World Economy

Spain Expanding, Can Outpace Peers

Spain Expanding, Can Outpace PeersSpain Expanding, Can Outpace Peers

Spain’s economy grew faster than experts predicted in the first quarter of 2016. Gross domestic product grew 0.8%, 0.1% higher than the forecasts.

The Spanish economy has been a model of defiance so far this year, with a recovery that began two years ago powering ahead despite the country’s worst political crisis in decades.

Spain has been without a proper government since December, when an inconclusive general election gave birth to a deeply fragmented parliament. Party leaders have failed to build a governing majority ever since and they now seem increasingly resigned to holding a repeat election in June, news outlets reported.

And yet, at least for the moment, there is little sign of a knock-on effect on Spain’s economy. According to the latest data from Spain’s central bank, gross domestic product expanded 0.7% in the first three months of the year and 2.9% on an annualized basis.

Economic growth was only a fraction below the rate seen in the previous quarter, putting the country on course to expand 2.7% this year.

If that prediction holds, Spain will be one of the fastest-growing nations in the eurozone once again, outpacing the likes of Germany, France and Italy, as it did last year.

“There is a slight deceleration—but there is an even greater deceleration in the rest of Europe. The outperformance of the Spanish economy continues,” Economy Minister Luis de Guindos said recently.

Along with the central bank and most private sector economists, he says that it is the broader global slowdown—and not political uncertainty at home—that currently poses the main threat to the Spanish economy.

  Blessing in Disguise

Over the past year in particular, Spain has received a big helping hand from factors outside Madrid’s control. Falling oil prices have boosted disposable income, while record-low interest rates and the recent decline of the euro have lifted the prospects for Spanish businesses. A string of terror attacks in countries such as Egypt, Turkey and Tunisia has diverted tourist flows to Spain, boosting one of the country’s most important sectors.

Until now, these international tailwinds have proved far more powerful than any concerns linked to domestic politics. However, while officials and analysts agree that Spain’s recovery is sufficiently robust to withstand six months of political drift, there are concerns about what would happen if repeat elections fail to resolve the deadlock and the country’s political uncertainty stretches into the second half of the year.

  Unemployment High

Across Europe, economic growth has helped bring the unemployment rate down. But in Spain, the rate is 20%, according to European Union surveys, and has been above that level for over five years, even as the country’s economy has been recovering.

Such a high level of joblessness, weighing on families for so long, would have caused the country to crack by now. The jobless number is so much higher than the rate for other economic laggards like Italy (11%) and Portugal (12%).

Certainly, some of Spain’s unemployment is overstated because some workers have off-the-books jobs. And people may feel optimistic because unemployment has fallen in recent quarters, from 25% two years ago.

Still, Spanish officials recently said they did not expect the jobless rate to fall below 15% until 2019. And there’s the matter of the country’s youth unemployment (those under 25): an almost incomprehensible 45.5%.

A new government in Spain—once it is chosen after almost half a year of discord—may end up pursuing smarter and bolder policies that reduce joblessness to levels that exist elsewhere in Europe.  

Marcel Jansen, an expert on labor markets at the Universidad Autonoma de Madrid, notes that unemployment above 20% is not uncommon in Spain. In fact, it has been at that level in three periods since Spain’s transition to democracy in the 1970s. And, ominously, from the previous unemployment rate peak in the 1990s, it took 14 years for it to decline to the wider European level, he said.