Employment jumps dramatically
After five years of depression, the Spanish economy is growing again. Employment rose by 402,000 in the second quarter. In the second quarter of 2013 employment rose by 98,000. The underlying economy was then still declining but not very steeply so no more than 150,000 of the extra jobs in the second quarter of 2014 are likely to have been for seasonal reasons, leaving 250,000 new jobs because of a recovering economy. This could imply a million jobs in a year if the recovery continues at the same rate.
Boom and bust still a danger
It is important that the recovery is not creating a new external debt burden as happened in the boom in the early to mid 2000s. Here the evidence is mixed. The development of the current account deficit from €3bn in the first quarter of 013 to €10.4bn in the first quarter of 2014 (there was a surplus of €8.0bn for the whole of 2013) looks alarming. But there was also a big, and rising, positive errors and omissions item of €8.0bn. The so-called capital account which consists mainly of EU grants for investment showed an inflow of €3.5bn. This left the financial account with a moderate outflow (implying reduced net liabilities) of €1.0bn. There was a net outflow of direct investment – the part of the financial account, which does not add to debt—of €3.8bn, but this reflected an unusually strong outflow from Spain in the first quarter. In most recent quarters there has been a substantial net inflow of direct investment. Therefore, though there was an increase in net debt liabilities of the Spanish economy of €2.8bn in the first quarter, the trend still appears to suggest an ongoing reduction in net debt. However, the figures will require careful monitoring.
Export performance and reduced import dependence are key
In some ways recovery should generate further recovery as the incomes of the newly employment (although they are likely mainly to be relatively low incomes) enable the newly employed to spend more. They should also pay more in tax and receive less in benefits so helping government to reduce the still high government sector deficit. However, it will also tend to pull in more imports so recent moderate rises in exports of goods and services (3.4% in 2013) will need to continue and, if possible, expand, if new imbalances are to be avoided. Reducing import dependency also could help, not least by investing in increased energy efficiency, which would also help address the fact that 69% of Spaniards, a higher percentage than in most other EU countries, are worried about the cost of utility bills.
Spain has demonstrated high degree of social resilience
Unemployment reached 26% and youth unemployment has been over 50% for several years. Although there is a significant amount of employment in the informal economy this is very unsatisfactory particularly for young people trying to enter the labour market. The fact that Spain has been through a five year depression without destabilizing social unrest or the rise of extremist parties is a tribute to the resilience of its social fabric. The rise of the new party, Podemos (We can) which won 7% of votes in the May European Parliament elections follows from the peaceful protests and encampments of Indignados is encouraging.
The one major concern is the demands of the Autonomous Community of Catalonia to hold a referendum in November calling for Catalan independence. Such a referendum would not be binding and it is claimed by the Spanish government that it would be illegal under the Spanish constitution but strong calls for independence cannot just be ignored. This is one matter on which the government of Mariano Rajoy has shown little tact, seeking to browbeat rather than persuade the Catalans that there interest remains in staying in Spain.