World Economy

Spain Races Ahead

Spain Races Ahead
Spain Races Ahead

Once the symbol of eurozone debt and stagnation, Spain is poised to outpace most advanced industrialized economies in growth this year, as rebounding consumer spending is overshadowing the country’s worst political crisis in decades.

Spain’s economy expanded 3.2% in 2015, well above the eurozone average of 1.6%. Growth is expected to remain elevated this year, growing at a rate of 2.6%, according to the International Monetary Fund, Economic reported.

Spain’s economy is predicted to grow faster than Germany, France and Italy, despite the current political stasis, with tourism on the up.

Preliminary estimates suggest the eurozone’s fourth largest economy expanded 0.7% in the first three months of 2016 and 2.9% compared with year-ago levels. That’s only slightly below the rate seen in the fourth quarter, a sign that Spain’s economic prospects remain strong heading into a volatile year.

By comparison, the 19-nation eurozone economy expanded a mere 1.5% in 2015, strengthening calls for additional stimulus by the European Central Bank. The ECB cut its main interest rate to zero and reduced its already negative deposit rate to -0.4% in March in an effort to re-inflate the eurozone economy. The ECB’s new stimulus measures included expanding the size of monthly bond purchases to €80 billion from €60 billion.

The ECB will deliver its next policy decision next Thursday. No changes to the main interest rates are expected.

  Signs of Recovery

Spain, which has been without a functioning government since December, is witnessing a solid rebound in retail sales and tourism. Consumer confidence is near record highs, as falling oil prices have been a major boon to disposable incomes. The combination of rock-bottom interest rates and a weak euro has also boosted Spain’s business sector. These forces are expected to underlie the Spanish recovery for the rest of the year.

Increased consumer spending and stronger business confidence have also boosted hiring. Spain’s unemployment rate dropped by 1.4% in March, the country’s employment ministry reported earlier this month.

The number of unemployed people in Spain declined by over 58,000 to 4.09 million last month, government data showed. Over the past year, unemployment has declined by over 357,000, helping to push unemployment down to 20.9%.

Spain’s unemployment rate reached a staggering 27% following the 2008 financial crisis. The only European country with a higher unemployment rate is Greece. Unlike Spain, the economy of Greece is expected to deteriorate again this year as Athens continues to cope with the aftermath of a devastating debt crisis. Greece’s economy is forecast to contract by 0.6% this year, according to the IMF.

The Spanish economy endured a devastating recession in 2009 and then again between 2011 and 2013. Growth has since picked up, and is expected to continue for the foreseeable future as the economy stabilizes from weak domestic demand and a massive debt crisis.

In addition to political uncertainty, Spain is saddled with structural imbalances that could make it difficult to maintain its current pace of growth. The housing recovery also appears to have leveled off, signaling that consumers are becoming more concerned with the political impasse in Madrid.

Spanish inflation rebounded sharply in March, latest government data showed. Spain’s harmonized index of consumer prices, which calculates inflation using a statistical methodology consistent throughout the EU, rose 2% from February, the National Institute of Statistics reported April 13. In annualized terms, HICP inflation was -1%.

Eurozone consumer prices rose 1.2% from February, which translated into a year-over-year rate of zero. So-called core inflation, which strips away volatile goods such as food and gasoline, rose 1% annually in March, official data showed.