Methodological review finds higher Spanish potential GDP growth
A Banco de España occasional paper presents a revised methodology for estimating Spain's potential GDP, revealing higher growth in recent years due to more positive demographic dynamics. The new approach incorporates granular growth analysis, a BVAR model for labor market variables, and specific COVID-19 period treatment.
Demographics drive stronger potential growth
The new methodology estimates Spain's potential GDP growth for 2022-2025 at an annual average slightly above 2 percent, significantly higher than previous projections of around 1.3 percent.
This upward revision is primarily attributed to more positive demographic dynamics, specifically stronger-than-anticipated net migratory flows, which resulted in an average annual population growth nearly 1 percentage point higher than previously forecast.
The revised approach incorporates a more granular analysis of growth sources, distinguishing between productive capacity utilization and the composition of capital and labor, leading to a more precise measurement of total factor productivity (TFP).
It also includes a specific treatment for the COVID-19 pandemic period, aligning with recent literature to better reflect its impact on potential growth.
These innovations aim to provide a more realistic assessment of Spain's long-term economic capacity.
Refining labor market and population models
The methodological review also introduces a joint estimation of labor market variables using a Bayesian Vector Autoregressive (BVAR) model with common trends.
This advanced statistical approach replaces traditional methods like Hodrick-Prescott filters for estimating the structural unemployment rate (NAIRU), allowing for a more robust analysis of interrelationships within the labor market.
Furthermore, the study expands the active population group from 15-64 to 15-74 years, aiming to capture the increasing labor force participation of older age groups in line with delayed effective retirement ages.
This adjustment, consistent with practices of international organizations like the European Commission, provides a more realistic reflection of expected labor supply.
Potential GDP is a crucial macroeconomic variable, representing the output level achievable without inflationary pressures, and is essential for guiding monetary and fiscal policy.
A robust update for Spain's outlook
This methodological revision by the Banco de España provides a more nuanced and optimistic view of Spain's potential growth, particularly highlighting the crucial role of demographic shifts.
The integration of advanced modeling techniques and a realistic treatment of the active population significantly enhances the robustness of these estimates.
For policymakers, this suggests a slightly larger economic runway for growth without immediate inflationary concerns, offering valuable input for long-term fiscal planning.