Spain: Seeds of recovery
The country is emerging from the
recession but critics claim confidence is both premature and dangerous
Look closely at the hulking container ships
that leave the port of Barcelona these days and you may catch a glimpse of a
national economy heading slowly towards recovery.
Most vessels disappearing into the
horizon sit a fraction deeper in the water than the day they arrived: for every
four containers laden with goods that are unloaded, Barcelona now sends six
full containers abroad. A few years ago, before the start of Spain’s brutal downturn, the flow of
traffic went in the other direction. Ships would arrive fuller than they left,
while the port’s spidery harbour cranes worked overtime to satisfy Spain’s
soaring demand for goods from around the world.
“I
have worked in this port for 22 years but I have never seen such a rise in
exports. And neither has anyone else,” says José Alberto Carbonell,
director-general of the Port de Barcelona. In the first eight months of the
year, with the Spanish economy still contracting, the port enjoyed an 8 per
cent rise in exports. Shipments to east Asia, Latin America and other
fast-growing regions rose particularly sharply, with container traffic to
Algeria up 22 per cent, to Brazil up 15 per cent and to Mexico up 13 per cent.
From his seventh-floor office
overlooking the Mediterranean, Mr Carbonell has a privileged view not just of
the ebb and flow of Barcelona’s port traffic but also of the state
of Spain’s economy in general. Ports, he says, serve as a “thermometer” of
a nation’s economic health – and his has recently shown unmistakable signs of
recovery. “There is a much better mood now than last year,” he says. “People
are not euphoric. But there is no longer doubt over the survival of the
companies we work with.”
From the noise and bustle of the Barcelona
docks to the thickly carpeted calm that envelops Madrid’s senior bankers, the
message coming from the country’s business leaders is the same. Spain, they
say, is not only emerging from the recession but it has used the harsh years of
the downturn to make the economy more competitive, less dependent on real
estate and more reliant on high-value exports. “In the last one-and-a-half
years, Spain has shown the willingness to do the right thing,” says a top
banker in Madrid. “Whether that is enough I cannot say but there has definitely
been an improvement.”
It is an improvement, however, that has
done little to lift the economic
misery suffered by millions of Spaniards. Even in the heart of Madrid, the
country’s still-prosperous capital, visitors struggle to spot signs that the
crisis is abating. Shops are still shuttering at alarming pace, while the glum
queues outside the city’s many soup kitchens are as long as ever. In poorer
Spanish regions such as Andalucia, the economic hardship is on even plainer
display.
Sceptics argue that the new-found
confidence in Spain’s economic prospects is both premature and dangerous: the
country is saddled with a vast – and still-growing – debt load, much of it owed
to foreign creditors. The cost of servicing and eventually reducing this burden
will put a severe brake on any recovery. Spain’s debt woes also make the
country acutely vulnerable to any external economic shocks – such as the political chaos in
Italy or the unresolved budget crisis in the US.
Nor is Spain likely to see any rapid improvement in unemployment: the jobless rate
is stuck above 26 per cent, and will remain close to that level for at
least the next two years.
One thing is beyond doubt: a real economic
turnround would resonate far beyond the borders of Spain. Last year, at the
height of the financial crisis that threatened to push Madrid into a sovereign
bailout, the country was seen by many as the frontline in the battle to save
Europe’s single currency. In the months that followed, Spain served as the
principal testing ground for the EU’s controversial response to the crisis.
Madrid pushed through brutal spending
cuts, tax increases and a raft of structural reforms that sparked outrage among
trade unions and ordinary voters. A sweeping labour
market reform made it easier and cheaper to fire workers, and gave
companies more leeway to strike wage deals at factory levels. The government of
Mariano Rajoy, Spain’s bland
but doggedly persistent prime minister, also took steps to cut the public
sector, reduce trade barriers inside the country and break up cosy cartels.
Spanish politicians – and their backers in
Berlin – claim that the recent signs of recovery vindicate their efforts. Luis
de Guindos, the economy minister, declared last month that Spain should stand
“as an example of the quality” of Europe’s policy response to the crisis.
Political leaders in Berlin, seen by many Spaniards as the true architects of
their country’s economic policy, have also found it hard to muffle their
triumphalist cries. Spain’s expected return to growth, they claim, shows that
Europe’s answer to the crisis was right after all.
The Spain-is-back brigade has some data to
back up its case: the current account has swung from a deficit of 10 per cent
in 2007 to a surplus of as much as 2 per cent this year; exports are forecast
to rise by more than 5 per cent both this year and next, as Spanish companies
take advantage of the rapid fall in unit labour costs and the corresponding
rise in competitiveness.
Jorge Sicilia, the chief economist of BBVA,
the Spanish bank, notes that investment in equipment and machinery has been on
the rise since the first quarter this year – suggesting that the export-led
recovery is spreading to other parts of the economy.
After nine successive quarters of decline,
Spain’s gross domestic product is expected to return to growth this quarter.
Both the Spanish government and the majority of international forecasters have
revised upwards their predictions for growth in 2014. Some believe Spain’s GDP
may rise by up to 1 per cent, a rate that should allow it to make a small dent
in its unemployment rate.
But what pleases politicians such as Mr de
Guindos more than anything else is the nature of Spain’s nascent recovery. In
past crises, he argues, Spain would habitually fall back on currency
devaluations to bolster exports and draw more tourists to the beaches of
Benidorm and Mallorca. Whatever advantage the economy gained, however, was soon
eaten up by wage increases and inflation. “The [current] gain in
competitiveness has been obtained not through currency devaluation but through
internal devaluation, through a process of lowering unit labour costs,” he said
recently. “This gain in competitiveness is much more permanent and much more
sustainable than when you simply devalue your currency.”
. . .
Exports, which accounted for 20 per cent of
GDP before the crisis, now make up almost 35 per cent of national output. What
is more, Spanish exports are moving steadily up the value chain – sales of
chemicals, pharmaceuticals and machinery are up – and heading increasingly to
fast-growing countries outside the eurozone. “Spain has a comparative advantage
that it can build on. Its exports are structurally strong – and getting
stronger,” says Morgan Stanley, which hailed the advent of a “New Spain” in a
recent research report.
Whatever signs of improvement there are, they
have to be set against the two great unresolved problems facing Spain:
dangerously high levels of debt and unemployment. Madrid revealed this week
that its public debt was on course to reach 100 per cent of GDP by the end of
next year. Some private sector economists believe that figure will rise above
110 per cent by 2018. To this must be added the vast debt load accumulated by
Spanish households and companies during the boom years – equivalent to about
200 per cent of GDP today.
Juan Rubio-Ramírez, professor of economics at
Duke University in North Carolina, points out that it is extremely rare for a
country to suffer from such high levels of both government and private debt.
“You need high growth or high inflation to make that kind of debt level
sustainable, and Spain is not likely to have either. You are in uncharted
territory here.”
Prof Rubio-Ramírez points out that Spain –
unlike Italy or Greece – still has a primary budget deficit, which means the
government is in deficit even after excluding interest payments on existing
debt. The current trajectory, he argues, leaves Spain almost no margin for
things to go wrong – and highly vulnerable to external shocks and renewed
market jitters. “When your debt is above 100 per cent of GDP, it is very easy
to come up with scenarios where debt really explodes,” he says.
Even economists who take a more sanguine view
of Spain’s debt load warn that it will serve as a drag on growth for many
years. With households, companies and the public sector all deleveraging at the
same time, domestic demand is unlikely to return to growth until 2015. Nor is
demand likely to receive much of a boost as a result of new hiring. Although
the labour market is showing signs of stabilisation, it will take many years to
bring the unemployment rate close to 20 per cent, let alone below.
“It is true that unemployment figures have
improved in recent times but it is equally true that unemployment is at such a
high level that any marginal improvement is irrelevant,” argues Santiago López,
a Madrid-based economist with Exane BNP Paribas. “Many people are no longer
actively looking for jobs and long-term unemployment already affects more than
50 per cent of the total unemployed population.”
. . .
The most likely scenario for Spain, then, is
one of slow recovery, a gradual reduction in unemployment and – eventually – a
slow decline in government and private sector debt. Growth will be held back by
the need to reduce debt at all levels of the economy, while debt reduction will
be hampered by low rates of growth. For millions of Spaniards – especially
young people, immigrants and the long-term unemployed – the coming years are
unlikely to offer much respite. For many of them, recovery will mean little
more than a vague brightening of economic prospects and perhaps the hope that
one day they too will be able to escape Spain’s shocking unemployment.
But – for all the problems – it has become
increasingly difficult to argue that Spain still marks the frontline in the
battle to save the eurozone. Today, policy makers in Brussels, Berlin and other
European capitals are far more likely to worry about political chaos in Italy,
a shaky government in Portugal, the lack of reforms in France and the prospect
of a third bailout package for Greece.
Spain has shown that it is able to maintain
political stability even in acute crisis. After much prodding and several false
starts, it has taken steps to clean up its banking regime, bring down the cost
of labour and tackle long-term challenges such as its underfunded pension
system. And while the jury is still out on most reform measures, Spain has won
itself some vital breathing space.
“The problems in Spain have been identified.
The process of correcting them has started. This process has by no means been completed
but everything we have done so far has shown us that we can do it,” says Mr
Sicilia of BBVA. “This is also important for Europe as a whole because it shows
that this can be done – that this crisis can be overcome.”
Housing: After the boom, the long recovery
Spain’s notorious housing bubble kept
inflating for more than a decade, sucking in more workers, more capital and
more land with every year that passed. At its high point in 2006 the
construction sector accounted for no less than 13 per cent of Spain’s gross
domestic product and employed 2.7m workers. That same year, Spain was
responsible for more housing starts than Germany, France, Britain and Italy
combined.
The collapse that followed was no less
spectacular. Construction today makes up just 5 per cent of Spanish output,
about 1.7m workers have lost their jobs and housing starts are roughly 95 per
cent below their peak.
House prices have dropped more than 30 per
cent from their peak but almost certainly have further to fall. The International
Monetary Fund believes prices will have to drop another 15 per cent; others are
more sceptical still, pointing out that house prices in Spain have not fallen
nearly as sharply as they did in Ireland or the US after their housing bubbles
burst.
A small but noteworthy flurry of deals over
recent months, often involving foreign private equity groups, suggests that
some investors are starting to see value in Spanish property. But analysts warn
that a broader recovery, one that would involve new hiring in the construction
sector, is still many years away. Despite the collapse in new housing starts,
about 800,000 units still remain vacant – equivalent to one empty flat or house
for every 20 households in the country.
This means Spain will have to pull itself out
of the slump without any meaningful help from the sector that was once at the
forefront of its economic rise. Along with the massive debt load and towering
unemployment, the hangover from Spain’s construction boom is a key reason
economists believe Spain will see only modest growth in the years ahead.