Spain : 5 reasons to expect a recovery

 

CNBC News has published a report by Alfredo Pastor, Professor of Economics and Banco Sabadell Chair of Emerging Markets at IESE Business School, explaining how the recovery of the Spanish Economy may be closer than many think.

As Spain enters its 5th year of recession, the Professor says that there are a number of reasons to believe that the worst may be over, and that the beginning of a slow recovery may not be far away.

Since 2009, the difference between the economy of Spain and other EU countries has narrowed :

Inflation - which peaked at 4.3% in 2008, was negative in 2009, is less than 3.0% today, despite sharp increases in indirect taxes.

Employment costs with respect to the euro zone average, which was 19% now stands at 9%, both across the whole economy and in industry.

Deficit for the Country's current account, which stood at 10% of GDP in 2007, was less than 2% in 2012.

Competiveness has increased due to wage cuts of around between 10-25% in the public sector, and 20-40% in the private sector, which is slowly being noticed by overseas trading partners.

Restructuring of the banking system is almost complete and de-leveraging of the banking sector is slowly proceeding (from 19 in 2007 to 16.7 in 2011)

Spain has met the demands of the euro zone regarding labour market reform and fiscal balance, which were required to set the economy on a balanced path, despite most of the austerity measures being unpopular with the masses.

The deficit created by the end of the housing bubble (11.2% in 2009 from a surplus of 1.9 of GDP in 2007) has been reduced to a little above 9.4% in 2011 in the face of a falling GDP, this has been at the cost of aggravating the recession.

The price paid for the adjustment has been very high: 6 million unemployed, or 26% of the labour force, partly due to the collapse of the property market, but an increasingly large number in industry, services and trade, due the credit crunch and ensuing recession and to the slump in household consumption. The destruction of economic fabric, factories, shops and businesses, has been extensive, but social unrest has so far been minimal.

The Professor Pastor goes on to say how little can be expected from domestic sources: consumption is hampered by high household debt and high unemployment; private investment, by lack of credit; government spending, by restrictions on the deficit. These constraints will not go away, and as a result growth will likely be slow.

Sources of growth exist: first, a healthy export sector that has increased market share throughout the recession; of these exports, steel and chemicals make up for 26% of the total, followed by capital goods (20%) and automobiles (17%); food products, Spain's traditional source of foreign exchange, are now only 16% of the total.

Second, there is a return of confidence in the stability of the Spanish economy and in the resolve to pursue reforms.

Increased confidence could result in a softening of the time-schedule of budget consolidation, so that public funds could be available to help extreme social situations. It should also result in a return of foreign investment, which would provide an alternative to domestic credit, severely constrained by the need for deleveraging.

The current situation, in which capital outflows totalled 20% of GDP in 2012, is clearly abnormal. In ordinary times, foreign direct investment in Spain amounts to around 10% of GDP per year. The measures taken so far and the speed of adjustment should help restore confidence in the stability of the Spanish business environment.

Lastly, the consolidation of the banking system could open the way for a successful negotiation of Spain's private debt, a still unresolved question that is another obstacle to growth. History tells us that the end of a big bubble is always followed by some sort of debt restructuring. No exceptions seem to exist.

Professor Pastor also raises the question of Catalan Sovereignty and the impact that this could have of on the overall economy of the country.

In short, in 2013 Spain may start to get out of the slump. If so, it will be slow progress, but progress. A long way, but upwards.

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