Opinion

Spain, a sensitive economy

photo_camera Bank of Spain

In the current context, where the fear variable enters fully into the socio-economic equation, international economic indicators are evolving in step with news of the war in Ukraine, Western sanctions against Russia, and Putin's reactions.

In Spain, the EU's fourth largest economy, economic fluctuations are notable for their polarisation. In general, Spanish indicators tend to be above the average of other European economies, whether in growth or recession.

There are many perspectives to be analysed, from the economic model to the magnitude of the shock of the crises, the degree of indebtedness, the ECB's monetary policy or the resilience with which the economy responds, among other factors. However, especially in Spain, there is an added factor, induced by political rather than economic interests: fear.

Uncertainty is omnipresent in business. So much so that in economics the word risk is associated with any decision, political or economic. And to speak of risk is to speak of anticipating fears, in the plural. And the Great Recession of 2008 had given rise to many of these fears, affecting the very decision-makers who took huge risks with subprime mortgages and, in the process, took millions of jobs all over the world. In Spain, nearly 6 million jobs were destroyed in 2013, with an unemployment rate of 26%, higher than the eurozone (11.7%).

It was a full-blown financial meltdown. It provoked a wave of migration and brain drain, leading the country to what was called "hunger lines", while some EU countries had held their own (Germany, the Netherlands, ...), others not so much. In July 2012, Spanish sovereign debt placed the risk premium at 638 points, surpassing Greece (450), Ireland (544) and Portugal (627). These countries were intervened by the Troika in 2010 and 2011. Spain was in 2012.

The COVID-19 pandemic was particularly harsh in Spain. In 2020, GDP plummeted by as much as -11%, outpacing all European partners. In France it was -7.9%, in Germany -5%, the Netherlands -3.8%, Belgium -6.3%. The same was true for the unemployment rate, which reached 15.5%, well above the Eurozone average of 8%.

Omicron, the transport strike and the ongoing war in Ukraine have caused consumption and investment to fall, thus weighing down the post-COVID recovery by posting GDP growth of only 0.3% in the first quarter of 2022, albeit above the eurozone (0.2%), and amid year-on-year inflation of 8.4% in April. Although it is not the highest, it is still above the European average (7.5%). With regard to unemployment, Spain's unemployment rate rose by one tenth of a percentage point in March to 13.5%, while the eurozone registered 6.8%. The SEPE's figure of 86,260 fewer unemployed in April is a good figure that augurs a positive trend of job creation and a gradual increase in GDP at the start of the second quarter.

Moreover, household consumption contracted by 3.7% in the first quarter of 2022. A policy of sustainability of consumption and the productive fabric, such as the anti-crisis decree, was more than necessary. Despite this, Feijóo's PP rejected it. A decree that plans to cushion the negative effects of energy inflation, covering the needs of families and companies with fuel discounts of 20 cents/litre, extension of the VAT rebate on electricity for small consumers, as well as a new line of ICO credits (10,000 million), with 362 million for agriculture and livestock, some 68 million for fishing and 500 million for energy-consuming industry, limiting the rise in rent to 2% and a 15% increase in the minimum living income (IMV).

Some policymakers have not hesitated to compare the current crisis, due to Putin's war, to the Great Recession of 2008, instilling fear in the population and thus in investors. A way of anticipating uncertain political and economic instability, but with immediate effects. Such as the fear of an economic meltdown of unknown proportions that ordinary citizens and economic agents could feel and project to contagion. Panic of losing what has been gained and not recovering what has been lost, the trauma of losing one's job and an unpromising future when one is over 50 years of age.

The volatility of the economy in an environment of political unrest and in the absence of social concertation only exacerbates the panic, especially when fear is already in the body. Economic panic takes hold of consumers and companies, following the same path, but in reverse, the multiplier effect of investments, leading to bearish sentiment. And it becomes a trigger for the contraction of the real economy. Particularly when it is already known that in Spain the contraction of household and business spending (domestic demand) is usually more important than external demand.

The gap between Spain and Europe is evident. Very positive in growth and very negative in recession, and confirms the sensitivity of the Spanish economy to uncertainty, especially when the parties opt for the political use of emotions. The PP is neither VOX nor Podemos, but a party of state and of alternating government. Feijóo, who seems to be in a better position, should reach an agreement at such a delicate moment in Europe, of which Spain is a major part.

By next summer, foreign demand is expected to pull the Spanish economy forward with exports and, above all, with the strong recovery in tourism. This would restore optimism and happiness to consumers and businesses.