Of the four largest Eurozone economies, Spain is enjoying the
strongest recovery with real growth rates topping 4% in the year leading up to
Q2 2015 yet output remains substantially below pre-crisis levels and GNI/capita
at PPP is only $32,860[1].
This figure is 15% below the UK’s levels, about $2,000 less than Italy and a
third less than the average German’s income. Thus the obvious question is
whether Spain will continue to cut this gap or will she confront serious
economic challenges in the foreseeable future?
The unemployment rate of 22.4%[2]
is the most concerning challenge that the economy faces since it has been a
long running issue: the pre-crisis trough was still above 8%. Considering
consumer confidence is at a 15-year record high[3],
private consumption is expected to continue to grow close to 3%/annum and
exports are 10%[4]
higher than the 2007 peak, it is fair to conclude that supply-side issues are
to blame for the high unemployment. Despite reforms in 2012, labour regulations
remain too rigid, especially over permanent contract severance packages. Recent
figures released by the Spanish Ministry of Employment reflect these concerns
since out of the 4m contracts signed in Q1 2015, 91.7%[5]
were temporary, a quarter of which lasted for less than a week. This, in turn,
may hamper longer term growth prospects as consumption may stagnate owing to reduced
job security and the low-paid nature of temporary jobs. According to a European
Commission report from February 2015, fixed-term
employees typically earn 16%[6]
less than their permanent counterparts even though, according to the “bonding
argument”, employers hand out lower wages for permanent contracts owing to the expected
dismissal costs. In addition, excessive temporary employment also damages
earning potential via another mechanism; there is a lack of investment since
there is little incentive to pour resources on temporary employees.
The recent depreciation of the euro is set to continue owing
to the removal of the Swiss central bank’s franc ceiling against the euro, the
ECB’s €60bn monthly asset purchases and divergent monetary policies with the UK
and US. Moreover, the €400bn current account surplus in the Eurozone may weaken
the currency further since it is a result of high savings not high demand for
European exports and thus the implied capital outflows play a larger role in
the exchange rate process. The depreciation may reduce the need for further
investment as it masks a lack of competitiveness; Spain is 35th in
the international competitiveness rankings published by the World Economic
Forum, not even in the European top ten. To make matters worse, there is also a
strong risk of hysteresis, despite figures showing increases of over 12%[7]
in productivity, since 53%[8]
of those without a job have been in that situation for over a year, 18% above
the OECD average, damaging potential growth severely.
Over-indebtedness is also a pressing issue for Spain in both
the private and public spheres. Household indebtedness is over 130%[9]
of gross disposable income and 4m Spaniards find themselves on a credit
blacklist run by ASNEF. The full recourse rule has exacerbated the problem by
prolonging the effects of the sub-prime mortgage crisis since the remainder of
loans must be repaid despite homes being repossessed. This alongside low-paid
short term contracts and high unemployment has disrupted the flow of credit
towards consumers. Lending has continued to disappoint falling 2.7% in the year
leading up to June 2015 despite Spanish banks sailing through the ECB’s stress
tests in October 2014 with only one bank failing initially to meet the capital
requirements. Lending volumes to consumers have not only been weak but business
lending has also fallen 5.7%[10]
in 2014. Again this has to do with over-indebtedness since the Spanish
non-financial corporate debt pile, as a percentage of GDP, is 10%[11]
higher than the Eurozone average. Thus the deleveraging process, that sprang
into action after the 2008 crisis, has not yet been completed explaining why
investment has been so sluggish in Spain with gross fixed capital formation
still 35% below the 2008 peak.
The government debt pile is as large as the economy, 15%[12]
above the OECD average and 35% above the world average. To make matters worse,
half of it is foreign owned increasing the cost and volatility of the debt
pile. The Eurozone has been confronted with deflationary pressures and in the
year leading up to Q1 2015 experienced a 1.1%[13]
fall in the price level. This will act to increase the debt burden which is
particularly concerning since it is unlikely firms and unions wield significant
price or wage setting powers owing to the high unemployment; as a consequence inflationary
pressures are set to remain weak. Moreover, anti-austerity parties are starting
to gain a foothold in Spanish politics demonstrated by Podemos forming coalition governments in key regions
such as Madrid and Andalucía. This combined with the victory of
pro-independence parties in Catalonia has not gone unnoticed by the bond
markets, with 5 year government bond yields doubling over the past 6 months,
increasing the cost of servicing debt which represents a substantial
opportunity cost. With Spain still running the largest fiscal deficit in the EU
at 5.8% of GDP, she can hardly afford such an increase in expenditure especially
when nominal GDP growth has been so disappointing over the past 7 years, with
total output still 1.8%[14]
below 2008 levels, meaning government receipts have risen only modestly.
Another troubling issue facing Spain is the nature of her
demographics with her population declining since 2011 and expected to fall by a
further 10%[15]
by 2052, according to the INE. One reason for this is that Spain only has 1.32[16]
births/woman with 2.1 needed just to sustain the population. The over-65’s
share of the population is set to rise from 17% to 30%[17]
by 2030 which , in turn, will put added pressure on the already fragile
government finances. To make matters worse, recent retirees have earned more
than previous generations and thus pension obligations will rise quicker than
the rise in pensioners as shown by the fact pension costs rose by 3.1% last
year despite only a 1.3% increase in retirees. Furthermore, the terrible job
prospects in Spain, especially for the young, as half of under-25s are
unemployed, has led to a ‘brain drain’ with the INE forecasting 500,000[18]
are set to leave the nation every year until 2023. Not only will these
demographic changes severely impair potential growth prospects but they pose
another conundrum for the already decimated construction industry. Construction
output fell from almost 22% of GDP to less than 10%[19]
and the expected population declines suggests demand for new homes will remain
weak. Significant slack already exists in the housing market, since there are
over 0.5m[20]
unsold housing units classified as new, compounding the woes for the
construction industry. This is particularly concerning since the areas in Spain
that experienced the construction boom have unemployment rates far higher than
the national average suggesting occupational labour immobility. For example,
Extremadura was one of the hubs of the housing bubbles but has since failed to
recover with the jobless rate 10% higher than the rest of Spain.
Thus, overall, Spain is growing but precariously as high unemployment remains a stark reminder of the
structural issues that still need to be addressed whilst the debt mountain
continues to obstruct consumption and investment. Finally, the danger of a
declining population poses a serious threat to long term growth prospects but
also living standards as pension obligations may become unmanageable and the
most productive workers are leaving in search of employment opportunities
elsewhere.
[2]
Country Report: Spain, Economist Intelligence Unit, 11 September 2015, p2
[3]
Ibid, p7
[4]
World Bank
[5]
Ministry of Employment (Spain)
[6] ‘Precarious
and less well-paid? Wage differences between permanent and fixed-term contracts
across the EU’ by Silva, Turrini (http://ec.europa.eu/economy_finance/publications/economic_paper/2015/pdf/ecp544_en.pdf )
[8]
OECD: Employment Outlook Spain 2015
[9]
OECD National Accounts Statistics (http://www.oecd.org/eco/surveys/Spain-Overview-2014.pdf),
p13
[12]
EIU, p13
[13]
Ibid, p7
[14]
Ibid, p23
[15]
INE
[16]
World Bank
[17]
Ibid
[20]
Spanish Ministry of Public Works
