Spain grows well above the euro zone in a more sustainable way

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Spain is growing at a faster rate than the other countries in the euro zone, which advanced at levels of between 1.5 and 2%, thus becoming one of the leading countries in economic growth. Although the good news is that growth seems more sustainable than before the crisis.

For 20 years, the Spanish economy has been a clear benchmark in economic growth with an average growth rate of over 2%. This is quite a high figure if we consider the average growth of the other leading countries, which, as we have said, is around 1.5% on average.

During the period that we have commented, economic growth suffered 2 historical highs, the most important being that of the first quarter of the year 2000 in which Spain reached a growth of 5.60%, a figure that is quite far from the growth rates of the euro zone, and a record low in the second quarter of 2009, just after the bursting of the real estate market bubble that dragged the economic growth figure to a minimum of -4.30%.

Spanish GDP is growing at a surprising rate, and according to economic forecasts, growth is expected to continue. Economic growth is forecast for the year 2017 in Spain of 3%. Encouraging figures that place Spain as one of the leading countries with the greatest growth potential for this year 2017.

Are we facing a new growth cycle or is it the same growth cycle as always?

More stable growth

The current rate of economic growth is very similar to that seen in the years prior to the outbreak of the financial crisis, but although growth and data reflect a behavior similar to that before the burst of the bubble, it must be said that growth Today it is a much more stable and balanced growth than that of those times.

In the years prior to the crisis, Spain has suffered a huge contraction in national demand due to the overwhelming fall in Gross Fixed Capital Formation (GFCF), supported by the collapse of Spanish housing.

In Spain, Spanish housing had an enormous weight in the economy and in the GFCF, the figures were around a weight very close to 70%, currently this figure has been reduced to 50%. A figure that clearly reflects that we no longer depend on housing to grow economically, although it can be said that the real estate sector in Spain is growing again in a more stable and controlled way, thus generating greater growth.

The current growth model in Spain introduces a very positive contribution from foreign demand. This has been a great change for the Spanish economy, which has managed to maintain the level of imports, stimulating and increasing the level of exports, that is, we import the same, but we export much more abroad. Clear samples that, if we turn to great economists like John Maynard Keynes, they reflect signs of growth and stimulus of the economy.

Translated into figures, in 2008 Spain's exports were 282,589 million euros, while at the end of 2016, exports had risen 29.1%, thus reaching a figure of 368,322 million euros. An annual variation of 5.3% and placing Spain among the 5 most exporting countries in the euro zone.

In 2007, the Spanish GDP growth data also led the ranking of economic growth in the countries of the euro zone, as Spain ended the year growing at a rate of 3.8%, while other leading countries in the Eurozone and belonging to the G7, did so at a rate below 3%.

At that time, foreign demand subtracted economic growth. While the contribution of domestic demand to growth was 4.6 points, the negative contribution of foreign demand was -0.7 points.

Evolution of growth cycles in Spain

If we look at the past, we could observe how between 1998 and 2007, the construction sector was the sector that pulled productive activity in Spain, with a year-on-year growth of 6%.

In 2006, at the height of the real estate bubble, construction peaked over GDP at 11.7%. It should be said that private debt also shot up thanks to the easy access to credit that existed at the time.

Construction has always been a clear reference to understand the functioning of the Spanish GDP, since it has always been a sector that has had a weight of between 7% and 10% in the Spanish economy, 13% of existing employment and 60 % of gross fixed capital formation.

The latest published data from the National Accounts show how the construction sector accounted for 5.4% of the Spanish GDP in 2014 and 5.9% of employment, this represents a notable decrease in the weight of construction, both in employment as in GDP.

Before the crisis, inequalities in the allocation of capital and labor held back productivity growth. Investment was mainly concentrated in the sectors of non-exportable goods with minimal marginal returns.

The outbreak of the crisis left its mark on Spain, radically changing the economic growth model, a model of dependence on a single sector, the brick sector in Spain, and it has diversified its investments in sectors of exportable goods.

Thanks to this change in trend, exports have gone from representing 25.7% of GDP in 2007 to 32% of GDP in 2016, as can be seen in the first graph.

As a result, a clear increase in productivity growth and a balance have been achieved, due to the fact that investments have been redirected towards sectors that have greater added value and that can contribute to the sustainable growth of exports.

Currently, Spain is a country that exports medium-high technology and medium quality products with significant susceptibility to market prices, which links the country to a dependence on cost competitiveness.

How has the ECB's monetary policies stimulated the Spanish economy?

The policies applied by the ECB have favored the growth of the Spanish economy very positively. Low interest rates have allowed the private sector to finance itself much cheaper and this has allowed an increase in new debt contracting and has stimulated investment from the private sector.

According to the statements made by the ECB's executive committee at the Geneva conference, lowering interest rates has helped combat the economic recession and deflationary pressures.

“In recent years, monetary policy interest rates have been lowered to exceptionally low levels. The main reason for maintaining this high degree of monetary accommodation has been to avoid the risk of economic depression and to combat deflationary pressures. At the same time, given the financial turmoil that led to what is now generally known as the 'Great Recession', the fall in interest rates has helped to offset the excessive increase in financing costs caused by the expansion of loans. financial spreads. With this perspective, the actions of the monetary policy have benefited the borrowers ”.

We can say that the devaluation of the currency has also favored exports, since it has favored competitiveness with other international currencies and has made our exportable goods cheaper than before. A factor that makes the cost competitiveness on which we depend is greater.

Employment, one of the indicators that best reflects the growth of the Spanish economy

According to the latest published employment data, employment in Spain is growing at its fastest rate. The Spanish economy is growing and is displacing all growth to boost job creation.

The continuous labor reforms have led Spain to grow above 2.7% year-on-year in the creation of full-time jobs. The overthrow of Okun's Law (law that reflects the empirical relationship between the variables unemployment rate and production of a country. It is a concept defined in the 1960s by the American economist Arthur Okun and that has great relevance in the economic and financial sphere) that estimated a growth of 2.5% to create employment has been a very wise decision to start creating employment.

Spain has gone from being the country that most destroyed jobs at the outbreak of the crisis, to leading the reduction in unemployment in the eurozone. The latest interannual data reflects that unemployment has been reduced by 430,275 employees.

Thanks to this new growth model, Spain has recovered 72% of the jobs destroyed by the bursting of the bubble and 33% of temporary jobs, which has allowed an increase in disposable income and in the purchasing power of companies. families

This has led to a notable increase in private consumption, with an annual variation of 3%. Being Spain, the 7th country in the eurozone where consumption rates have increased the most.

Spain, a country in debt

Despite the undoubted change in the model of the Spanish economy, Spain continues to have serious risks to face. According to the latest data published by the Bank of Spain, Spain has once again been among the most indebted countries in the euro zone, with a new debt record of 1.12 trillion euros in the month of March compared to 11,160 million of the previous month. An increase in indebtedness that places the Spanish state in the 5th most indebted state in the eurozone behind Greece, Italy, Portugal and Belgium.

Spanish public debt is already above 100% of GDP, specifically at 100.33% of GDP, and although the growth of the Spanish economy continues to increase, the government has not yet been able to implement a balance budget that manages to reduce the levels of debt suffered by the Spanish state.

Thanks to the ECB and its negative rate monetary policy, Spain is issuing debt with negative interest rates, which leads Spain to finance itself for free, a fact that would not have been possible without the ECB's lowering of rates to 0%.

In summary:

  • Spain continues to grow very favorably, but it has to reduce its debt levels to achieve economic stability for the country.
  • Employment is improving satisfactorily and private household consumption is increasing.
  • The policies adopted by the ECB favor private investment and increase the contracting of mortgage loans, thus favoring the growth of the construction sector in Spain and the creation of companies.
  • Exports have focused on goods that generate the highest added value and have increased notably, compared to imports.
  • Spain has changed its growth model for a much more balanced model, which is making the pillars on which the Spanish economy is growing much more sustainable and resistant than before the outbreak of the crisis.

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