Spain’s cost competitiveness normalization continues as predicted in our article on the end of the Spanish miracle. This is consistent with the +22.3% hike in the minimum wage as of January 2019 and with the unemployment rate reaching a ten-year low. In Q1, companies’ labor costs increased +2.1% compared to Q1 2018, the fastest pace in more than five years. This acceleration was driven by both wages (+1.7% y/y) and other costs (+3.1%). When looking at sectors, services registered the fastest rise in labor costs in Q1, posting the highest growth (+2.3% y/y) since 2013. This is in line with our conclusions about the consequences of the minimum wage hike. As many sub-sectors in services have a high labor intensity (ratio of compensation to sector gross value added) and low average compensation by worker, they have been the most sensitive to the increase. Going forward, we see higher labor costs indenting corporate margins: we expect the profit share of gross value added to fall from 43% to 41.5%, its lowest level since 2011, converging to the average Eurozone level (about 40.5%).
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Weekly Export Risk Outlook 20 June 2019