Government or no government, Spain’s economy fares well

Shoaib Ur Rehman July 26, 2019

MADRID: Spain may have been waiting for a new government for months but its economy does not seem to mind as it grows much faster than the eurozone average.

Since an inconclusive general election in April, socialist Prime Minister Pedro Sanchez has been at the head of a caretaker executive that can only handle day-to-day business with no agreement for a new government in sight.

His conservative predecessor Mariano Rajoy also ruled in a caretaker capacity for around 10 months in 2015 and 2016 before managing to form a minority government.

 

– Forecasts raised –

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After a long recession, Spain returned to growth at the end of 2013.

Then from 2015 to 2017, it registered three successive years of economic growth above 3 percent before slowing to 2.6 percent in 2018.

But after the economy fared better than expected at the start of the year, international financial institutions have upped their growth forecasts for Spain in 2019.

The European Commission increased its forecast to 2.3 percent from 2.1 percent — compared to an expected 1.9 percent in the eurozone overall. Meanwhile the International Monetary Fund raised its forecast for Spanish economic growth to 2.3 percent from 2.1 percent and Spain’s central bank bumped its up to 2.4 percent from 2.2 percent.

Economic growth “will continue to be fuelled by the buoyancy of private domestic consumption,” the central bank predicted, underscoring a rise in salaries and low interest rates that have boosted people’s purchasing power.

One of the key measures of socialist Prime Minister Pedro Sanchez was to increase the minimum wage by 22 percent to 1,050 euros ($1,200).

But the central bank said the rise in salaries “is, at first glance, less conducive to the growth of consumption” than job creation.

Spain’s unemployment has tumbled from a high of 27 percent in 2013 to 14 percent end of June, even if it remains the second highest rate in the eurozone after Greece.

 

– Catching up –

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The Spanish economy, like that of other eurozone countries such as Ireland and Portugal, is still catching up following a devastating economic crisis and is therefore not so sensitive to political ups and downs, said Josep Comajuncosa, an economist at Barcelona’s ESADE business school.

“Workers and the production capacities of companies that were not used during the crisis are now integrated into the production process” as many have found a job again and firms are getting more orders, he said.

The rise in household consumption, an increase in exports and a slight uptick in public spending compensate for uncertainty over company investment, he added.

But in any case, “uncertainty from global problems — trade wars, Brexit — has a lot more influence than the little added uncertainty that an absence of government can generate in Spain.”

 

– Long-term impact? –

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Some crucial reforms remain at a standstill due to successive political deadlocks.

For instance, public investment in infrastructure is carried out on the basis of budgets that are rolled over from one year to the next as governments fail to get a new one approved.

“As a result, public investment is much lower than what it should be, like in the ‘Mediterranean corridor’ (along the eastern coast) or the regions of Valencia and Catalonia” which are the source of many exports, said Comajuncosa.

And thus the political deadlock “reduces the potential for growth in the future,” he added.

Mari Cruz Vicente of the CCOO union, one of the biggest in Spain, added that “we have been without a stable government for years, which has prevented us from facing (economic) and labour market challenges.”

She says it is “urgent” to modify a labour reform adopted by the conservatives in 2012, which has been held responsible for a rise in job instability by facilitating lay-offs.

The union also wants a major reform of the pensions system, which is in heavy deficit, and to adjust pensions to inflation.

International financial institutions also regularly ask for reforms to university and professional training to make it better adapted to the needs of companies.

Copyright AFP (Agence France-Press), 2019
 

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