While other big eurozone countries are on the edge of recession, the region’s fourth-largest economy is enjoying a run of growth that has lasted years — buoyed most recently by household spending.
Spain has outperformed the eurozone’s average growth rate for half a decade but during the past 12 months the country’s economy has changed tracks from the export-based model that brought it back from the depths of recession.
Growth is now underpinned by consumer demand, aided by pay increases that were instigated by the government. The switch has stoked controversy between those who see Spain as a model for others to follow and those who worry about pump-priming by the state.
Most forecasters expect gross domestic product to expand by more than 2 per cent this year, compared with less than 0.5 per cent for Germany and just over 1 per cent for the single currency bloc as a whole
“The economy is doing quite well, compared to others in Europe in particular,” said Erik Nielsen, chief economist at UniCredit bank, who welcomes the shift to domestic demand. “It’s a real lesson for the Germans.”
Consumption has in part been fuelled by the government’s decision to raise the minimum wage by 22 per cent this year — the biggest increase in four decades.
But some analysts query the sustainability of this performance at a time when the broader eurozone economy is flagging and the country remains mired in political deadlock, facing its fourth general election in as many years.
“It is the consumer, domestic demand, that has been supporting growth,” said an official at Spain’s central bank. “The question is how long that can go on.”
The country has lacked a strong government since December 2015. A fourth national poll is pencilled in for November 10 if the caretaker Socialist administration of Pedro Sánchez cannot form an administration by September 23. There is no certainty that would produce a stable government where the previous three failed.
Meanwhile, there is little prospect of structural reform to address Spain’s economic vulnerabilities, and the lingering political uncertainty could sap consumer confidence, say economists.
As eurozone growth as a whole decelerates and international tensions such as the US-China trade war hit sentiment across the globe, Spain’s economy has begun to show signs of slowing.
Warning signs include a slump in the domestic car market. Domestic passenger car sales were down 31 per cent in August on the same month a year ago; the fall across the first seven months of the year was 6.6 per cent. Car exports are flat.
The sector — which, along with related industries, accounts for almost 10 per cent of Spain’s GDP and 9 per cent of jobs — “is going through one of the most challenging moments in its history”, said Noemi Navas, spokeswoman for the Spanish Association of Automobile and Truck Manufacturers.
Manuel de la Rocha, Mr Sánchez’s chief economic adviser, argues it is natural for the economy to slow a little after its dramatic rebound from a savage recession sparked by the global financial crisis. After several years in which Spain’s growth was well above the EU average, “the current deceleration is perfectly normal, more so in the international context”, he told the FT.
In the absence of productivity-bolstering reforms, growth is set to converge towards the country’s trend rate — estimated at between 1.5 per cent and 2 per cent — he added.
According to many analysts, the recovery owes much to reforms carried out by the previous centre-right government in the depths of the financial crisis.
In his first term in 2011-2015, then-prime minister Mariano Rajoy brought in labour reforms that curbed employment costs and cut a fiscal deficit that had reached 10 per cent of GDP. With the help of an EU bailout that totalled more than €40bn, his administration also did much to clean up the financial sector.
Those steps paved the way for the export-led recovery that helped Spain record growth of 2 to 3 per cent between 2015 and last year.
But Mr Rajoy’s deficit-cutting efforts flagged after 2015. Spanish banks still have less regulatory capital than many of their EU counterparts and as demand cools elsewhere, exports now barely contribute to growth. Instead, domestic demand has become the motor of the economy.
That switch has been financed by a fall in household savings — from above 10 per cent at the start of the decade to about 5 per cent, one of the lowest levels in the EU — as well as by the minimum salary rise.
The central bank has signalled concern about the impact on unemployment of the minimum wage increase. In August, traditionally a bad month for unemployment, more than 50,000 people lost their jobs. Overall, Spain’s jobless rate, at 14 per cent, is one of the highest in the industrialised world, although it is now far below its 2013 peak of nearly 27 per cent.
The government depicts the minimum wage increase as part of a social democratic programme that has helped boost the economy and fight inequality while not, so far, costing jobs.
“The increase in minimum salaries and other political decisions [such as an increase in civil servants’ wages] have helped sustain growth,” Mr de la Rocha said. But the country still requires “important reforms” in areas such as energy, education and skills to push up growth over the longer term, he said, adding: “That’s why we need a government.”
Economists such as UniCredit’s Mr Nielsen remain relatively sanguine about Spain’s prospects.
“The fall in the savings rate ultimately expresses a sense of confidence that people are not too worried,” Mr Nielsen said. “This shift to domestic demand is very good when the world looks in trouble.”