Spain Surprises Eurozone as Economy Shows Signs of Rebound

After feeling the ravages of recession more than most other countries in Europe, Spain now appear to be emerging from the wreckage with significant strength, contrary to speculation from economists...

After feeling the ravages of recession more than most other countries in Europe, Spain now appear to be emerging from the wreckage with significant strength, contrary to speculation from economists.

Unemployment was pushed to as high as 27% over the 6 year downturn and at some points it seemed fairly certain that the nation would meet the same fate as Greece. Figures released from the eurozone this morning however, show that unemployment fell by 111,600 in April, more than twice the market forecasts.

April is usually characterised by stronger employment as the tourism season begins. Nevertheless, also in seasonally adjusted terms, this is a drop of 50,202 people and the best April since the '90s. Year on year, the number of people looking for a job is down a very healthy 304,892.

The EU have now improved their forecast for Spain saying that the nation will post its fastest economic growth in 8 years as Prime Minister Mariano Rajoy allows his budget shortfall to rise in the run up to Spain's general election in 2015.

However, low inflation continues to impact on Spain's competitiveness, remaining at a core level of 0.1% according to a report from the Bank of Spain – well below the European Central Bank's (ECB) eurozone target of 2%.

Low prices are always welcomed by consumers but a broad, sustained decline in prices can lead shoppers and businesses to postpone purchases as they wait for prices to tumble even further while at the same time, it becomes harder to finance existing debts. Protracted low inflation can push an economy into a downward spiral and ECB chief Mario Draghi has said this "is a risk by itself" that needs monitoring.

Rajoy has urged Draghi to roll out the programme of quantitative easing which central bank officials have been devising to boost prices across the currency area. However, the ECB are still considering whether to embrace policies ranging from negative interest rates to quantitative easing and have said that they may start broad-based asset purchase if the inflation outlook worsens over the coming month.

Spain continues to be bullish on a strong recovery by 2015. Economy Minister Luis de Guindos told reporters in Brussels last week: "What is important is that the European Commission says that next year Spain will grow more than the European average and will create more employment than the European average. I think that's the message and it's a very positive message".

The Spanish government's response to a long drawn out recession came in 2012 when the most austere budget of the post-Franco era was introduced, unveiling €27.3bn of budget cuts and tax rises and a freeze on public sector pay.

Budget Minister Cristobal Montoro ruled out further budget cuts last week saying that the measures already in place will be enough to meet Spain's deficit targets through 2016, when the government is committed to cutting the shortfall to 2.8% of GDP.

Unemployment is expected to continue its moderate decline over 2014 which will improve consumer spending and eventually bring inflation into line with ECB targets. In general there is a dramatic improvement in the economic outlook of Spain which is set to give Rajoy the boost he needs to claim victory in the general election.

- Wednesday 07 May 2014

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