Since 2014, Spain has been growing at rates higher than those of most other European countries. During these years, Spain has recovered the competitiveness lost before the crisis. Inflation, unit labor costs and mark-ups have performed better than in the eurozone as a whole, resulting in strong export growth.
In 2017, exports were 35% above the 2007 levels. This improvement in external competitiveness has allowed Spain to increase its market share in world trade, FXStreet reported.
Contrary to the experience before the crisis, now the unemployment rate is falling significantly and, at the same time, the current account exhibits a sustained surplus, close to 2% of gross domestic product. This is probably one of the most remarkable features of the current recovery, and something unprecedented in the recent history of the Spanish economy.
The Spanish banking system is more solvent and efficient than before the crisis. The intense and profound restructuring of the banking sector led to mergers, to the transformation of most savings banks into commercial banks, and to the injection of public funds to restore the solvency of some savings banks in order to safeguard the savings of millions of small savers.
This restructuring process of the banking sector has also led to a significant increase in the flow of new credit, at the same time as the private sector was deleveraging.
Households have reduced their indebtedness by 22 percentage points (from 83% of GDP in 2009 to 61% in 2017). And debts of non-financial firms are now even below the eurozone average, with a reduction of 40 percentage points of GDP (from 116% to 78%).
New Credit Flows
Therefore, the economic recovery is allowing the deleveraging of the private sector and, at the same time, is increasing the flow of new credit (with an average growth rate of around 10% since 2014). These flows of new credit are financing investment, new jobs and growth, at a lower cost than before the crisis. As a result investment in machinery and new equipment is now above the maximum levels before the financial crisis.
This deleveraging process of the private sector is taking place through an improvement in the financing capacity of households and firms. In particular, firms have gone from a net borrowing of 13% of GDP in the first quarter of 2008 to a net lending above 3% at the end of 2017.
Public Deficit Falls
Fiscal consolidation and economic growth have made it possible to reduce the public deficit from 11.2% of GDP in 2009 to 3.1% in 2017. Despite this adjustment, public consumption per capita was 5% higher than before the crisis, and there has been an enormous effort to preserve the most important elements of the Spanish welfare state.
In periods of growth such as the current one, the Spanish economy needs to strengthen its fiscal space to face future recessions and to improve the sustainability of the welfare state in the face of the ageing population.
It is important to continue with the fiscal consolidation, maintaining a primary budget surplus that will gradually reduce the level of public debt. To this end, the best strategy is through structural reforms that increase public revenues through higher GDP, higher employment and higher productivity.
More Employment
The results in terms of employment are also remarkable. According to social security data, 86% of employment lost during the crisis has been recovered. At the current pace, at the end of 2019 Spain could reach the level of employment of 2007.
Given that unemployment explains 80% of inequality in Spain, employment creation is crucial to ensure a more inclusive society and to spread the welfare effects of growth.
At the end of 2017, real wages and productivity were about ten percentage points above the average of the previous expansionary cycle.
In short, the Spanish economy produces more today than before the crisis, with higher productivity. Now the challenge is to continue creating employment and, at the same time, improving productivity and wages.
Improving Competition
Additional policies should be implemented to continue the improvement of the external competitiveness of the Spanish economy. This will foster the participation of Spanish firms in global supply chains, and will also have positive effects in sectors with a large margin to increase productivity, such as tourism, construction and the public sector.
In the short term, if existing risks such as protectionism or political uncertainty do not materialize, we expect that Spanish GDP will grow this year by close to 3%, and by around 2.5% next year.
Highlight
The economic recovery is allowing the deleveraging of the private sector and, at the same time, is increasing the flow of new credit
Caption
The Spanish economy produces more today than before the (2007) crisis, with higher productivity.
