August 2015 Issue
Spain, much like its Southern European neighbour Greece, has been the subject of a considerable amount of media speculation in recent years. As the Greek economy lurched and stumbled, parallels with the Spanish situation were inevitable. Both countries were heavily impacted by the financial crisis, both teetered on the financial abyss for some time, and anti-austerity groups in both nations made significant gains in elections. However, as Greece’s economic situation has deteriorated, in Spain the outlook has become decidedly rosier.
Recently, Spain was seen as an economic pariah in the eurozone; today, however the national economy is booming. Earlier this year Spanish growth of 2.9 percent was forecast in both 2015 and 2016, but that figure has subsequently been revised up by the International Monetary Fund (IMF). Indeed, in early June the IMF raised its growth forecast for Spain for the second time in three months, suggesting the Spanish economy would grow by 3.1 percent in 2015, a figure far outstripping the European average.
For the first time since the financial crisis, Spain’s economic fortunes are looking up. The Spanish government believes that the revitalised economy should create at least two million jobs by 2018, helping to cut the national unemployment rate to about 15 percent. Much of the Spanish recovery can be attributed to significant developments on a domestic level. Labour market reforms have had a major impact on the national economic outlook. A more supportive global economic environment has also contributed handsomely to the revival. For the time being, unemployment remains endemic – currently sitting at more than 20 percent – but the job market has stabilised and joblessness has begun to fall. It is likely to be a long road back, yet the country is heading in the right direction. The real estate and banking sectors are also beginning to find more stable footing. The country’s banking system is finally in a position to support a number of economic sectors, something which would have seemed impossible 12 months ago.
The government has also made a number of revisions to income tax, reducing the highest rate from 52 to 47 percent and the lowest rate from 27 to 24 percent. Plans to cut tax further next year, to 45 percent and 23 percent respectively, have been announced, provided that the incumbent government wins another term in the impending general election.
“As the IMF and others argue that Spain must stay the course of reform, pressure from anti-austerity groups will rise.”
However, there are still some underlying economic imbalances. Spain’s large public deficit, estimated to be 4.2 percent of the country’s economic output this year, and an external debt worth around 170 percent of GDP – one of the highest in the world – are potential threats to the turnaround.
The IMF warned the Spanish government that the country’s growth potential could easily go unrealised if unpopular economic reforms are reversed in the future. “A reversal of past reforms would create uncertainty and could stall the recovery, especially if the external environment were to deteriorate”, the IMF said in a report at the end of an official visit to the country. The IMF also said the government will be required to launch a further program of reforms due primarily to volatility in European and global economies.
According to the IMF, the Spanish economy has benefitted enormously from lower oil prices, the depreciation of the euro and the European Central Bank’s “supportive monetary policy” over the last 12 months. However, an economic recovery could not and should not be built on such unstable foundations. “Vulnerabilities remain and deep structural problems persist, so additional efforts will be needed to sustain robust growth over the medium term”, said the IMF.
With the Spanish general election on the horizon, the coming months could be hugely significant for the national economy. As the IMF and others argue that Spain must stay the course of reform, pressure from anti-austerity groups will rise. The political situation is particularly volatile, with incumbent prime minister Mariano Rajoy unpopular despite his best efforts to revitalise the economy. Mr Rajoy lifted the country out of its longstanding and damaging recession in Q3 2013, and has led to the country to steadily increasing growth rates in subsequent quarters.
Labour market reforms in particular could have a major impact on the viability of the Spanish economy. These efforts, according to the IMF, should be made to close the gap between the cost of dismissing a permanent and a temporary worker. Furthermore, measures should be put in place to help reduce the cost of providing public health and education services. The IMF’s comments came against a backdrop of continuing upheaval and negotiation between the Greek government and the country’s creditors over bailout funds.
Against all odds, the Spanish economy appears to be in a position of relative strength, something which would have seemed inconceivable just a few short years ago. For the country’s future prosperity, a steady hand is needed on the tiller.
© Financier Worldwide
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Richard Summerfield