After the Fiesta – The Spanish Economy in Trouble Tutor2u Economics – February 2009

Vulnerable to the crisis Spain likely to see a 3.5% decline in GDP in 2009 – the first recession since 1993 The return of mass unemployment after 10 years of labour market successes Real danger of price deflation Fiscal deficit will balloon to more than 6% of GDP Economy became over-dependent on a booming property sector which has now gone into reverse – over 1m empty new homes Very high level of private sector debt (similar to Ireland) Spanish manufacturing businesses seem to be affected more by the credit crunch than elsewhere in the Euro Zone

Recession hits and confidence drops

Spain enjoyed a decade long boom “In the decade to 2006, real growth ran at an annual average of 3.7 per cent, compared with 2.1 per cent for the rest of the Euro Zone. Per head, GDP has risen to more than 90 per cent of the average for the European Union’s core 15 western member states.” “In previous crises, Spain simply devalued its peseta to improve the competitiveness of its exports and attract investment – the path now being taken by the UK and the free-floating pound – but a unilateral devaluation is no longer an option for a member of the single currency zone.” Source: Financial Times, Feb 2009

Relative living standards improved

But the economy over heated

An example is the widening trade deficit

And an unsustainable current account deficit of more than 10% of GDP

A familiar story to UK home buyers

Construction has gone into freefall

Unemployment is already above 3 million

And much higher than in the UK

Constraints of Euro Membership The ability of Spain to drag itself out of recession is limited by several factors 1.Membership of the Euro – Spain has no direct control over short term policy interest rates 2.Inability to engineer a depreciation / devaluation of the exchange rate to boost her export industries 3.Limits on the ability to increase further government borrowing – fiscal deficit is already very high 4.Evidence of occupational and geographical immobility in the labour market – creating a structural unemployment issue 5.Asset price deflation and a high level of debt created during the boom years – a major constraint on consumer confidence and spending