Spain's economic performance is sustainable after all

By: Jaime Malet, Chairman of the American Chamber of Commerce in Spain

 

Spain is undergoing a period of unprecedented growth and prosperity. The Spanish economy, the 8^th largest in the world, has registered 13 consecutive years of growth and its GDP has expanded at more than 3% over the past decade. Spain’s annual growth rate in the third quarter was 3.8%, the highest since 2001. Between 1995-2005, Spain generated 6.4 million new jobs, which amounted to more than one-third of the total for the EU-15. The figure for this year will exceed 700,000. Spain’s stock market is at a 6-year high. Immigrants, who have filled half of the 2.6 million new jobs created in 2001-05, are contributing substantially to economic growth by spurring consumption and making the labor market more flexible.

 

Yet many analysts predict that Spain’s current economic growth model is unsustainable and will soon run out of steam. They view the run-up in house prices as a symptom of a speculative bubble, and assert that growth is too dependent on construction, consumption and tourism. As evidence of the inevitability of a severe slowdown some point to Spain’s high levels of household debt and its considerable trade and current-account deficits (9% of GDP), and warn that higher interest rates in the euro-zone will stifle the Spanish economy.

 

The imbalances mentioned by the skeptics must be addressed. But there are a number of reasons why Spain will continue to power ahead.

 

First of all, Spain’s fiscal position is extremely solid. Several years of budget surpluses (1.5% projected surplus for 2006) have enabled public debt to fall to 46 % of GDP and the OECD forecasts that it will further drop to 44% next year. When the slowdown does come, the government will be able to provide an anti-cyclical stimulus and still remain well within the limits set by the EU’s Stability and Growth Pact.

 

Moreover, Spain’s expansion is more balanced than it appears, with services, industry and construction all thriving. Industry is growing at a 4% rate, the highest since 2000, investment is expanding at 6.3% and investment in capital goods has surged by more than 8% for eight consecutive quarters. 

 

There is also no reason to believe that Spain will not continue to attract sizeable FDI inflows. The country still enjoys a wage cost advantage versus other western European economies, has a highly-skilled yet increasingly mobile and young work force, a more liberalized labor market than many euro-area economies and modern infrastructure.

 

Consumer and business confidence remain extremely buoyant. 76% of US companies doing business in Spain feel that growth prospects for the Spanish economy are either very favorable or favorable in the near term.

 

Although the increase in housing prices will have to slow, concerns about a bubble in real-estate are overdone. Spain’s property market was starting from a low base and thus the rise in prices cannot be compared to those experienced by more mature economies. In addition, strong population growth, surging incomes and the permanent demand for homes by foreigners wishing second residences in sunny Spain are arguably structural and not passing phenomena.

 

Flush with cash, Spain’s construction and other multinationals have rushed to position themselves in other markets and thus reduce dependence on real-estate. They are purchasing stock in Spain’s electricity companies, winning bids in Europe and the US to build and manage transportation and energy infrastructure and taking over foreign rivals.

 

When Spain joined the EC in 1986, its per capita income was only 68% of the EC average, whereas now it stands at 90% of the EU-15. Spain’s population is keenly aware of the benefits membership has brought. The political debate can be quite acrimonious in Spain. But in stark contrast to other European countries, extreme left- or right-wing parties garner practically no votes in Spain. This makes it much easier for the mainstream left (Socialist) or right-wing (Partido Popular) parties to pursue orthodox fiscal and budgetary policies.

 

Spain has proven over the past 25 years that it provides excellent conditions to attract foreign investors. Indeed, Spain’s dynamic growth, rock-solid macroeconomic, institutional and political stability, membership in the euro-zone, together with its strategic location, modern infrastructure, outstanding business and investment climate and high quality of life are the ideal combination for companies searching for new markets in Europe, Latin America and the Mediterranean basin.

 

Spain is a highly-developed but still emerging country whose relatively young population exudes dynamism, self-confidence and entrepreneurial spirit. Its business class has come of age during the past 25 years as the Spanish economy has internationalized and has the resources and skills to develop new sectors and opportunities in order to transform the current growth model. Spain will inevitably have some growing pains. But it is a comparatively young democracy, with a confident and growing population, a resourceful business class, a healthy inflow of immigrants and political consensus among the main parties on economic policy. There is no doubt that the Mediterranean tiger will continue to roar.

 

 

Jaime Malet

Chairman, American Chamber of Commerce in Spain

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