World Economy

Spain Economy Motors on at Fastest Pace

Spain Economy Motors on at Fastest PaceSpain Economy Motors on at Fastest Pace

Spain’s economy grew at its fastest rate since 2007 in the second quarter with more growth expected ahead, although the pace of recovery may flag as the effect of supportive cheap money and low inflation starts to wear off.

Since Spain emerged from a prolonged downturn in mid-2013, economic growth has been driven by a steady rise in consumer spending underpinned by competitive prices, record numbers of tourists and a gradual drop in a sky-high unemployment rate, Yahoo News reported.

“We’re starting to see the light at the end of the tunnel,” Economy Minister Luis de Guindos told Onda Cero radio after Thursday’s data showing a quarterly growth rate of 1%. “We are now able to return to pre-crisis income levels.”

The International Monetary Fund expects Spain’s economy to grow 3.1% this year, the fastest rate in the eurozone.

The center-right government is banking on such a recovery to boost its chances of winning a second term in office in elections due by year-end. But it faces a major task to persuade voters the turnaround is trickling down to all.

Low inflation, which has helped give cash-strapped families more disposable income, extended into July, and retail sales rose for an 11th straight month in June, separate data showed.

But Spain still has more than five million out of work, at 22.4% a bigger proportion than any eurozone state except Greece. High levels of public and corporate debt are also limiting an investment revival that, if sustained, would herald a more balanced recovery.

“Growth driven by consumer spending can only last so long. We expect that will fade away little by little,” said Angel Talavera, economist at Oxford Economics in London.

“The second quarter [growth] will probably be the peak... We don’t expect a very big slowdown, but a gradual moderation.”

 Mixed Picture

With major companies reporting second quarter earnings Thursday and Friday, the picture in Spain’s corporate sector–still dismantling a legacy of inefficiency from the downturn–remains mixed.

“Support for consumer spending is materializing, including rising employment and income tax cuts,” Raj Badiani, senior Spanish economist at IHS Economics, said in a note.

But he also forecast a slowdown in the pace of the recovery over the next 18 months, pointing to a still difficult labor market and fiscal pressures that suggested the government’s public deficit targets for this year and next would be missed.

Badiani said industrial investment was also likely to have underpinned growth in the quarter. Spanish companies have generally been offering evidence that business is picking up–albeit with caveats.

Dominant telecom operator Telefonica hiked prices in May for most of its phone and TV packages without losing many customers, though its revenue and operating profit fell year on year.

Oil firm Repsol said domestic petrol sales rose, while Gas Natural said that demand for electricity and gas was up in the first half–albeit only modestly–after years of declines.