After two years of contraction, the latest economic indicators show that Spain's economic recovery is gaining momentum. In the second quarter of 2014, GDP grew by 0,6% compared to the previous period, recording the highest quarterly growth rate since 2007. Gross domestic product has now been on the rise for four consecutive quarters. This rebound is primarily due to the level of net exports, a factor to which domestic demand has now been added. Growing foreign demand and higher business confidence boosted investment, while a labor market recovery and rising demand for durable goods boosted private consumption. The private components of domestic demand, in particular consumption and investment, have become the cornerstone of GDP growth and an increase is expected in the second half of the year. With the recovery of domestic demand, the Spanish economic performance is now more sustainable, so much so that it registers the fastest dynamics compared to the countries of southern Europe. In this context, growth forecasts have been revised to 1,2% in 2014 and 1,9% in 2015, reflecting the success of economic reforms and recent domestic demand. At this rate, the analyzes published by Atradius predict a further increase in the Spanish GDP growth rate in the coming years, reaching peaks of 3% in 2017.
Growth is also having a positive impact on the labor market, whose conditions have improved since 2013, with unemployment decreasing from 26,3% in May 2013 to 24,5% in July 2014: the biggest drop since 2006. The creation of 190.000 new jobs in 2013 was the largest annual increase in six years. These developments are also the result of labor reforms of 2012, which gave companies more flexibility regarding wages and working conditions. The unemployment rate is expected to decrease further in 2015 below 24%. However, some serious problems remain in the local labor market: 15% of the workforce has been unemployed for more than a year and unemployment among young people remains high (55%). The unemployment rate should not fall below 20% for at least another four years: then further and more decisive reforms against the structural weaknesses of the labor market become necessary.
Recently, the consumer price index (CPI) fell to -0,3% in July 2014 and -0,5% in the following month. This is concerning in relation to the question, since consumers have an incentive to delay purchases and consumption until prices fall further, which in turn could adversely affect production activities. However, at the beginning of September 2014 the ECB cut interest rates to 0,05%, announcing its intention to purchase bonds denominated in Euros to avoid a vicious circle of deflation in the Eurozone. At the same time, growing domestic demand should lead to an increase in consumer prices in the coming months, reversing the deflationary trend. Consumer prices should thus increase again in 2015, to 0,9%.
The competitiveness of Spanish exports on the international market is confirmed at good levels, according to 2007 being the only recent year in which the ratio between GDP and the contribution of net exports was negative. However, a real comparison of the effective exchange rate (REER) which measures a country's international competitiveness through costs and price changes shows that there is still considerable room for improvement. While Spain's REER declined in the mid-2014 review, it is the second highest of the Eurozone partners. In 2013 the current account balance recorded the largest surplus since 1986, at 0,8% of GDP in 2013, while another surplus of 0,7% is expected this year. This trend reversal reflects the structural improvements in market competitiveness (increase in exports to +5,2% in 2013), offering a mix of quality products and strategic diversification of export markets: While France and Germany remain key destinations, Spain has increased shipments to the emerging markets of Africa, Latin America and the Middle East. Furthermore, the level of incoming foreign productive investments has improved. But, despite significant current account improvements, Spain's net foreign debt remains at 92% of GDP, one of the highest in the Eurozone. However, it is reported that this ratio is expected to decrease in the coming years.
Banking sector reform is on track, but lending conditions still remain tight. The financial sector assistance program supported by the European Stability Mechanism (ESM) was successfully completed in January 2014. Spanish banking institutions thus had to correct their capital shortcomings: the Core Tier 1 capital ratio, i.e. the ratio ratio of a bank's core equity to total risk-weighted assets increased from 9,6% at the start of the program (June 2012) to 11,8% by the end of 2013. Further signs of industry recovery Iberian banking was the halving the dependence of local banks on ECB financing. Tuttavia, some shortcomings persist, first of all the credit crunch, the still high risk of default and deleveraging of the private sector, without forgetting the weight of the public sector on the local banking system, with repercussions on the debt. The yield on Spanish 2,6-year bonds continued to decline, registering a 2014% differential with the German bund at the end of August 7,5, compared to a peak of 2012% in July XNUMX. This is also an indication of the renewed confidence of investors in the Spanish economy.
