Spain is likely to move ahead of other peripheral eurozone nations eventually, painful though the immediate future may be. Like other countries on the periphery of the eurozone, Spain faces serious and ongoing economic challenges, including high sovereign debt, a troubled financial sector, recession and unemployment.
However, there are grounds to be more positive about Spain’s future in the longer term. It has a diversified export base and a strong tourism industry. It also has competitive labour costs. These factors should help its economic growth overtake other large peripheral economies, such as Italy, once the major problems of credit and the property bubble are dealt with. Such outperformance is some way off and likely in around five years’ time.
We expect the country to recover gradually in the second half of the year, with a slight improvement in domestic demand and strong exports
We expect the country to recover gradually in the second half of the year, with a slight improvement in domestic demand and strong exports. Positive year-on-year growth will not be reached before the second half of 2014. The recovery will be slow.
To make the most of its strengths, Spain will need to negotiate a number of challenges. Difficulty in reducing the deficit and an increase in debt could become more of a problem when the US Federal Reserve slows stimulus measures. However, if the Spanish economy begins to grow before this happens, the reduction in debt purchases by the Federal Reserve should have a limited impact. A possible cut in the rating of Spanish debt to below investment grade is the main risk in the short term, while persistent youth unemployment may also affect the potential long-term growth.
But Spain has already demonstrated its commitment to structural reforms, achieving significant progress in restructuring its financial system. The creation of SAREB, which looks after the assets of the four nationalised Spanish banks, has largely resolved the issue of property asset quality, which has been one of the key problems.
To maintain momentum Spain will need European support for sustaining investment by the public and private sector.
This piece is based on an interview Matteo Cominetta gave to Expansión, a Spanish financial newspaper, on 20 August 2013.