On the same day that Spain faced its worst railway tragedy in decades when a speeding train derailed outside the Northwestern city of Santiago de Compostela, the country also took heart in the news that for the first time in two years, its unemployment rate actually came down.
Spain still has a staggering 26.3% jobless rate, on par with Greece’s, and the worst in the whole Eurozone. However, economists such as Jean-Pierre Durante, head of the financial market research team at private bank Pictet & Cie. in Geneva, Switzerland, are slightly more optimistic about the future of the Spanish economy and its ability to exit the draining recession it has been facing over the past years.
“The Bank of Spain has announced that Spanish GDP contracted by just 0.1% quarter-on-quarter in Q2,” Durante said. “Although this does mean the eighth quarter of negative growth in a row, it is also the smallest contraction since Q3 2011 and marks a definite improvement on the -0.5% recorded for Q1 2013.”
Durante expects the recession in Spain to draw to a close as the second half of the year unfolds, boosted in part by a revival in exports. Business surveys have shown that there’s been a pick up in export orders from Spain, however, he cautioned, this is just one part of the picture and the end of the recession will not directly translate to lasting economic recovery, since the ongoing deleveraging of the private sector, fiscal austerity and high unemployment are very fierce headwinds that continue to threaten Spain and drag down economic growth.
In fact, the small decrease in the unemployment rate was almost entirely a consequence of the summer and an increase in tourism to Spain: “After correcting for seasonal factors, the 149,000 increase in new jobs dwindles to just 13,000,” Durante said.
Still, there are signs that Spain really is turning the corner and has begun to change its economic model with a view to creating long-term growth and lasting economic stability, and it is certainly not the most afflicted among the Euro area peripheral countries.
For one, Spain’s banking sector has, for the most part, been recapitalized, Durante said, and the high increase in the country’s public debt should eventually ease off. Moreover, at current levels, Spain’s public debt is still manageable as compared with that of Greece, Italy, Portugal or Ireland, all of which have to cope with public debt levels that are above a staggering 120% of GDP.
And the labor market reforms that Spain has adopted since the onset of the Eurozone crisis have also resulted in a much-needed and significant improvement in the country’s economic competitiveness by boosting exports from the manufacturing sector, Durante said, even though there’s room for further improvement in the labor sector.
Nevertheless, manufacturing only accounts for 13% of the Spanish economy, he pointed out, so even if it is likely to continue expanding, the manufacturing sector is still unlikely to absorb close to the six million unemployed workers currently in Spain.
“The conversion of Spain’s economy into a competitive, export-oriented economy will take time, which means the most likely scenario we’ll see is new, competitive sectors recovering and growing while others, still penalized by the crisis aftermath, will continue to shrink, and aggregated economic activity is likely to remain subdued for quite a while,” Durante said.
Overall, the strongest headwind that Spain will have to contend with in coming years is, in Durante’s opinion, the very high levels of private debt.
Private companies’ debt amounts to 129% of Spain’s GDP, he said, and household debt is around 86% of GDP and shows no signs of reducing. By comparison, German and Italian households both have debts below 60% of GDP and even the Greeks are less indebted than the Spaniards.
“The overall economic situation is only likely to improve once there has been a significant drop in Spain’s unemployment rate, but as we have seen earlier, this will take time,” Durante said. “As a result, household debt is likely to continue acting as a dampener on Spanish consumer spending and investment for some time.”