Strong Growth in Spain’s Service Sector

Strong Growth in Spain’s Service Sector

Strong Growth in Spain’s Service Sector

Spain’s service sector has regained momentum over this year, reflecting the recovery in key component businesses like tourism and exports. The service sector recorded its fastest expansion since end-2006 in August, driven by a rise in new orders from companies for the thirteenth consecutive month.

Spanish firms are increasing export output as their products become more competitive and their reach is wider. The Purchasing Manager’s Index (PMI) of service sector enterprises stood at 58.1 in August, up from 56.2 in July, according to a survey published last month by financial services firm Markit. A reading above 50.0 indicates that activity is on the increase.

One of the most significant aspects of the Spanish data is that it outpaced indicators from Eurozone peers like Germany, France and Italy. The service sector accounts for about half of Spain’s economic output.

SERVICE SECTOR JOB CREATION

Sustainable job creation is one of the Spanish government’s main goals. The country has been dogged by one of Europe’s highest jobless rates since a property bubble burst in 2008. But in the second quarter, the unemployment rate fell to 24.5 per cent, its lowest level in two years, lifted by new jobs in the service sector. The quality of employment also improved, with many more permanent contracts signed.

The PMI data showed that the service sector continued to create jobs in August, driven by another record tourism season, although at a slower rate than in July. And PMI service sector data for September, released just last week, show that staffing levels were unchanged month-on-month. Markit said the sector is still growing solidly despite the slowdown in employment.

At the end of September, the government hiked its GDP growth forecast for 2014 to 1.3 per cent from a previous 1.2 per cent, while other Eurozone countries like Italy are slashing their outlook. Both the government and the Bank of Spain have pointed to a recovery in domestic demand and consumption as future growth drivers. This will translate into increased activity in selected service businesses like hotels and restaurants, as well as financial and consultancy firms.

SECTOR PRICING A CHALLENGE

Perhaps the toughest challenge for the service sector going forward is pricing. In August, the fall in output prices was the largest since March due to ongoing competitive pressures. But Markit’s September survey showed that input prices in the sector also dropped for the first time since September 2013, partly due to falling fuel and energy costs. The service sector will continue to expand if greater price equilibrium can be achieved in the coming months.

For information on investing in Spain, contact corporate law firm Argali Abogados.

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