An Estimate of the Potential Growth of the Spanish Economy

Abstract

This paper seeks to estimate the potential output of the Spanish economy, using the production function methodology standard in the literature. According to these estimates, the growth of the potential output of the Spanish economy stood at around 3% in the period 2000-2007, owing to the marked increase in the population and in the participation rate and the fall in structural unemployment, as well as vigorous capital accumulation. The contribution of these factors to potential output was reduced by the negative evolution of total factor productivity. In addition, the economic crisis is estimated to have had a significant negative impact on potential output, which has primarily taken the form of a large increase in structural unemployment, a sharp slowdown in population growth, as a consequence of the loss of momentum in immigrant inflows, and a reduction in the contribution of the capital stock resulting from the impact of the crisis on investment. As a result, the potential growth of the Spanish economy stands at around 1% during the crisis years and in the years immediately thereafter, insofar as some of these negative effects take place with a certain time lag. Lastly, in the medium term, the potential output of the economy is estimated to recover progressively, once the effects of the crisis have disappeared, reaching growth rates about 2%, against a background of negative rates of change in the population of age 16-64, a smooth improvement in the NAIRU, a slight recovery in investment and a higher contribution from TFP. The application of a strong process of structural reforms could, however, significantly improve the growth prospects of our economy.