2014 certainly began with plenty of optimism regarding the Spanish economy, and even I started believing the talk of economic recovery. The week began with President Rajoy appearing on Antena 3, with the IMF (International Monetary Fund) later tripling Spain’s growth forecast for 2014 from 0.2% to 0.6-0.8%, and the week closed with an excellent Gesconsult report. And there was plenty of positivity on Spain elsewhere, as evidenced by recent headlines such as these:

"Spain is back” JP Morgan (1/11/2014)

“There used to be a fear of investing in Spain, now the fear is of missing the opportunity to invest” Morgan Stanley (11/12/2013)

“Barclays believes the Spanish economy is more attractive and expects new investors to emerge” Barclays (1/10/2014)

“Spain is practically back to where it was before the economic crisis”. IMF (1/7/2014)

Obviously, the speculation and thoughts of opinion leaders can be partly to blame for movements in and out of economic crisis, by influencing macroeconomic investment and affecting the real economy via lending and consumer confidence. We need to look beyond the headlines and examine specific figures for the Spanish economy:

• Foreign direct investment grew 100% between January and October 2013 vs. 2011 (source: Bank of Spain)
• The prospects for economic growth in 2014 are better for developed countries (which includes Spain) than emerging economies, in terms of percentage growth vs. 2013 (from 4.5 to 5% in emerging countries compared to 1 to 2% in developed countries) (source: IMF)
• 2014 growth forecasts for Spain range from the IMF’s 0.6% to 1% from JPMorgan and Santander, while the Spanish government’s forecast stands at 0.7%.
• Public sector employment is back to pre-crisis levels, but cuts will have to continue (source: INE)
• Labor reforms and growing unemployment have triggered a slump in labor costs, which have fallen 4 points since 2007, while in Germany labor costs have risen 14 points, in France 12 points and in Italy 10, while the OECD average stands at 8% (source: OECD)
• As a result, our productivity has increased 13% since 2007 vs. the OECD average of +4%, with Italy’s 4 points drop being particularly noteworthy (source OECD)
• Exports have grown 30% since 2007, much faster than in the rest of Europe, doubling the exports growth seen in Germany and 5 times faster that of Italy (Source: Eurostat)
• The number of export companies has shot up from 9,600 in 2004 to 140,000 in 2013 (source: Institute of Foreign Trade)
• Ibex35 companies have seen the percentage of their business represented by Spain shifting from 65% in 2003 to just 39%, with strong expansion into the EU (19%) and Asia/ROW (16%), while sustaining their already firm position in Latam (26%) (Source: CNMV)

All this leaves no doubt that strong growth prospects for Spain are well founded, something which resonates with business leaders. A survey released by PwC this week at Davos, canvasing 1,344 CEOs worldwide (including 23 Spanish CEOs), revealed that 50% of those surveyed were confident that the global economy would improve, while 75% expected their own companies to do so. This should certainly mean more jobs and subsequently increased consumption.

However, there are certainly still risks in place, meaning we must remain watchful and miss no opportunities to bolster the recovery:

• The political climate. Problems include deep-seated corruption, the cost of civil servants, sluggish institutions and the very workings of the autonomous region system (which has led to conflict with Catalonia).
• Possible deflation. Inflation in Spain went from 1.4% in 2010 to 0.2% in 2013, which could lead to the following:
  • Postponing of consumption and investment decisions
  • An increase in the real value of debt, driving up losses and bankruptcies
  • Declining asset prices, diminishing the value of loan collateral and driving up delinquency losses
  • Credit drying up, meaning less business activity
  • Salaries declining rigidly, leading to tighter margins for businesses and therefore less investment and less employment.
  • The final consequence could be a liquidity trap; with interest rates dipping to 0% and making cash an attractive investment asset, carrying no risk and offering real positive returns.
• No lending recovery in Spain and Europe, choking off economic growth and investment.

In short, there are much more positives than negatives, and we hope that our political classes are up to the challenge, while civil society and businesses need to be mature enough to seize this opportunity to create a new era of prosperity for the years ahead.

Source: Gesconsult