6 reasons why Spain’s economy is still hurting
Spain was one of the worst-affected countries in the 2008 recession, hit hard by huge losses on real estate investments and a sharp rise in unemployment. Seven years on, the Spanish economy has yet to recover.
Here are some of the factors that have weakened the country’s recovery:
- As a member of the Eurozone, Spain can’t devalue its own currency by printing more money. Without this monetary lever to stimulate export growth independent of other Eurozone countries, Spanish policymakers have had to turn to alternative measures. The primary method used to increase the competitiveness of Spanish exports has therefore been reducing labour costs (known as ‘internal devaluation’).
- Unemployment rose sharply during the recession, reaching a peak of 26.9% in early 2013 from a pre-recession level of less than 8%. Employment remains a long way from recovery, currently standing at 23.8%. High unemployment keeps wages low, but domestic demand suffers as a result of a quarter of the population being without an employment income.
- High unemployment and a need to discount labour in the absence of being able to devalue the currency has led an average monthly labour cost in 4Q14 of €2,638.80, a 0.5% fall from the previous year’s figure. This is the fully-burdened cost, with the actual wage cost being €1,991.84 (0.2% down from the year before).
- According to the Harmonised Competitive Index, which compares unit labour costs across the Eurozone, Spain is the sixth most competitive out of the 19 countries in the monetary union. However, Spain falls below the average and other bailout recipients such as Cyprus, Greece and Portugal remain more competitive.
- Real estate, for so long one of the largest contributors to the Spanish economy and a major domestic employer, declined consistently in the recession. There was only one quarter of growth between the end of 2007 and mid-2013, and any growth since then has been anemic, never exceeding an annualized rate of 2%.
- Unemployment among under-25s continues to be more than double that observed in the population at large. Although the rate has been falling from a peak of 53.9% since August last year, youth unemployment remains stubbornly above 50%. Perhaps more positively, thanks to the stagnation in the wider labour market, the so-called “lost generation” does not yet seem to be missing out on increased opportunities for experienced staff.
4Q14 Labour HCI (data source: ECB)
Spain clearly still has a long way to go before its economy returns to its pre-recession heights, but it may still be a good place for exporters to invest in thanks to a weak euro and competitive wages given the skilled workforce.
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