World Economy

Spanish Firms Expanding Despite Fears of Recession

Spanish Firms Expanding Despite Fears of Recession
Spanish Firms Expanding Despite Fears of Recession

In Spain’s small cured meat southern village of Jabugo, uncertainty over who will govern next in Madrid is a remote concern for investors keen to produce more of the Andalusian delicacy.

Drawn by the export potential for the premium meat, family-owned meat producer ElPozo is pouring €70 million ($78 million) into building a new processing plant in the area even as Spain enters its sixth month without a new government and gears up for a repeat election on June 26, Reuters reported.

It is far from alone. In part thanks to Spain taking Germany-inspired austerity medicine and dealing with its banking crisis earlier than many European peers, company investments have chugged along since an inconclusive December ballot.

Even now, with opinion polls projecting a similarly fragmented result and raising fears of a paralysis that could jeopardize Spain’s recovery from a painful double-dip recession, local and foreign firms are finding reasons to expand, from the country’s relatively low wages to recovering household spending.

French carmakers Renault and Peugeot separately confirmed in May they would be investing a combined €1.3 billion into their Spanish plants over the next four years and the two will produce new models there.

  Economy Grows

The economy grew 0.8% between January and March for the third straight quarter, one of the fastest rates in the eurozone, as both consumers and businesses shrugged off politicians’ failure to strike a coalition deal.

In ElPozo’s case, surging Chinese demand for the Spanish meat is an opportunity it is loath to pass on. Spain’s meat exports are thriving, having jumped 16% last year to nearly 2 million tons.

“We want to inundate the world with the Iberian quality,” said Rafael Fuertes, one of the senior managers at ElPozo.

The firm already derives about 15% of its revenue from exports and is seeking to make a push in Latin America as well as Asia.

Its plant in Jabugo, first mooted in 2011, aims to produce 2.5 million sausages and other types of cold cuts a year, after the firm more than trebled its early production targets and increased by 50% its investment budget last year.

Spain’s 17 highly-devolved regions, whose stretched finances drew international concern at the height of the eurozone debt crisis in 2012, argue they are now a source of institutional stability.

They boast of their own parliaments, budgets and local subsidy schemes, while even small municipalities can help get projects moving.

  Momentum Persists

The economy has plenty of momentum, with companies going through with investment plans hatched before the last election, but it cannot continue on auto-pilot indefinitely and there are already signs that the momentum has begun to slow.

If the next election fails to quickly break the political impasse, and ushers in another round of inconclusive negotiations, the uncertainty could yet have a more marked impact on companies’ ambitions.

Spain’s trade tailwinds could also fade. “Higher oil prices could now start working in the other direction,” said Gizem Kara, senior eurozone economist at BNP Paribas. “Exports are also not doing so well, due to a slowdown in emerging markets, compounded by the impact of the stronger euro. This is likely to weigh on investment growth.”

Industrial spending on equipment and machinery slowed slightly in the first three months of the year, growing 1.3% on a quarterly basis compared to 1.9% previously, while the construction sector registered a contraction as a result of infrastructure tenders drying up.

Already in May, surveys pointed to waning growth in Spanish factory orders, while the latest consumer and business sentiment indicators are mixed, at a time when uncertainty over the direction of policies still lingers.