After more than two years of grinding recession and the destruction of 3.8 million jobs, Spain has returned to growth. But the improvement was so weak that the jobless rate is not expected to fall to pre-recession levels for many years.
The Bank of Spain reported Wednesday that gross domestic product expanded by 0.1 per cent in third quarter. In the previous quarter, GDP shrank by the same amount. Still, the improvement delivered a psychological boost to the centre-right government of Prime Minister Mariano Rajoy, who has been under enormous pressure to provide evidence that austerity programs and the sacrifices that go with them are not the route to eternal recession.
Spain’s growth figure leaves Italy as the only big euro zone economy still in recession. In September, the Italian government cabinet said the economy would shrink 1.7 per cent this year, far worse than its previous forecast of 1.3 per cent. Italy, however, started its austerity programs well after other euro zone countries, suggesting it will emerge from recession far later.
While encouraged that the economy has shifted direction, Mr. Rajoy was careful not to promise a robust economic rebound. He said the recovery would be “slow and gradual,” a strong suggestion that one of the world’s highest jobless rates – 26 per cent – will not get dented any time soon.
In August, the International Monetary Fund said Spain’s jobless rate would not fall below 25 per cent until 2018 because the “weak recovery will constrain employment gains.” The IMF noted that Spain requires a GDP growth rate of about 2 per cent to create jobs. It expects a growth rate of a mere 0.2 per cent next year and less than 1 per cent a year for the following four years.
Spain’s deep recession, deteriorating finances and a jobless rate that has soared to Greek levels were the result of Europe’s biggest property busts, in 2007 and 2000. The collapse of an economy overly geared to construction turned Europe’s biggest jobs-creation machine into its biggest jobs-destruction machine. Many housing estates were simply abandoned even though they were entirely or largely finished. Most construction workers lacked the skills to find careers elsewhere.
Spain’s recovery is all the more fragile because its banks, which received a €40-billion ($57.3-billion) European bailout early this year, are sitting on enormous quantities of dud loans. AFI, a financial and economics consultancy in Madrid, said in a note last week that the non-performing loan rate had edged up to 12.1 per cent of loan portfolios in August. The good news is that the rate of deterioration is slowing; a year earlier, the loan rot was setting in at twice the speed.
Spain’s return to growth was in good part due to an export surge fuelled by a sharp fall in labour costs since the 2008 financial crisis. AFI said that unit labour costs are down 15 per cent, primarily due to increases in labour productivity and prolonged wage restraint. “The cost containment exercises at export enterprises are leading to decreases in sales prices, which in turn should continue supporting external competitiveness in 2014,” AFI said.
Greece’s unit labour costs have fallen by an even greater amount since 2008, triggering a similar export drive. Greece’s deep recession is expected to end next year, though it too is not expected to see sharp drops in unemployment for many years.
Italy’s recession remains intact in part because it is one of the few European economies whose labour costs have not declined since 2008. Italy’s coalition government, under Prime Minister Enrico Letta, has been too fragile to force through meaningful reforms that might put the economy back on track.
With negative growth and persistent budget deficits, Italy’s debt-to-GDP ratio is reaching crushing levels. DBRS, the debt ratings agency, said it expects the ratio to reach 135 per cent within two years, up from 127 per cent last year. Italian sovereign borrowing costs have been falling but are still high and could spike higher, triggering a fresh crisis, if Mr. Letta’s government falls.