International Finance
Economy

Exports, Austerity Help Spain Recover from Recession

Based on a growth prediction of 0.7 percent the Spanish budget for 2014 included less cuts and greater stimulus. 7th October 2013 Spain’s Prime Minister has presented its most pain free budget in many years, banking on a nascent economic recovery gathering steam in 2014. Based on a growth prediction of 0.7 percent the Spanish budget for 2014 included less cuts and greater stimulus, unveiling...

Based on a growth prediction of 0.7 percent the Spanish budget for 2014 included less cuts and greater stimulus.

7th October 2013

Spain’s Prime Minister has presented its most pain free budget in many years, banking on a nascent economic recovery gathering steam in 2014. Based on a growth prediction of 0.7 percent the Spanish budget for 2014 included less cuts and greater stimulus, unveiling its government expenditures Finance Minister of Spain Cristobal  Montoro said the budget proposal was one for economic recovery which would allow the government to pave way for creation of new jobs. Spain’s 2014 budget follows a government revision of key economic data, forecasting gross domestic product (GDP) to rise 0.7 percent rather than  0.5 as calculated previously and lower than expected unemployment with a rate of 25.9 percent.

The debt laden country which is Eurozone’s fourth largest economy is climbing out of a two year recession, expecting a first quarter of economic expansion in the July through September period.

Banking Sector Stabilises

The European Central Bank and the European Commission said Spain’s banking sector is on the road to recovery, but the country must keep up the pace of overhaul, especially on the labour markets and pension reforms. The country slipped into recession in 2008 when a real-estate boom collapsed, making its banks insolvent and raising doubts about the country’s solvency, GDP of the country which staged a recovery in 2010 and 2011 has shrunk 7.5 percent in the past five years. The debt laden country received $ 135.2 billion credit line from the European Union in exchange for a commitment to restructure its banks and continue its austerity programmes. The bailout package has seems to have done a lot of good to Spanish banks, the banking sector liquidity and the financing structures have improved as bank deposits have risen and lenders have regained their access to market funding.  On the negative side, mortgage delinquencies have reached to 5 percent for the first time, just a year ago this was just 3.23 percent – thwarting the efforts of the government to increase its growth forecast. European review agencies have said it was vital to maintain the proper checks of the banking sector’s solvency and resilience to shocks. However, the recovery in the banking sector has prompted the Prime Minister Mariano Rajoy slash Spain’s huge budget deficit from an estimated 6.5 percent of GDP to 5.8 percent of GDP in 2014. In order to achieve the projected growth the government is freezing civil servants’ salaries for the fourth consecutive year and plugging loopholes on corporate taxes and create more revenue from sales taxes. The government has also adopted a pension reform plan, which would save 800 million Euros next year and 33 billion Euros over the course of the next decade.

Unemployment

Spaniards continue to migrate to Germany and France where they find suitable jobs, despite a downward revision – the government still expects unemployment rates to end the year at 26.6 percent and expects it to fall at 25.9 percent at the end of 2014.

Tourism

The number of tourist visits grew by 3.9 percent in the first seven months of the year compared to the same period in 2012. The number of foreign visitors increased this year mainly due to civil unrest in Turkey and Egypt, the number of visitors from Russia has seen a huge increase followed by Britain and France. Tourism contributed over 5 percent to the nation’s GDP and added 900,000 jobs in 2012.

Exports Boom

The country embroiled in an economic crisis- may have finally seen some kind of hope in the form of  rising exports, “The country’s exports are outpacing other countries including Germany” said Antonio Roldan, a European analyst at Eurasia group – adding cheap labour have increased its competiveness in the exports industry. The Port of Barcelona in north-east Spain is a bee-hive of activity where export drive can be seen, the Port is the country’s third largest container dock, behind Valencia and Algeciras, and handles exports and imports of more than 3000 countries, representing a combined turnover of 300 billion Euros ($ 393 billion). Roldan said the port- a vital channel for all Spanish external trade, has become an artery of the economy. It employs over 13,000 people and on its website claims that for every two jobs it creates, three additional jobs are created in the economy as a whole. The economic ministry said the shortfall of exports to imports fell to 786.7 million Euros, Spain exported goods and services worth 19.86 billion Euros, a record for July and a 1.3 percent rise on the same period a year ago. Its trade deficit fell by 68.8 percent in the first half of 2013 to 5.8 billion Euros, the Economic ministry said.

Spain’s senior populace and bankers say the country is not only emerging from recession but has used the harsh years of the downturn to make the economy more competitive, less dependent on real-estate and relying on macroeconomic indicators such as high-value exports. However, despite the resurgence of the banking sector and growing Exports, the economic hardship continues with staggering unemployment levels and low standards of living, in places such as Andalucia, the economic hardship is severe.

Our View

Eurozone’s fourth largest recovery has staged a recovery of sorts – the numbers are impressive, after nine successive quarters of decline, Spain’s GDP is expected to return to growth this quarter. Exports, which accounted for 20 percent of GDP before the crisis, now make up almost 35 percent of national output. The recovery path architected by political leaders in Berlin has seen positive results, the current account which had a deficit of 10 percent in 2007 is expected to have a surplus of 2 percent this year, its  well architected spending cuts, tax increases and labour market reforms are bearing results on the economy but seeing outrage from the ordinary voters and trade unions. The export backed recovery of Spain has other dangers, Madrid revealed earlier this week that its public debt was 100 percent of GDP and some economists reckon the debt will rise to 110 percent by 2018. As Prof. Juan Rubio Ramirez, Professor of Economics  at Duke University in North Carolina says it is very rare for a country to suffer from such high levels of external and internal debt, leaving it vulnerable for external shock and renewed market jitters. “You need high growth or high level of inflation to make that kind of debt sustainable” he says.

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