Economists urge caution amid Spain’s economic upturn

Spain's economic recovery may flag, but it is going in the right direction, say economists

Despite Spain’s impressive economic recovery in the latter part of 2013 swelling consumer, banker and investor confidence to levels not seen since pre-2007, economic experts in the country have urged caution for the months that lay ahead.

With Spain’s jobless figures falling by 108,000 in December – one of the steepest falls in Spanish unemployment on record and marking a third monthly decline in a row – there is growing belief that Spain has turned a corner. The government’s stringent labour market reforms, introduced in 2012, have helped reshape the country’s employment outlook. Firms are more confident in hiring, wages are lower, contracts are more flexible and exports are strong…

All good news, but some experts warn that Spain is still only at the very beginning of a path that is long, winding and full of potential hurdles. “Employment creation in the last few months was considerable. That was a surprise to a lot of us.” Madrid Autónoma University’s Professor of Economics Marcel Jansen told the Financial Times. “Since autumn the figures are clearly showing there are signs of recovery. It is hard to say how solid this recovery is but the numbers have certainly exceeded expectations.”

Jansen does warn that Spain’s jobless figures may have been assuaged slightly by a handful of other factors unrelated to job creation. Long-term unemployed who no longer qualify for traditional benefits, for example, will have dropped off the official numbers. Improving economic situations in other countries may have tempted some migrant workers back home, or they may have given up hope of finding work in Spain altogether and have since left the country.

Yet coupled with a services sector that experienced its first monthly growth in December for more than six years, the suggestions are strong that a mild economic recovery is underway in Spain. The country is already experiencing the early stages of a classic recovery cycle, which is usually sparked by suppressed wages, which in turn lead to renewed competitiveness, export growth, corporate investment, job creation, and consumer demand.

“What we are seeing is that the improvement in the financial economy is feeding through into confidence, and that is possibly encouraging people to spend a bit more,” Edward Hugh, an economic analyst, told the Financial Times. “But for this to continue people need this improvement to feed through into their income, and that is not yet happening.”

The consensus among leading Spanish economic commentators is that domestic demand is likely to remain flat throughout the year, with the country’s resurgent export industry set to once again propel the economy forward. Investor confidence – already pulling strongly – is not so much misplaced, believe some industry watchers, but perhaps overly optimistic and premature.

“Investment appetite in Spain is currently probably an excessive reaction,” said London School of Economics Professor Luis Garicano. “I think what you see is a picture of stabilisation, but there is still large volatility and potential for accidents.

“Financial markets are being too sanguine about the underlying structural problems in Spain, where the reality on the ground is still tough.”

Essentially, most analysts seem to agree, Spain’s economic recovery is likely to be characterised by a prolonged period of slow but stable growth, rather than a magical turnaround. Compared to the doom and gloom predictions of less than 18 months ago, this is a far more positive position for the country to find itself in.