilities decreased by 15.1% due to changes in the debt and loan forgiveness schedule, and owing to a decrease in the public deficit.

Expenditure for financial operations of administrative public sector of the Catalan Government. Recognized liabilities (Millions of euros) Change % change 2017 2016/2017 2016/2017

Financial assets 746 -5 -0.6

Financial liabilities 5,207 -925 -15.1 Expenditure for financial operations 5,953 -929 -13.5 Source: General Comptroller of the Catalan Government.

8.2. The local public sector

In 2017, non-financial revenues from the budgets of local authorities increased by 4.1%

Local public sector accounts in Catalonia include local authorities, provincial councils, county councils, Barcelona Metropolitan Area, associations of local governments and bodies governing areas smaller than municipalities.

131 Nota de Conjuntura Econòmica. 100 July 2018

In 2017, the consolidated non-financial revenue of the local public sector stood at 10.799 billion euros, a figure 4.1% higher than in 2016. Local authorities, which manage the majority of local public sector funds, increased budgeted non-financial revenue by 5%. Counties increased their revenue by 11.2%, while provincial councils and the Barcelona Metropolitan Area recorded stable situations. The increase in the consolidated total is can essentially be explained by a 4.1% rise in direct taxes. This chapter accounted for 36.6% of total revenue. Current transfers, which accounted for 33% of the funds, also presented an increase (from 3.7%, in this case).

In 2017, the budgeted financial revenue from the local public sector increased by 30% to 925 million euros.

Revenue of the local public sector of Catalonia. 2017 budget (Millions of euros)

% change 2017 % share 2016/2017 Direct taxes 4,285 36.6 4.1

Indirect taxes 285 2.4 5.7

Taxes and other income 1,987 16.9 4.1

Current transfers 3,868 33.0 3.7 Property incomes 176 1.5 -9.0 Disposal of real investments 518 4.4 63.7 Capital transfers 1,460 12.5 20.3 Non-financial revenue 10,799 92.1 4.1 Financial assets 224 1.9 28.6 Financial liabilities 701 6.0 30.5 Financial revenue 925 7.9 30.0

Total revenue 11,724 100.0 5.8

Source: Spanish Ministry of Finance and Public Administrations.

Non-financial budget expenditures increased by 7.3%

Non-financial expenditures budgeted by the local public sector in 2017 stood at 10.624 billion euros and were 7.3% higher than the previous year. Likewise, financial expenses budgeted in 2016 came to 1.057 billion euros and remained for the most part stable.

County councils presented the most intense growth of non-financial expenditures, recording a spending increase of 11.5%. For their part, expenditure by local authorities increased by 8.1%. In contrast, the recognised liabilities of Barcelona Metropolitan Area experienced a slight reduction.

132 Nota de Conjuntura Econòmica. 100 July 2018

The chapter on spending on goods and services, which accounts for 35% of total spending, increased by 5.4%. Staff costs, which account for 28.7% of the total, increased by 2.4%, and current transfers grew by 8%. Alternately, interest expenditures continued to fall, decreasing by 23.4%. Real investments grew by 38.4%, and capital transfers decreased by 23.6%.

Expenditure of the local public sector of Catalonia. 2017 budget (Millions of euros) % change 2017 % share 2016/2017 Personnel expenses 3,354 28.7 2.4 Purchase of goods and services 4,086 35.0 5.4 Financial expenses 103 0.9 -23.4 Current transfers 1,629 13.9 8.0 Contingency fund 58 0.5 16.7

Real investment 1,318 11.3 38.4

Capital transfers 76 0.7 -23.6

Non-financial expenditure 10,624 91.0 7.3 Financial assets 252 2.2 16.8 Financial liabilities 804 6.9 -3.7 Financial expenditure 1,057 9.0 0.5 Total expenditure 11,681 100.0 6.7

Source: Spanish Ministry of Finance and Public Administrations.

8.3. Central Government in Catalonia

The recovery of employment and consumption has increased the revenue collected by the Spanish Tax Agency (AEAT)

In 2017, the revenue received by the Catalan government after its collection by the Spanish Tax Agency (AEAT) came to 38.672 billion euros, representing an increase of 2.2%. This rise in tax revenue for Catalonia exceeded the average for all autonomous communities, corporate taxes being an exception to this trend. Percentage-wise, Catalonia collected 20.4% of the regionally-based total.

Personal income tax collection rose by 7.4% in Catalonia as a result of increased wage retentions, higher employment rates and net tax amounts from the 2016 tax year. Corporate tax revenue decreased by 17.8%. In this section, it is necessary to take into account the effect of

133 Nota de Conjuntura Econòmica. 100 July 2018 some companies changing their tax domicile to other autonomous communities near the end of the year. VAT collection increased by 2.6%, despite the change in the system of administering the tax, which shifted revenue from 2017 to the following year. In addition, excise tax revenue rose by 6.9% in Catalonia.

Tax Revenue of the Tax Agency 2017 % change 2016/2017 (Millions of % Catalonia / Total euros) total regional Catalonia regional Income tax 15,459 20.9 7.41 6.6

Corporation tax 3,770 16.3 -17.8 -6.8

VAT 15,814 24.9 2.6 1.2

Consumption taxes 1,469 7.2 6.9 2.2 Other taxes 2,160 23.7 5.0 4.1 Total 38,672 20.4 2.2 4.2 Source: Tax Agency.

Investment in Catalonia under the 2018 General State Budgets accounted for 13.4% of the regionally-based total

The Central Government’s regionally-based investments in Catalonia in the draft law on the General State Budgets for 2018 amount to 1.35 billion euros. This figure accounts for 13.2% of the total regionally- based investments, a percentage much lower than what one would expect given Catalonia’s importance to Spain in both economic and human terms, that is to say, in terms of both GDP (19.2%) and population share (16.3%). Investments planned for 2018, both in Catalonia and across all regions, grew by 17.4% compared to the 2017 budgets.

Investment of the General State Budget (Millions of euros) % change 2017 2018 (1) 2017/2018 Catalonia 1,150 1,350 17.4 Total regional allocation 8,728 10,243 17.4 Total 12,858 14,823 15.3 % Catalonia/total regional allocation 13.2 13.2

(1) The 2018 data belongs to the General Budget Bill of the State.

Source: General State Budget.

Some 82.5% of the investment planned in the draft law on the General State Budgets are from state companies, while 15.8% correspond to ministries and agencies in autonomous communities. Investments

134 Nota de Conjuntura Econòmica. 100 July 2018 planned for the Social Security system have a residual role. Investment planned by state companies in Catalonia accounts for 16.9% of the regionally-based total, while investment by ministries and autonomous community agencies account for just 6.2%.

Investment of the General State Budget in Catalonia. 2018 (1) (Millions of euros) % Catalonia / 2018 total Ministries and autonomous organizations 212.7 6.2

Social Security system 23.1 10.4

Public companies 1,113.7 16.9

Total 1,349.6 13.2

(1) The 2018 data belongs to the General Budget Bill of the State. Source: general budgets of the State and Social Security.

In recent years, the investment value of the General State Budgets Catalonia reached its high point in 2009 and fell to its lowest point in 2014. While 2018 once again shows a growth trend, it still accounts for only 35.6% of the budgeted investment figure of 2009. The budgeted investment in Catalonia’s share of the State’s regionally-based total investment fell from a maximum of 15.2% in 2009 and 2010 to 9.5% in 2015, the lowest figure seen in recent years. In 2018, this figure stood at 13.2%.

Investment evolution of the General State Budget (1)

4,000 18

3,500 16

14 3,000 12 2,500 10 2,000 %

MEUR 8 1,500 6

1,000 4

500 2

0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

State investments in Catalonia (left axis)

% of the total autonomous communities (right axis)

(1) Includes ministries and autonomous organizations, Social Security system and public companies. The 2017 data belongs to the General Budget Bill of the State.

Source: General State Budget.

135 Nota de Conjuntura Econòmica. 100 July 2018

Investment in Catalonia from the General State Budgets accounted for 12.6% of the regionally-based total in 2017

Investment budget estimates may be changed significantly during implementation. Therefore, in addition to analysing budgeted investments, it is also useful to examine the investments made.

In 2017, the level of implementation of regional investments by the State (excluding Social Security) was 83.9%. Investments in Catalonia totalled 902 million euros, representing 12.6% of the regionally-based total. This implies that 81% of the planned budgeted amount was settled.

During the process of budget implementation, a portion of investments not initially assigned to any specific region was distributed at the autonomous community level. Thus, the implemented investments of ministries and agencies were higher than those budgeted, whereas the implementation of State company investments (of greater volume) was lower.

Outturn investment of ministries, autonomous organizations and public companies in 2017 (Millions of euros) Catalonia % execution

% about the Total 2017 regionalized total Catalonia regionalized Ministries and autonomous 220 6.0 106.1 125.4 organizations Public companies 682 19.4 75.2 62.5 Total 902 12.6 81.0 83.9

Source: General Comptroller of the General Administration of the State.

136 Nota de Conjuntura Econòmica. 100 July 2018

Box 6. Gross disposable household income in the counties and other territorial units

Figures on household income reveal the gross disposable income of the resident population in each different territory. The main part of this income is generated by production activity, which may take place in the same county as the residence, or not. This income from labour and capital is known as primary income. To calculate gross disposable household income (GDHI), we need to add to these resources the result (positive or negative) of the distribution process that derives, basically, from the public sector. Accordingly, the resulting GDHI is the figure that shows the available resources of the families in each territory, once flows of social benefits (in cash) have been included, along with payments of direct taxes and social contributions payable from family income. For this reason, the distribution of GDHI can vary substantially compared to the distribution of GDP. Factors that affect this include occupational mobility between counties, the employment situation of residents, age, social benefits received, the amount of direct taxes paid and so on.

Idescat calculates GDHI for the counties based on information that INE compiles on the GDHI in Catalonia. Besides figures on the counties, Idescat also provides data on GDHI by area in the Territorial Plan, by municipality with more than 5,000 inhabitants, and by county capital. The table below shows the evolution of GDHI and GDHI per head of county districts and territorial areas between 2011 and 2015, as well as noting the most significant data at municipal level. Previous to this, consideration is given to the data on these figures for Catalonia as a whole, from which information is obtained through the household income account.

Gross disposable household income in Catalonia

In 2015, the GDHI of Catalonia grew by 2.1% at current prices, though GDHI per head increased less (1.8%) due to rising population. Particularly notable among the main components is the 5.9% growth of salaried worker remunerations, which reflects the improvement in the

137 Nota de Conjuntura Econòmica. 100 July 2018

labour market in 2014 (year-on-year was 1.4% the previous year). The gross operating surplus, which had fallen by 1.3% year-on-year in 2014, grew by 0.1% the following years. In turn, net property income fell by 15.8%, mainly due to interest rates. In total, primary income increased by 2.8% in 2015 (compared to growth of 1.9% year-on-year in 2014).

The household income account shows that, in 2015, primary income generated in Catalonia was 11.0% higher than the gross income that families finally received after the distribution process. Among the main components of this redistribution, social benefits fell by 1.7%, while current transfers grew by between 2.7% and 2.8%, both in resource and use flows. Finally, direct taxes on income and equity decreased slightly (-0.3%), and social contributions increased (2.5%). Overall, gross disposable household income grew by 2.1% in 2015, consolidating the upturn that had begun in the previous year.

Gross disposable household income in Catalonia

% variation % variation Million euros % s/GDHI 2014/2015 2011/2015 Primary income account Resources Employee salaries 99,373 79.5 5.9 -1.4 Resources Gross operating surplus 30,198 24.1 0.1 -3.4 Resources Net revenue from property 9,265 7.4 -15.8 14.3

Primary income (total) 138,835 111.0 2.8 -1.0

Secondary distribution of income account Resources Social benefits 32,166 25.7 -1.7 0.0 Resources Current transfers 7,028 5.6 2.7 -8.0 Uses Direct taxes on income and equity -17,248 -13.8 -0.3 3.4

Uses Social Security payments -27,169 -21.7 2.5 -4.4

Uses Other current transfers -8,561 -6.8 2.8 -9.3 Gross disposable household 125,050 100.0 2.1 -0.3 Source: INE.

Over the 2011-2015 period as a whole, household GDHI remained relatively stable, decreasing by only 0.3% (and growing by 0.6% in terms of per capita income). The main changes in this period include, particularly, the downturn in the wages of salaried employees (-1.4%) and the slump in social security contributions (-4.4%) due to the sharp decline in employment. Social benefits remained stable, and direct taxes on income and wealth grew by 3.4%.

138 Nota de Conjuntura Econòmica. 100 July 2018

Evolution of GDHI and GDHI per head in territorial areas and counties

In 2015, GDHI grew in most territorial areas compared to the previous year; GDHI fell only in Terres de l’Ebre, the area around the River Ebro in Catalonia, and Alt Pirineu i Aran, the High Pyrenees and Aran. This pattern as behaviour is identical to that observed in 2014. Population fell everywhere, except in Barcelona Metropolitan Area, Camp de Tarragona and in the counties of Girona. However, the greatest population drop was seen in Ponent. Accordingly, the results for per capita GDHI were positive in all areas except Alt Pirineu i Aran.

At county scale, GDHI increased in 2015 above the average for Catalonia (2.1%) in Vallès Oriental (4.0%), Garraf (3.8%), Baix Llobregat (3.7%), Vallès Occidental (3.6%), Gironès (3.4%), Bages (2.9%), Anoia (2.7%) and Maresme (2.3%). Regarding GDHI per head, Garraf and Vallès Oriental were the counties with the largest growth (3.8%), despite the fact that the population of these counties had increased only slightly (by 0.1% and 0.2%, respectively). In terms of per capita income, Vallès Occidental grew by 3.6%, and Gironès and Bages by 3.2%. In the counties where GDHI fell most in the most pronounced fashion, we should mention Alta Ribagorça (-4.2%), Cerdanya (-4.1%) and Terra Alta (-3.9%). As regards per capita income, these three countries are also where GDHI fell most notably, along with Pallars Jussà and Conca de Barberà.

As regards municipalities, in 2015 Sant Fruitós de Bages led the field in GDHI growth, with an increase of 38.1% compared to the previous year. Sant Fruitós was followed by Castelldefels (11.7%) and Matadepera (9.6%). The municipalities where GDHI fell most sharply in 2015 were Canovelles (-4.8%), Montblanc (-4.1%) and Sallent (- 3.8%). In terms of GDHI per head the municipalities with the highest per capita income were Sant Just Desvern (25.7 thousand euros) and Matadepera (25.4 thousand euros). Castelló d’Empúries (10.2 thousand euros) and Lloret de Mar (10.4 thousand euros) were the two municipalities with the lowest per capita income.

Observing the figures for the 2011-2015 period, it is noted that there was no area that did not record GDHI growth in 2014. In 2015, GDHI grew by 0.6% in Barcelona Metropolitan Area, but growth did not occur in any other area. In Alt Pirineu i Aran, GDHI fell by 9.4% over the entire 2011-2015 period, and the decrease in Terres de l’Ebre was 4.8%. Camp de Tarragona also registered a large drop in GDHI (3.0%). In terms of per capita income, the downward trend was less pronounced. The areas worst affected by falling GDHI were Alt Pirineu i Aran (-4.8%), Camp de Tarragona (-2.0%) and Terres de l’Ebre

139 Nota de Conjuntura Econòmica. 100 July 2018

(-0.8%). On the other hand, two areas per capita income increased in two areas: Barcelona Metropolitan Area (1.1%) and the central counties (0.6%).

The trend followed in the counties over the 2011-2015 was the same as that seen in the territorial areas, with growth in certain counties that was not observed in the 2011-2014 period. A particularly outstanding case is Baix Llobregat county, where GDHI grew by 3.5% over the 2011-2015 period despite population stagnation (-0.1%). Thanks to this dynamic, per capita income grew more strongly in Baix Llobregat than in any other county (3.6%). Vallès Oriental (2.8%), Vallès Occidental (2.2%) and Osona (1.8%) complete the group with the highest GDHI growth although, if number of inhabitants is also considered, then Garraf and Selva counties also stand out, with GDHI per head growth of 2.5% and 2.3%, respectively. The fact that population fell in both these two counties (by 1.2% in Garraf and 2.3% in Selva) helps to explain this phenomenon. At the other extreme is Cerdanya county, which suffered a 12.1% fall in GDHI accompanied by large population decrease (-4.9%) resulting in a 7.5 % decrease in GDHI per head. The fact that imputed rent is taken into account, included in calculations as household income only if the property is the main place of residence and not a second home, also helps to explain this. Alta Ribagorça (-11.9%), Pallars Sobirà (-10.3%) and Alt Urgell (-9.8%) also head the list of county where GDHI shrank most in absolute terms. Taking population evolution into account, Tarragonès was the third county where GDHI fell most in terms of per capita income, as to a relatively significant decline in absolute terms (-4.7%) was added an increase in the population (0.5%), resulting in a GDHI per head decrease of 5.2%.

As regards the municipalities, Sant Fruitós de Bages also led the way in GDHI growth over the 2011-2015 (26.9%). In this, Sant Fruitós was followed by Tona (17.6%) and Celrà (13.3%). The municipalities with the largest declines in GDHI were Cervera (-11.1%) and Seu d’Urgell (-11.0%).

GDHI evolution compared to the average in Catalonia

Over the 2011-2015 period, household income and population evolved differently, moving towards a certain polarisation in the relative positions of the territorial demarcations compared to the average for Catalonia. Indexed GDHI per head in Barcelona Metropolitan Area increased by five decimal points, and the relative position of the central regions improved by two decimal points while that of the remaining areas worsened. Indexed GDHI per head in Camp de Tarragona fell

140 Nota de Conjuntura Econòmica. 100 July 2018

from 89.9 (that is to say, 10.1% below the average for Catalonia) in 2011 to 87.5 in 2015. The most extreme case was Terres de l'Ebre, with a decrease of 4.7 percentage points over the whole period, as GDHI per head in the county was 11.9% lower than the average for Catalonia as a whole in 2011 while, by 2015, this figure had reached 16.6%.

At county level, only three counties had an indexed GDHI per head higher than the Catalan average in 2015: Barcelonès (13.3% above the average), Baix Llobregat (3.6%) and Vallès Occidental (1.4%). Baix Llobregat is a particularly outstanding case in point: in 2011, indexed GDHI per head in the county was practically level with the Catalan average (100.8), while the figure rose to 103.6 in 2015. Another interesting case is Ripollès county, which was 6 decimal points above the Catalan average in 2011 and 1.9 points below in 2015. Finally, another county where indexed GDHI per head fell sharply was Cerdanya, which registered a decline of 7 points (from 87.5 in 2011 to 80.5 in 2015). This county, home to many second homes and mountain tourism activities, nevertheless occupies one of the lowest places in the ranking as regards gross disposable income. This is due, in part, to imputed rent, which imputes income to people who live in homes they own, even if they are paying a mortgage. If they do not live in the home, the rent is not imputed so that, therefore, the classification of “second home” is one of the factors explaining the fact that gross disposable income is below the Catalan average in Cerdanya county.

In the municipal sphere (among townships with population of more than 5,000 and county towns), Sant Just Desvern, Matadepera and Sant Fruitós de Bages are the municipalities with the highest GDHI per head compared to the average for Catalonia as a whole, with indexed values of 153.1, 151.3 and 146.8, respectively, and intense growth over the 2011-2015 period. We should also note that the fact that Cabrils, Alella, Tiana and Teià also occupy leading positions in the ranking means that four townships in Maresme county all enjoyed considerable GDHI growth. Another important change is also observed: while, in 2014, of the ten municipalities with the lowest GDHI per head, seven were from the Terres de l’Ebre region (Sant Carles de la Ràpita, Amposta, Deltebre, Alcanar, L’Ametlla de Mar, La Sénia and Ulldecona), in 2017 there were only two (Ulldecona and La Sénia). Castelló d’Empúries is the municipality with the lowest indexed GDHI per head (60.6, that is to say 60.6% below the average for Catalonia. Castelló d’Empúries is followed by Lloret de Mar (62.1), Ulldecona (66.6) and Salt (66.7).

141 Nota de Conjuntura Econòmica. 100 July 2018

Composition of GDHI by component

Regarding the relative weight of GDHI components, there are notable differences at territorial scale. In 2015, Camp de Tarragona was the area where salaried remuneration accounted for the greatest weight in GDHI (83.3% in 2015). On the other hand, Alt Pirineu i Aran was the area where this component was least important (66.5% of the total). We should also mention that, generally speaking, the weight of salaries paid has grown compared to 2014, from 76.7% to 79.5% in 2015. Tarragonès is the area where salaried remuneration accounts for the greatest relative weight in GDHI (85.9%), followed by Gironès (85.8%) and Aran (85.0%). Terra Alta continues to rank as the county where the remuneration of salaried workers is lowest, although its relative weight has grown, rising from 40.3% in 2014 to 47.6% in 2015. However, it is precisely in Terra Alta county that the gross operating surplus has the highest relative weight (accounting for 39.0% of GDHI). By territorial area, the gross operating surplus has the greatest relative weight in Alt Pirineu i Aran (32.2%).

Regarding social benefits, although there are no significant differences between areas, they are most important relatively in Berguedà, where they represent 37.2% of GDHI (1.3 decimal points less than in 2014). Cerdanya, on the other hand, is the county where social benefits have the least weight (19.7%).

As for uses, social contributions should be mentioned. Although there are no notable differences between areas, they account for significant relative weight in Aran, where they account for 25.9% of GDHI, 10.9 percentage points more than in Terra Alta (15.0%). In the case of taxes, the highest relative weight of GDHI is also found in Aran (16.1%), while Terra Alta is at the opposite end of the scale (-6.4% of GDHI).

Gross disposable household income (GDHI). 2010 base % of variation 2013-2014 % of variation 2011-2014 Catalonia =100

GDHI per GDHI per Popu- GDHI per Popu- GDHI per inhabitant inhabitant County GDHI lation inhabitant GDHI lation inhabitant 2011 2015 Àmbit metropolità de Barcelona 2.6 0.3 2.3 0.6 -0.6 1.1 106.2 106.7 Baix Llobregat 3.7 0.7 3.0 3.5 -0.1 3.6 100.8 103.6

Barcelonès 1.7 0.1 1.6 -1.1 -2.1 1.1 113.4 113.3

Maresme 2.3 0.4 1.9 -0.6 0.1 -0.6 98.8 97.4 Vallès Occidental 3.6 0.0 3.6 2.2 0.4 1.8 100.5 101.4 Vallès Oriental 4.0 0.2 3.8 2.8 0.3 2.5 97.0 98.5 (continued on next page)

142 Nota de Conjuntura Econòmica. 100 July 2018

(continuation) % of variation 2013-2014 % of variation 2011-2014 Catalonia =100

GDHI per GDHI per Popu- GDHI per Popu- GDHI per inhabitant inhabitant County GDHI lation inhabitant GDHI lation inhabitant 2011 2015 Comarques gironines 1.4 0.0 1.4 -1.6 -1.6 0.0 85.8 85.1

Alt Empordà 1.1 -0.5 1.6 -2.5 -1.8 -0.8 77.2 76.0

Baix Empordà 0.2 0.2 0.0 -4.9 -1.4 -3.6 83.3 79.9 Garrotxa 0.7 0.0 0.6 -1.0 -0.4 -0.6 96.7 95.9 Gironès 3.4 0.2 3.2 0.5 -0.1 0.6 94.3 94.6 Pla de l'Estany 0.6 0.6 0.0 -1.6 0.9 -2.5 96.3 93.6 Ripollès -2.3 -1.1 -1.2 -6.1 -4.4 -1.8 100.6 98.1

S elva 1.4 -0.9 2.3 0.0 -2.3 2.3 77.8 79.2 Camp de Tarragona 0.9 0.2 0.7 -3.0 -1.0 -2.0 89.9 87.5 Alt Camp 0.2 -0.5 0.7 0.0 -2.0 2.0 89.2 90.3 Baix Camp 1.6 -0.5 2.1 -1.0 -1.7 0.7 86.4 86.3 Conca de Barberà -3.3 -0.7 -2.6 -4.5 -3.9 -0.7 90.4 89.1

Priorat -1.7 -1.1 -0.7 -3.7 -5.0 1.4 86.6 87.6

Tarragonès 1.0 0.3 0.7 -4.7 0.5 -5.2 92.8 87.7 Terres de l'Ebre -1.0 -0.3 -0.8 -4.8 -4.1 -0.8 78.5 77.6 Baix Ebre -1.3 -0.5 -0.8 -4.8 -3.3 -1.5 77.6 76.3 Montsià 0.5 -1.1 1.7 -3.7 -4.5 0.8 72.8 72.9

Ribera d'Ebre -2.6 -1.3 -1.3 -6.6 -4.8 -1.9 92.6 90.1

Terra Alta -3.9 -1.4 -2.6 -6.2 -6.9 0.7 89.6 89.9 Ponent 0.2 -0.4 0.7 -1.6 -1.6 0.0 90.3 89.8 Garrigues -2.0 -1.4 -0.7 -4.0 -4.7 0.7 90.5 90.3 Noguera -1.3 -0.6 -0.7 -1.8 -3.1 1.4 85.5 86.3

Pla d'Urgell 1.0 0.3 0.7 0.0 -0.7 0.7 86.9 87.0

Segarra -0.3 -0.3 0.0 -3.1 -3.1 0.0 87.3 87.0 Segrià 0.9 -0.4 1.3 -1.2 -1.2 0.0 92.9 92.0 Urgell -1.0 -0.3 -0.7 -2.5 -2.5 0.0 85.5 85.2 Comarques centrals 1.8 -0.1 1.9 -0.7 -1.3 0.6 96.3 96.5 Bages 2.9 -0.3 3.2 -1.6 -2.2 0.6 97.2 96.8 Berguedà -1.3 -0.7 -0.6 -4.2 -5.4 1.2 97.2 97.6

Moianès 1.0 1.0 0.0 -3.7 0.6 -4.3 98.4 93.5

Osona 1.6 0.4 1.2 1.8 -0.1 1.9 95.6 97.0 Solsonès -0.9 -0.3 -0.7 -3.2 -2.5 -0.7 88.2 86.9 (continued on next page)

143 Nota de Conjuntura Econòmica. 100 July 2018

(continuation) % of variation 2013-2014 % of variation 2011-2014 Catalonia =100

GDHI per GDHI per Popu- GDHI per Popu- GDHI per inhabitant inhabitant County GDHI lation inhabitant GDHI lation inhabitant 2011 2015 Alt Pirineu i Aran -3.1 -0.3 -2.8 -9.4 -4.9 -4.8 88.1 83.4 Alt Urgell -2.7 -0.5 -2.2 -9.8 -3.7 -6.3 84.8 79.3

Alta Ribagorça -4.2 -0.4 -3.8 -11.9 -7.3 -5.0 96.4 91.3

Aran -1.3 -0.6 -0.7 -5.0 -2.9 -2.1 85.2 82.7 Cerdanya -4.1 -0.5 -3.6 -12.1 -4.9 -7.5 87.5 80.5 Pallars Jussà -3.1 -0.5 -2.6 -7.1 -6.5 -0.7 91.3 89.6 Pallars Sobirà -3.6 -1.6 -2.0 -10.3 -6.0 -4.5 92.0 87.3 Penedès 2.3 -0.3 2.7 -1.3 -0.7 -0.6 91.9 90.8

Alt penedès 0.6 0.0 0.6 -2.2 -0.4 -1.8 97.7 94.9 Anoia 2.7 0.0 2.8 -1.8 -1.1 -0.7 89.8 88.5 Baix Penedès 1.4 -0.1 1.5 -4.0 -1.8 -2.2 81.7 79.0 Garraf 3.8 0.1 3.8 1.3 -1.2 2.5 96.6 97.9 Catalonia 2.1 0.3 1.8 -0.3 -0.9 0.6 100.0 100.0

Source: Idescat.

Gross disposable household income in Catalonia. Year 2015 % of every component of the total of GDHI. Resources (%) Uses (%) Gross Social Employee operating Social Security salaries surplus benefits payments Taxes Others Àmbit metropolità de Barcelona 80.3 24.0 25.5 -21.8 -14.3 6.3 Baix Llobregat 83.8 24.2 24.0 -22.2 -13.3 3.4

Barcelonès 77.4 23.6 27.0 -21.2 -15.3 8.5

Maresme 80.3 26.6 24.3 -22.3 -14.4 5.4 Vallès Occidental 84.3 23.5 24.1 -22.7 -13.5 4.2 Vallès Oriental 81.5 24.6 23.6 -22.0 -12.6 4.9 Comarques gironines 79.7 25.1 24.9 -22.4 -13.3 6.1

Alt Empordà 78.7 28.2 23.8 -23.3 -14.2 6.8

Baix Empordà 75.6 29.0 24.9 -22.0 -14.6 7.1 Garrotxa 76.6 20.4 27.7 -20.8 -11.8 7.9 Gironès 85.8 22.5 23.0 -23.4 -13.9 6.0 Pla de l'Estany 81.7 24.6 22.3 -22.4 -12.5 6.3 Ripollès 69.7 21.8 33.8 -19.5 -11.9 6.0

S elva 78.5 25.4 25.9 -22.2 -11.8 4.2 (continued on next page)

144 Nota de Conjuntura Econòmica. 100 July 2018

(continuation) Resources (%) Uses (%) Gross Social Employee operating Social Security salaries surplus benefits payments Taxes Others Camp de Tarragona 83.3 22.5 25.6 -22.5 -13.2 4.3

Alt Camp 77.3 22.9 26.0 -21.1 -11.2 6.0

Terres de l'Ebre 67.7 26.6 29.8 -19.7 -11.0 6.6 Baix Ebre 71.0 24.6 30.4 -20.5 -12.7 7.1 Montsià 66.1 27.3 29.3 -19.6 -9.6 6.5 Ribera d'Ebre 72.0 24.1 29.9 -19.9 -11.9 5.8

Terra Alta 47.6 39.0 29.4 -15.0 -6.4 5.4

Ponent 73.4 26.2 24.6 -20.8 -11.1 7.6 Garrigues 55.2 33.8 27.1 -16.4 -8.1 8.4 Noguera 61.9 30.9 25.5 -18.6 -9.2 9.4 Pla d'Urgell 71.9 27.9 22.7 -20.8 -10.1 8.4 Segarra 76.6 26.6 23.0 -22.6 -11.5 7.8

Segrià 77.7 24.4 24.5 -21.6 -11.9 7.0

Urgell 70.0 25.7 26.6 -20.1 -10.5 8.4 Comarques centrals 74.7 21.1 29.3 -20.4 -12.1 7.3 Bages 74.7 19.0 30.9 -20.0 -13.0 8.4 Berguedà 61.3 21.4 37.2 -17.1 -9.9 7.1

Moianès 76.0 26.8 24.2 -21.0 -12.6 6.7

Osona 78.9 22.6 26.0 -21.7 -11.8 6.1 Solsonès 65.2 28.7 26.1 -18.8 -9.8 8.6 Alt Pirineu i Aran 66.5 32.2 24.6 -19.6 -12.0 8.3 Alt Urgell 62.6 29.6 27.4 -17.8 -10.2 8.4 Alta Ribagorça 64.4 33.2 23.7 -18.3 -11.0 8.0

Aran 85.0 30.4 20.3 -25.9 -16.1 6.3

Cerdanya 69.4 37.0 19.7 -21.0 -14.2 9.1 Pallars Jussà 58.6 28.9 30.7 -16.9 -10.0 8.7 Pallars Sobirà 61.8 35.9 22.6 -18.4 -10.2 8.2 Penedès 79.8 25.4 26.1 -21.9 -13.3 3.9

Alt penedès 81.3 23.5 25.4 -22.1 -12.1 4.0

Anoia 79.5 22.4 27.6 -21.7 -11.7 3.9 Baix Penedès 75.7 27.3 29.3 -21.1 -13.6 2.4 Garraf 81.3 27.8 23.8 -22.4 -15.1 4.6 Catalonia 79.5 24.1 25.7 -21.7 -13.8 6.2 Note: territorialised statistical information of the GDHI and the main components of the houlsehold incomes is provided by Idescat. In this table, the net balance of the non-territorialised components are grouped in section "others". Source: Idescat

145 Nota de Conjuntura Econòmica. 100 July 2018

Gross disposable household income per inhabitant in Catalan counties. 2015. Indexed value Catalunya=100

Source: Idescat.

146 Nota de Conjuntura Econòmica. 100 July 2018

Box 7.The Survey on Living Conditions

Average income of the population and households rises, but inequalities increase

The Survey on Living Conditions (Enquesta de Condicions de Vida, ECV) is an annual statistical operation, harmonised at European level, whose objective is to provide information on economic aspects of households, such as income and the distribution of this income, and on aspects related to living conditions and social exclusion.

Net incomes by households, by person and by unit of consumption. 2017

Net average incomes (in euros) % variation 2016/2017 By By unit of By By unit of house- By consump- house- By consump- holds person tion holds person tion Without dependent children* 27,313 14,944 19,568 -1.5 -1.4 -1.2 Single person 16,616 16,616 16,616 -6.7 -6.7 -6.7 Two adults without dependent children 30,209 15,105 20,140 1.7 1.8 1.7 With dependent children 44,647 13,513 20,744 -3.2 -2.0 -2.2

With dependent children* 38,937 10,609 18,370 2.8 2.2 2.3 Single person with one or more dependent 21,393 9,464 13,793 -7.0 -5.7 -8.5 children Two adults with one or more dependent 39,915 10,949 19,183 2.0 1.8 1.8 children

Other households with dependent children 46,637 9,846 17,148 6.9 8.0 9.1 No information - 12,833 19,734 - - -

Total 31,411 12,712 18,957 0.2 0.4 0.7 Source: Idescat. Note: Average incomes by person is obtained by dividing the net households incomes by the number of household members. On the other hand, income per household consumption unit is calculated to take into account economies of scale in households. It is obtained by dividing total household income by the number of consumption units. These are calculated using the modified OECD scale, w hich assigns a w eight of 1 to the first adult, a w eight of 0.5 to remaining adults and a w eight of 0.3 to children under 14 years of age.

The figures from the latest ECV date back to 2017, but the information compiled refers to the previous year, 2016, when the economy and employment had already been giving signs of recovering growth rates

147 Nota de Conjuntura Econòmica. 100 July 2018

for the past two years after a long period of intense adjustment due to the crisis. This explains the improvement in average household income observed in the last three editions of the ECV, although in this last edition the improvement was not so significant.

More specifically, the last survey shows growth of 0.4% in average income per head (compared to 3.1% the previous year) and 0.2% in the case of household income (compared to 2.2% the previous year).

Despite the improvement in income levels, levels of inequality have worsened. Both the two measures of inequality published by Idescat coincide in showing an increase in inequalities, after two years of reduction: the Gini coefficient increased from 31.4 in the 2016 ECV to 31.8 in the latest edition of the survey. Similarly, the S80/S20 ratio rose from 5.5 to 5.7 over the same period.

Main inequality rates in Catalonia 34 7

33

32 6

20 S 80/S Gini coefficient Gini 31

30 5 2013 2014 2015 2016 2017

Gini coefficient S80/S20

Source: Idescat.

Indicators of monetary poverty and people living in households with low work intensity worsen

One of the basic indicators in the ECV is the level of poverty in households. In Catalonia, two poverty level indicators are published, drawn up INE and Idescat respectively.

The poverty rates compiled by INE for all autonomous communities are based on the state median income threshold (this valuation is the same as that published by Eurostat for communities). For its part, Idescat calculates the poverty rate in Catalonia based on the income threshold of Catalan population as a whole. The figures on poverty in

148 Nota de Conjuntura Econòmica. 100 July 2018

Catalonia obtained are lower in the former case and higher in the latter. In this second case, Idescat data on poverty provide a more precise view of the economic reality of the Catalan population.

The (monetary) poverty rate enables us to identify the population that lives below a certain income threshold. However, monetary income is not the only factor in identifying poverty, especially when comparing different areas and countries. For this reason, in an attempt to identify poverty in a more multidimensional way, the EU and its statistical office, Eurostat, use a broader definition of poverty, one which considers not only monetary poverty but also social exclusion. This second factor – social exclusion – is evaluated according to material deprivation and lack of access to certain goods and services, that is to say, poverty as lack, to which another indicator related to work intensity, is added.

Three indicators are used to calculate poverty defined in this broader fashion. The three are then merged into a single, generic indicator, the benchmark indicator used by the EU, known as the At Risk of Poverty and/or Exclusion (AROPE) rate. The three components from which this indicator is obtained are: 1) the at-risk-of-poverty rate (the share of persons who live below the at-risk-of-poverty threshold, which is set at 60% of median income per consumer unit); 2) the severe material deprivation rate (or SMD rate, which considers the forced lack of certain goods and services); and 3) the share of population living in households with very low work intensity (or LWI rate, an indicator that evaluates work intensity in households). The grouping system for calculating the AROPE rate considers the population that satisfies at least one of its three components.

At Risk of Poverty and/or Exclusion rate (AROPE). Catalonia. 2017 (Percentage of the total population) People who live in households with a very Severe material low work intensity rate Source Poverty risk rate deprivation rate (SMD) (LWO) AROPE rate Catalonia: 20.0 % Catalonia: 5.0 % Catalonia: 8.8 % Catalonia: 23.8 % Idescat Catalan threshold Catalonia: 15.0 % Catalonia: 5.0 % Catalonia: 8.8 % Catalonia: 19.4 % INE and Eurostat Spain: 21.6 % Spain: 5.1 % Spain: 12.8 % Spain: 26.6 % Spanish threshold Source: Idescat, INE and Eurostat.

The table above shows the results for Catalonia, obtained from the two reference thresholds – Catalan and Spanish – and compared with the results for Spain as a whole. In the case of Catalonia, we note that there

149 Nota de Conjuntura Econòmica. 100 July 2018

are two evaluations of the monetary poverty rate, one according to Idescat estimates and another combining the estimates of the INE and Eurostat. On the other hand, the rates of people with SMD and the population with households with LWI, the figures from all three statistical sources coincide. Finally, there are also two different estimates of the AROPE rate in Catalonia, logically enough since this is a combination of the three previously-mentioned rates. The figures for Catalonia obtained from the Spanish threshold are presented only for information purposes, while the analysis that follows focuses on the poverty rates published by Idescat and referring to the income thresholds of the Catalan population.

In 2017, the risk of monetary poverty rate grew by eight decimal points and amounts to 20% of the Catalan population

According to Idescat, the risk of poverty grew in 2017, affecting 20% of the Catalan population. That is to say that, despite the economic recovery, the poverty risk rate continued to grow over the last two years, after a sharp drop reflected in the 2015 edition of the ECV. The Catalan risk of poverty rate is below the Spanish average (21.6%) and above that for EU-28 (17.3% in 2016).

The annual income threshold after which a person enters risk of poverty increased by 0.4% compared to the previous year. As a result, in 2017 the income threshold was 10,096.50 euros per year, and in households with two adults and two children, 21,202.70. b. With regard to these data, we should remember that the poverty threshold establishes a relative poverty risk rate, so that it is possible for a person to be considered poor one year but not the next year, even if their income does not vary from one year to another. It is possible that this is the phenomenon that explains, at least partially, this year’s eight- decimal-point increase in the rate of poverty risk. Due to the 0.4% increase in the threshold, certain specific groups, whose income was previously just above the earlier threshold but did not increase sufficiently are now included and considered to be in a situation of poverty. This is the case of certain groups of pensioners whose pensions have increased at a rate below that of prices and average net income.

Breaking the figures down by age shows a worrying tendency, the high growth rate of poverty risk among children under 16, which stands at 28.5%, only three decimal points below the highest peak in the series (2014) and 8.5 percentage points above the total rate. In the last two editions of the ECV, moreover, monetary poverty levels among people over the age of 64, who traditionally enjoyed a better situation than

150 Nota de Conjuntura Econòmica. 100 July 2018

those in other age groups (resulting in significantly lower poverty risk rates), have grown significantly, converging on poverty levels among the population between the ages of 16 and 64. The current difference is just 3.5 percentage points.

Poverty risk rate by age. Catalonia. 2013-2017 < 16 years 16-24 years 65 years or over Total 2013 27.3 19.8 12.4 19.8

2014 28.8 20.6 14.4 20.9

2015 27.9 18.5 12.1 19.0

2016 24.0 19.0 15.0 19.2 2017 28.5 19.0 15.5 20.0 Source: Idescat.

By household composition, the risk of poverty is greater in households with dependent children (with an at-risk rate of 24.2%) and, especially, in those with one adult and one or more dependent children (35.3%). Despite being so high, the poverty risk rate of this type of household has decreased by 5.1 percentage points in the last year.

At risk of poverty rate by sex and by type of households. Catalonia. 2016-2017 2017 2016

Population Population (thousands) Rate (thousands) Rate Gender Men 778 20.7 749 20.0

Women 694 19.3 657 18.2

Type of households

Without dependent children* 551 15.6 523 14.9

Single person 209 27.6 186 24.7

Two adults without dependent children 202 11.8 239 14.1 Other households without dependent children 140 13.0 98 9.3 With dependent children 909 24.2 881 23.0 One adult with one or more dependent childre 93 35.3 117 40.4 Two adults with one or more dependent child 599 22.3 564 20.1 Other households with dependent children 217 26.8 200 26.9 Non available 13 23.1 -- -- Total 1,472 20.0 1,406 19.2 Source: Idescat. * Dependent children: children under 16 years or betw een 16 and 24 years, but inactive and living w ith at least one parent.

151 Nota de Conjuntura Econòmica. 100 July 2018

On this point, mention should be made of the fact that the 2016 edition of the ECV included new indicators of poverty risk that consider ownership of property as income (considered imputed rent ). In 2017, the inclusion of this imputed rent accounts for the 13.9% increase in the average income of Catalan households, and decreases of 2.4 percentage points in the poverty risk rate and 1.9 percentage points in the AROPE rate. The results of these statistics, taking into account the aforementioned imputed income, improve poverty indicators among groups in which the ownership of property is more widespread; this is the case of those over 65 years of age, whose poverty risk rate falls from 15.5% to 7.8%.

Other data should also be highlighted, some of which are contrast with the poor results obtained in the poverty risk rate. For example, the percentage of the population that state that they find it difficult or very difficult to get to the end of the month has fallen considerably. In fact, throughout the period covered by the ECV (2013-2017), this percentage has decreased significantly. In 2013, (based on figures referring to income in 2012), 15.5% of people stated that they found it very difficult to get to the end of the month, and 21.0%, said they found it difficult. In the last edition of the ECV, these percentages fell by 7.0% and 13.6%, respectively. With regard to changes over the last year, there was a large decrease in the case of persons aged 30-44. In 2016, 14.2% of this group stated that they found it very difficult to get to the end of the month, while in 2017 this figure was 5.7%. On the other hand, among people over 64, 28.2% stated that they found it fairly easy to get to the end of the month in 2016, a figure that rose to 41.1% in 2017.

In 2016, moreover, new questions were included in the survey. These new questions focus on specific aspects concerning the population at risk of social exclusion. The results show that, in 2016, some 6.5% of Catalan households stated that they had requested help from relatives, friends or private or religious organisations for food, clothing or other basic goods, and that this percentage rose to 8.5% in 2017. We also know, for example, that in 2016 1.3% of Catalan households stated that they had been deprived at least once of the supply of some energy source necessary to carry out the everyday activities, a percentage that fell to 0.9% in 2017.

The AROPE rate worsened by 1.3 decimal points due to the increase in the rates of poverty risk and people living in households with very low work intensity

The At-risk-of-poverty-or-exclusion (AROPE) rate complements the

152 Nota de Conjuntura Econòmica. 100 July 2018

poverty risk indicator (which measures relative poverty expressed in monetary terms) and takes into account, in addition to the risk of poverty, the number of people suffering severe material deprivation and the number of people living in households with very low work intensity (LWI). The most recent data shows that, after a very significant decrease in the LWI rate in 2015 and 2016, this rate spiked once more in 2017 to reach the same level as 2015 (8.8%). Despite this upturn, the level remains relatively low and is consistent with data on the recovery of employment. However, the LWI rate does not provide much information about the seasonality and precariousness of the new jobs.

At Risk of Poverty and/or Exclusion rate (AROPE) and its components Catalonia. 2013-2017 People who live in households with a Severe material very low work deprivation rate intensity rate Poverty risk rate (SMD) (LWO) AROPE rate 2013 19.8 6.1 10.8 24.5

2014 20.9 6.3 12.0 26.0

2015 19.0 6.7 8.8 23.5 2016 19.2 5.5 7.2 22.5 2017 20.0 5.0 8.8 23.8

Source: Idescat.

All poverty indicators are lower in Catalonia than in Spain as a whole, but both the risk of monetary poverty and the AROPE rates are higher in Catalonia than the European average

Comparative figures on Spain show that the results in Catalonia are better for all components of the AROPE rate. The most important difference is in the LWI rate (8.8%), which is 4 percentage points below that in Spain (12.8%).

The figures available for EU-28 correspond to 2016 and, accordingly, comparisons are subject to any changes that may have occurred in 2017. The results for Catalonia in 2017 show a monetary poverty risk rate of 20%, a figure that stands higher than the European average rate (17.3% in 2016); The AROPE rate in Catalonia (23.8% in 2017) is also higher than that for EU-28 (23.5% in 2016).

153 Nota de Conjuntura Econòmica. 100 July 2018

At Risk of Poverty and/or Exclusion rate (AROPE) and its components Catalonia, Spain and the European Union. Year 2017 Catalonia Spain EU-28* Poverty risk rate 20.0 21.6 17.3 Severe material deprivation rate (SMD) 5.0 5.1 7.5 People who live in households with a very low work 8.8 12.8 10.5 intensity rate (LWO) AROPE rate 23.8 26.6 23.5

Source: Idescat, INE and Eurostat. * 2016

Catalonia is among the autonomous communities with the lowest at-risk-of-poverty rates, but the improvement is only slight

At-risk-of-poverty rate by autonomous communities. (Years 2014 and 2017)

Extremadura

Ceuta Andalusia Canary Islands

Region of Murcia

Castile-La Mancha Melilla Valencian Community Spain

Balearic Islands

Galicia Cantabria Community of Madrid

Castile-Leon

Catalonia Aragon Principality of Asturias

La Rioja

Basque Country Navarra

2014 2017 0 10 20 30 40 50

Source: INE.

154 Nota de Conjuntura Econòmica. 100 July 2018

According to INE figures, comparing at-risk-of-poverty rates by autonomous community, Catalonia has the sixth-lowest rate. We should remember that, when we compare Catalonia with the autonomous communities, we should do so according to the at-risk-of- poverty rate calculated according to the Spanish income threshold which was, in the case of Catalonia, 15% in 2017.

In order to analyse the evolution of the autonomous communities during the recovery period, the results obtained in the years 2014 and 2017 are shown. These detail income in 2013, when the crisis hit the income of families particularly, and are compared with those for 2016. The poverty risk rate in a good number of the autonomous communities improved. In some, such as Murcia, La Rioja, Castile and Leon and Asturias, the rate improved by more than 4 percentage points. In Catalonia, although the rate fell compared to 2014, the decrease was only slight (by 0.8 decimal points), just above the reduction for Spain as a whole (0.6 decimal points). At the opposite extreme are the autonomous communities where, despite the economic recovery of recent years, the poverty risk rate has increased. In some cases, the rate has risen significantly. These autonomous communities include Extremadura, where the poverty risk rate rose by 5.7%, the Balearic Islands (3.4%) and Galicia (3.3%).

155 Nota de Conjuntura Econòmica. 100 July 2018

9. Economic indicators

Gross domestic product (I) (Million euros)

Annual data 2013 2014 2015 2016 2017 GDP 202,638 207,156 215,722 224,751 234,651 Demand Domestic demand1 176,765 181,006 190,818 196,670 206,123 Private consumption expenditure 110,264 112,671 117,065 120,171 125,650

Government consumption expenditure2 32,251 32,428 34,613 34,956 35,985

Gross capital formation3 34,250 35,907 39,140 41,543 44,488 Equipment goods and others 21,177 22,116 24,108 25,368 26,826 Construction 13,188 13,593 14,263 15,361 16,688

External trade balance1, 4 25,873 26,149 24,904 28,081 28,529

Foreign balance1 13,126 11,479 12,309 13,370 15,217

Exports of goods and service 76,089 78,967 82,728 85,647 92,435

Imports of goods and services 62,963 67,488 70,419 72,277 77,217

1 Trade balance with the rest of Spain 12,747 14,670 12,595 14,711 13,312

Supply

Agriculture 1,993 1,916 1,860 1,987 2,169 Industry 37,665 39,012 41,693 43,515 46,170 Manufactures 31,332 32,982 34,691 36,858 39,047 Construction 9,218 9,059 9,332 9,806 10,422 Services 138,201 140,843 145,018 150,927 156,489

Total Gross Value Added 187,077 190,831 197,902 206,236 215,252

Net taxes on production 15,561 16,325 17,821 18,515 19,400

Gross domestic product 202,638 207,156 215,722 224,751 234,651

Population (at 1st of July) 7,456,391 7,429,303 7,436,560 7,472,291 7,515,315

GDP per inhabitant (euros) 27,176 27,884 29,008 30,078 31,223

1 Contribution to the GDP grow th. 2 Includes the expenditure consumption by non-profit making institutions at the service of households. 3 Includes the stock variation. 4 Includes the foreign trade balance and the trade balance w ith the rest of Spain.

Source: Idescat.

156 Nota de Conjuntura Econòmica. 100 July 2018

Gross domestic product (II) (% annual variation in volume, except indicated cases) Annual data Quarterly data 2017 2017 2017 2017 2018 2014 2015 2016 2017 Q1 Q2 Q3 Q4 Q1 GDP 2.1 3.8 3.6 3.4 3.3 3.3 3.4 3.5 3.4 GDP (Quarterly variation) - - - 0.9 0.9 0.9 0.8 0.8 Demand

Domestic demand1 2.2 4.8 2.7 3.1 2.7 3.2 3.6 2.7 3.1

Private consumption expenditure 1.7 3.7 2.4 2.4 1.8 2.7 3.0 2.0 3.2

Government consumption expenditure2 0.0 5.3 0.9 2.4 1.1 2.5 2.8 3.3 4.0

Gross capital formation3 5.6 8.0 5.2 5.6 6.8 5.3 6.2 3.9 2.0

Equipment goods and others 4.8 7.7 4.4 5.4 7.3 4.5 6.4 3.4 0.2

Construction 4.4 4.4 6.4 5.1 5.9 5.9 4.9 3.9 4.2

1, 4 External trade balance 0.2 -0.4 1.3 0.7 1.0 0.5 0.3 1.1 0.6 1 Foreign balance -0.7 0.4 0.4 1.0 1.5 1.8 -0.2 0.9 0.2

Exports of goods and service 4.8 4.4 4.8 6.3 6.1 7.2 6.0 5.8 4.4 Imports of goods and services 8.0 3.9 4.5 4.4 2.6 3.1 7.7 4.1 4.7

Trade balance with the rest of Spain1 0.9 -0.8 0.9 -0.3 -0.5 -1.3 0.5 0.2 0.4

Supply

Agriculture 0.9 -2.9 6.1 -3.1 0.3 -3.5 -4.9 -4.2 -2.2 Industry 2.8 5.9 5.0 4.9 3.8 4.0 5.2 6.4 5.2

Manufactures 3.6 4.8 6.4 4.6 - - - - -

Construction -1.3 2.3 3.2 4.7 3.8 3.5 5.3 6.4 6.2

Services 1.8 2.7 3.1 2.9 3.1 3.0 2.8 2.6 2.8 Total Gross Value Added 1.9 3.2 3.5 3.3 3.3 3.2 3.4 3.5 3.4 Net taxes on production 5.0 10.9 4.7 3.9 4.0 4.1 4.0 3.5 3.2 Gross domestic product 2.1 3.8 3.6 3.4 3.3 3.3 3.4 3.5 3.4

1 Contribution to the GDP grow th.

2 Includes the expenditure consumption by non-profit making institutions at the service of households. 3 Includes the stock variation. 4 Includes the foreign trade balance and the trade balance w ith the rest of Spain. Source: Idescat.

157 Nota de Conjuntura Econòmica. 100 July 2018

Activity and demand (I) 1 (% annual variation) Industrial Industrial Consumption Civil work Dwellings Activity in Hotel Passengers 2 3 4 5 Production Climate of cement tenders initiated services overnights in flights

Year

2013 1.0 -18.6 -25.4 16.2 -39.0 -2.1 1.9 0.1

2014 1.6 -8.1 -8.2 93.6 51.4 3.0 1.9 4.2

2015 2.6 -3.4 6.2 -26.6 49.2 6.2 3.5 4.0 2016 3.1 -2.0 5.1 -11.6 38.1 2.9 6.9 10.5 2017 3.7 - - 44.2 34.7 5.8 2.7 7.7 Quarter 2017 Q1 2.0 -0.5 23.3 48.9 27.5 6.4 -2.5 6.3 2017 Q2 1.4 3.3 8.3 63.7 78.3 6.1 12.2 10.9

2017 Q3 4.9 1.0 10.0 10.3 20.1 6.1 1.8 7.5

2017 Q4 7.6 - - 68.6 15.0 4.7 -5.6 5.3

2018 Q1 4.5 - - 46.9 16.8 5.5 3.1 9.4

1 Except Industrial Climate index, w hich indicates the balance of positive and negative answ ers.

2 Data adjusted by w orking days.

3 New dw ellings visas by the college of technical architects. 4 Turnover. 5 Passengers on transit are not included.

Source: Idescat; Ministry of Business and Know ledge; Spanish Ministry of Public Works and INE.

Activity and demand (II) 1 (% annual variation)

Turnover of Mercantile Imports of Registration Imports of Private Registration retail consumer of cargo capital sector companies Business

of cars commerce2 goods vehicles goods loans stock creation3 confidence Year 2013 8.5 -3.9 -1.7 2.7 -2.8 -5.3 7.6 -25.9

2014 20.0 2.1 12.9 27.1 11.2 -7.6 0.2 -3.0

2015 27.3 3.2 17.7 37.4 15.5 -4.3 5.2 10.5

2016 10.0 2.7 7.3 6.6 4.2 -10.4 18.6 12.8

2017 8.0 -0.9 7.2 4.6 6.7 -8.1 -15.0 17.6

Quarter

2017 Q1 12.5 -1.5 7.7 16.5 21.7 -4.5 -8.8 23.2

2017 Q2 6.0 -0.5 5.3 2.3 2.9 -0.3 -9.1 20.2

2017 Q3 6.1 -0.3 7.2 1.3 3.8 1.2 -14.5 15.4

2017 Q4 8.0 -1.5 8.7 -0.8 0.2 -8.1 -15.0 11.8

2018 Q1 11.4 1.6 4.2 5.6 -7.4 -9.4 -15.5 18.7

1 Except business confidence, w ich is a fixed base index 1st quarter 2013 = 100. 2 Value in constant prices (w ithout service stations). 3 Accumulated data. Source: Directorate General of Traffic, INE, Idescat and Bank of Spain.

158 Nota de Conjuntura Econòmica. 100 July 2018

Trade of goods and foreign tourism (% annual variation)

Exports of goods Imports of goods Foreign tourism

High High Number of Expendit

Total EU-28 technology Total EU-28 technology people ure Year

2013 0.2 0.6 -0.4 -3.5 1.9 -2.8 8.3 14.7

2014 2.3 5.7 6.2 7.4 7.9 9.7 7.4 6.6

2015 6.0 6.4 9.8 5.6 6.0 9.1 1.8 4.5

2016 2.0 3.1 8.3 1.5 2.4 3.4 4.0 3.7

2017 8.7 7.2 9.0 8.3 3.6 6.1 5.0 9.7

Quarter 2017 Q1 13.5 10.7 20.9 13.5 8.1 15.4 4.0 8.2 2017 Q2 5.9 5.2 2.7 5.3 -1.0 4.0 13.9 18.6 2017 Q3 6.2 5.5 3.3 7.4 0.8 3.5 4.9 9.5 2017 Q4 9.6 7.8 10.0 7.2 6.9 2.5 -6.5 -0.9

2018 Q1 3.4 4.8 -4.4 4.2 4.7 7.2 3.4 10.4

Source: Idescat, INE and Spanish Tax Agency.

Labor market (I) (% annual variation, except indicated cases)

Employment Unemployment rate Population Activity rate rate (% of (%)

(% of 16-64 16-64 years years old old Temporality 16-24 A c t ive Employed Unemployed population) population) rate (%) Total years old Year 2013 -1.3 -2.0 1.4 79.1 60.7 18.6 23.1 50.3 2014 -1.5 2.1 -13.4 79.0 62.9 18.3 20.3 47.1

2015 -0.6 1.5 -9.1 78.9 64.2 19.6 18.6 42.3

2016 -0.1 3.4 -15.6 78.8 66.4 21.2 15.7 34.3

2017 0.1 2.9 -14.6 78.6 68.0 21.6 13.4 30.4

Quarter

2017 Q1 -0.3 2.3 -12.6 78.7 66.6 20.8 15.3 32.0

2017 Q2 -0.4 2.8 -17.6 78.4 67.9 21.7 13.2 30.5 2017 Q3 0.4 2.9 -13.9 78.7 68.8 22.2 12.5 30.3 2017 Q4 0.9 3.5 -14.2 78.6 68.6 21.6 12.6 29.0 2018 Q1 -0.3 3.3 -20.5 77.7 68.1 20.9 12.2 29.5

Source: Idescat and INE.

159 Nota de Conjuntura Econòmica. 100 July 2018

Labor market (II) (% annual variation) Social Security registration All regimes Self- Registered contracts1 employed Open- Fixed- Registered

Total Industry Construction Services workers Foreigners Total ended term unemployment Year

2013 -2.7 -3.7 -12.1 -0.7 -1.3 -4.3 1.6 -18.0 4.6 0.5

2014 1.7 0.2 -2.0 2.4 1.9 -1.5 13.0 21.6 11.9 -6.9

2015 3.5 2.1 5.4 3.7 1.9 4.1 11.9 14.1 11.6 -10.0

2016 3.7 2.7 4.6 3.9 1.2 7.3 9.3 15.5 8.5 -11.9

2017 3.8 2.9 6.0 3.8 0.7 9.1 6.7 9.4 6.3 -11.1

Quarter

2017 Q1 3.8 2.8 6.3 3.8 1.0 8.2 10.1 13.4 9.6 -11.5

2017 Q2 4.0 2.6 5.9 4.1 0.9 9.7 9.5 11.1 9.3 -12.8

2017 Q3 3.8 2.9 6.1 3.9 0.8 9.4 7.8 10.4 7.4 -11.4 2017 Q4 3.4 3.2 5.5 3.4 0.2 8.8 6.7 9.4 6.3 -8.7 2018 Q1 3.7 3.3 5.1 3.7 0.6 9.9 7.9 10.8 7.5 -7.4

1 Annual variation of accumulated data in the year. Source: Ministry of Labour, Social Affairs and Families, and Spanish Ministry of Labour, Migration and Social Security.

Prices, salaries and labor costs (% annual variation)

Prices CPI

Industrial goods No- Industrial Salaries in Total

Core Elaborate without elaborate Energy prices collective labor Total inflation food energy Services food products index bargaining1 cost2 Any 2013 1.7 1.9 3.2 1.1 1.9 3.2 -0.3 0.7 0.65 -0.2 2014 0.1 0.4 0.6 0.1 0.4 -0.7 -1.1 -1.6 0.64 -1.7 2015 -0.2 0.9 1.2 0.5 1.0 2.9 -8.8 -2.7 0.79 0.7

2016 0.1 1.1 1.1 0.9 1.2 2.4 -8.3 -3.6 1.08 0.1

2017 2.2 1.3 1.1 0.4 1.8 2.8 8.0 4.3 1.51 -0.3

Quarter

2017 Q1 2.9 1.2 0.4 1.0 1.4 4.3 15.1 6.5 1.36 -1.2

2017 Q2 2.2 1.4 0.8 0.4 2.2 2.1 7.8 5.2 1.31 -0.1

2017 Q3 2.0 1.6 1.5 0.4 2.1 0.9 5.4 3.3 1.42 -0.2

2017 Q4 1.7 1.1 1.7 -0.1 1.5 4.1 4.3 2.2 1.42 0.3

2018 Q1 1.2 1.2 1.9 0.2 1.6 1.6 0.9 1.2 1.58 3.0

1 Accumulated data. 2 Labor cost per w orker and month.

Source: Ministry of Labour, Social Affairs and Families, Spanish Ministry of Labour, Migration and Social Security, Idescat and INE.

160 Nota de Conjuntura Econòmica. 100 July 2018

10. Social and gender indicators

Main social indicators by gender Men Women Total Year Labour market Activity rate (16-64 years) (%) 82.6 74.6 78.6 2017 Employment rate (16-64 years) (%) 72.2 63.8 68.0 2017 Unemployment rate (%) 12.6 14.4 13.5 2017 Temporary rate (%) 20.4 22.7 21.6 2017 Proportion of part-time jobs (%) 7.3 22.2 14.3 2017 Gender pay gap (1) 100.0 86.1 - 2015

Education

Population aged 30-34 with tertiaty education level 38.8 50.6 44.8 2017

Early school leavers (18-24 years) (%) 19.6 14.4 17.0 2017 Young people neither in employment nor in education and training 15.8 16.5 16.2 2017 (18-24 years) (%) Students enrolled in Catalan universities for the 2015-2016 Curs 46.3 53.7 100 academic year (% of the total) 2015-2016 Wealth and demography Ageing rate (2) (%) 12.8 141.3 119.7 2018 Over-aging rate (3) (%) 12.8 19.7 16.8 2018 Life expectancy at birth (years) 80.4 85.9 83.2 2015

Poverty

People at risk of poverty (%) 18.2 20.0 19.2 2016

In-work at-risk-of-poverty rate (%) 12.6 11.2 12.0 2016 Population that have difficulties to reach the month's end (%) 11.7 13.6 12.7 2016 Power and decision-making Mayors, by gender (%) 81.6 18.4 100 2015-2019 Councillors, by gender (%) 64.8 35.2 100 2015-2019 Deputies of the Catalan Parliament, by gender (%) 57.8 42.2 100 2017-2020 Chairman of the Management Board by gender. Companies. IBEX- 94.3 5.7 100 2015 35 (%) Board members of the Management Board by gender. Companies. 76.9 23.1 100 2015 IBEX-35 (%) (1) The 'gender pay gap' is the difference betw een average hourly pay for w omen and men before tax across the economy as a w hole. (2) The ageing index is calculated as the number of persons 65 years old or over per hundred persons under age 15. (3) The over-aging rate is calculated as the number of persons 85 years old or over per hundred persones 65 years old or over. Source: Idescat, INE, Eurostat and Catalan Institute of Women.

161 Nota de Conjuntura Econòmica. 100 July 2018