Spain: Economic upswing backed by reform policies

The Spanish economy has managed until now to continue its strong recovery course virtually uninterrupted. In the third quarter, the Spanish National Statistics Office estimated the quarter-on-quarter growth rate for gross domestic product (GDP) at 0.7 percent. While slightly lower than in the preceding quarters, it still leaves Spain the almost undisputed leader among the member states of the eurozone. Economic growth for the whole of 2016 is expected to slightly exceed the 3 percent mark. What makes this all the more surprising is that for a long time the country had only been ruled by a caretaker government. Yet this period without government does not appear to have harmed the country in any way. Instead, the Rajoy government launched crucial reforms between 2012 and 2015 and thereby created the conditions to enable the economy to fall back into step again. The country can now reap the rewards of the previous years‘ efforts.

The key reform areas included the labour market, the tax system and the pension system. However, the courageous reform measures that have fueled the economic recovery have now sent the approval ratings of the Rajoy government into decline. But after months of to-ing and fro-ing and several general elections, the Spaniards have now reached an agreement on a new government. And the new head of government is the old one – Mariano Rajoy. His government work since 2011 has led to a restoration of confidence. This is not only evidenced in the overall growth in GDP but also particularly in investment. Since 2014, investment activity has been accelerating strongly again. Following an increase of 6 percent last year, the growth rate is expected to have gained nearly 4 percent this year.

The economic upswing gives cause for optimism, and can be expected to continue next year, albeit at a somewhat slower pace. However, external factors are likely to be responsible for causing growth to decelerate somewhat. These factors include the uncertainty over the Brexit negotiations that are due to commence between the United Kingdom and the EU, as well as the elections in the Netherlands, France and Germany. The question of what direction Italy will take following the outcome of the constitutional referendum will also nurture uncertainty for a brief period. Nonetheless the steam lost by the Spanish economic locomotive is likely to be minimal.

However, two major challenges still require tackling. Firstly, the persistently high unemployment rate of more than 19 percent. While the unemployment rate has been lowered quite significantly from its rate of more than 26 percent in 2013, the path to normalisation remains long. Secondly, the country’s budget situation. The ratio of debt to GDP has more than doubled in the last seven years and is only likely to lie just below the 100 percent mark by the end of 2016. The deficit of an estimated -4.4 percent is also high and continues to exceed the Maastricht limit of -3.0 percent. This year, the EU Commission came extremely close to imposing penalty payments on the country. This served as a warning. To prevent Spain from becoming the first country to have to pay budgetary fines in the EU, the Rajoy government must achieve rapid progress in consolidating the public finances. The robust domestic upswing should create the necessary latitude for this.

Rate this article

Thank you for your rating. Your vote:
There is no rating yet. Be the first! Current average rating: 0

Leave an answer

Your e-mail address will not be published. Required fields are marked *