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News Analysis: Good and bad news mixed as Spanish economy enters new phase

English.news.cn   2014-04-23 07:25:21

MADRID, April 22 (Xinhua) - At the end of the first quarter of 2014 the general consensus between the Spanish government, the European Commission, the Eurozone countries and the IMF, as well as studies carried out by the major Banks is that the Spanish economy is starting the long awaited economic recovery.

After five and a half long years of recession, the longest and deepest recession in Spain's recent history is giving way to a new context which became visible at the end of 2013 and which could lead to job creation.

However, doubts remain over whether or not this reactivation of the economy will be sustained and strong, or whether or it could slide into another period of negative growth. A look at the areas of 'light and shade' in the current economic climate, could help us determine the answer to this question.

EXTERNAL DEMAND NEEDED

The formula applied in Spain for the past two years for the reactivation of the economy is to carry out an 'internal devaluation' of the economy through a significant reduction in labor costs and a rise in competitiveness with rival economies abroad. This is being done by fiscal means and reductions in salaries, along with an important increase in sales tax. Wages have fallen in real terms by around 25 percent during the crisis.

The problem with this is that the increase in sales tax and the fall in purchasing power in Spanish households have caused a fall in internal demand as a result of weak private consumption. This means that in the short term the 'motor' of external demand is the only way to reactivate the economy through exports and tourism.

This is exactly what has dragged the Spanish economy forward in recent quarters. In the first two months of 2014 Spanish exports rose by 4 percent in respect to the same period in 2013, climbing to 37.76 million euros (52.1 million U.S. dollars): the best ever figure since records began in 1971.

Meanwhile Spain has received 6.2 million international tourists this year, 11.8 percent up on the same period a year ago.

Finally after nine quarters of negative growth of Spain's GNP, the Spanish economy began in 2013 to show signs of a slight growth in GNP. This was confirmed with a rise of 0.2 percent in the last quarter of 2013.

The European Commission has improved its growth predictions for the Spanish economy and now expects it to grow by at least 1 percent, (the same as the Spanish government). Meanwhile growth of 1.5 percent is expected for 2015.

This optimism is based in the change in the tendency which was produced in the last quarter in consuming in Spanish households and in investments in machinery, which according to Spanish National Institute of Statistics grew by 0.5 and1.9 percent respectively.

There has also been an improvement in the indicators for the labor market according to the Ministry for Employment, with slight falls in unemployment and an increase in the number of people inscribed into the Social Security system, which totaled 16,296,288 in March of this year.

There has also been a rise in consumer confidence since the start of the year, while smaller shops also experienced a rise in sales since the last quarter of 2013 after 13 quarters of negative results.

In this more optimistic context for the tendency for an improvement in internal demand, we should also add three positive factors which are likely to prove vital. These are the end of the financial bailout for Spain in December and the fact that Spain's risk premium has fallen to below 200 points, after having climbed to almost 700 in July 2012. This will lower the cost of the public debt as the perception of Spain's economy improves, as shown by a recent increase in Spain's credit rating by Moody's.

Finally the opening of lines of credit for Spanish homes for the first time after several years of negative data in late 2013 also coincides with an improvement in the expectations of Spanish families and companies.

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Editor: An
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