After years of negative growth and deflation, the Spanish economy is finally seeing light at the end of the tunnel. The EU’s 5th largest economy will grow by nearly 3% this year, the fastest rate of growth since the financial crash. In the previous quarter deflation had nearly halved, indicating that consumers are spending more and prices may yet start to rise. And unemployment is rapidly declining, with the rate expected to fall below 20% for the first time in five years. Since the financial crash, Spain has been on a steady decline, with it seeming that sluggish growth would never end. However, the economy is slowly getting into gear and catching up with the wider world. Will it last?
The 2008 financial crash hit every country one way or another as it swept through the world like a destructive tsunami. In particular, the Spanish economy was hit hard, with the economy going into a downwards trend for nearly a decade. The USA returned to pre-recession GDP in 2011. The UK in 2015. However, Spain is only 85% of the way there, highlighting how damaging the crash was to the Spanish economy. As everyone will know, at the centre of the great financial crash, was the subprime mortgage crisis. In a country where the property market was God, this spelled the end of the good times. In a ten-year period, house prices in Spain had doubled, with mortgage debt typically growing at 25% per year. Soon, house sales would fall by exactly the same amount. Construction then came to a grinding halt, with the fall in Spanish construction the largest in Europe. A huge 28% of the houses built in the period between 2001 and 2007 sat vacant as the crisis hit Spain. The financial crash was not only a battering ram to Spanish construction, it was a battering ram to the Spanish people and their dreams.
The first few years after the financial crash hit Spain seemed to be a period of shock, as the country was forced to accept hardship and austerity. Up until 2007, Spain had been running a surplus, despite large increases in expenditure. The huge fall in tax receipts would, however, lead to a ballooning deficit that would reach over 11% of GDP. The economy wouldn’t receive a substantial stimulus until the huge EU bailout that was implemented in 2012. There would be many events until this deal was eventually reached though. There was a new Prime Minister, with the conservative Mariano Rajoy taking office. There would be £65 billion of austerity measures, including a 3% hike in VAT. Spain’s public debt would nearly double to over 72% and the bailout measures helped push it to over 85%. After four years of a contracting economy, the EU bailout seemed like a lifeline to Spain. In late 2012, the European Commission announced the first £100 billion in credit to be authorised to Spanish banks. It was the largest financial policy since Government spending was cut by nearly 9% only one year ago.
In recent years, the Spanish economy seems to have had a resurgence of sort. The Spanish economy has been growing since late 2013 and is set to grow by nearly 3% this year. The Spanish unemployment rate topped 26% in early 2014, with youth unemployment standing at a staggering 55% during that period too. However, due to the EU bailout and several other measures, unemployment has dropped to just 20%, with youth unemployment decreasing to around 45%. Although Spain remains in deflation, they are expecting to enter positive numbers regarding inflation in early 2017, which will be another turning point for the recovering economy. Spain exited the bailout program in early 2014, being only the second EU country to have done so. During the program, Spanish banks borrowed over £56 billion to help speed up economic growth. The bailout was expensive and at times complicated but it may have just saved the Spanish economy.
Despite the Spanish economy starting to pick up pace, there are many threats to the country’s prosperity. The economy is still in deflation, with prices decreasing by 0.6% in the last quarter. Spain is expected to have an inflation rate of just 1.6% in 2020 and hence there is a real risk the economy could remain in deflation if consumer activity doesn’t pick up. If a consumer recognises deflation they will understand that by delaying purchases they should get them for less and hence are less likely to purchase goods. This stifles growth and reduces consumer expenditure, potentially hurting the Spanish economy. The Spanish Government will also have to tackle the high deficit and debt levels the country faces. The country still has a deficit of over 5% to GDP, which is helping push up debt levels, which stand at 99% to GDP. However, the Spanish Government do intend to continue with their plan to help cut their deficit levels, continuing to slash expenditure. This plan is in danger if there is a Government change in the near future. Spain has had two General Elections in the last two years and commentators suggest they will need a third election to help break the political deadlock the nation faces, with no party currently holding a majority. If another election is held and Podemos get anywhere near power, this could spell disaster for Spain, as the party will almost definitely scrap the deficit reduction plans and announce a new splurge of spending plans. They have also previously advocated a referendum on Catalonian independence. If this is held and the referendum results in Catalonian independence it could spell the end for the resurging economy and push it in to yet another lost decade.
After nearly ten years of economic decline, it seems like Spain is bouncing back once again. Once an economic powerhouse, they slipped into a crisis in 2008, when property prices decreased hugely. For a country that was reliant on the construction industry to help cover booming expenditure, this spelled trouble. It took five, long years and a huge EU bailout for Spain to see growth in their economy again. However, there is finally growth to be seen and the Spanish economy seems to be getting stronger, even if it does remains fragile. If it can overcome the many threats, Spain may just be on a real road to recovery. Time will only tell if the EUs fifth largest economy is resurgent for good.