Off late I was learning about the impacts of Global recession on the economy of Spain. After going through a number of reports, news, blogs and facts ‘n’ figures; here is a gist of my whole study to take you understand what happened, how happened and what it is taking Spain to get out of it.
1. SPAIN OVERVIEW
Spain, conventionally known as “Kingdom of Spain”, has been a dynamic and rapidly growing economy since the country had a transition to democracy in 1975. Spain’s entry to European Union in 1986 opened the gates to healthy financial support from the richer countries, principally Germany, that financed large number of social and regional cohesion projects that transformed Spain economy. Today Spain stands 33rd in Global Competitiveness as per Global Competitiveness Report (2010) from World Economic Forum. But the irony of the fact is that this rank has dropped by 4 notches since 2009 and the major contributor to this downfall has been the global recession that had impacted Spain to a large extent during last year as compared to many other countries of the world.
2. EMERGENCE OF THE CRISIS
Spanish economy was booming for the past 10 years and annual GDP was growing at the rate close to 4% every year till 2007. One of the pre-recession concerns for Spain was huge trade deficit which rose to 10% of GDP in 2008. Secondly, Spain was also losing its competitiveness in the world market because of which inflation emerged as a major concern. The housing bubble was growing bigger and bigger and the real estate prices had increased by more than 150% from 1998. With the arrival of recession, the economy started slowing down in 2007 and went into deep depression by July 2009 with a negative growth of 4.2%.
3. IMPACT ON MACRO ECONOMIC VARIABLES
Before the arrival of recession, Spain used to epitomize the living abroad dream - a country that would give them a world class life at lower costs, year round sunshine and a relaxed life. And no wonders that Spain was one of the most popular destinations for the expatriates around the world with percentage of foreign population being as high as 11% in the country in 2008.But one black day in November 2008, BBC reported the collapse of the construction sector followed by fall in industrial output by 15.1% and Spain was perhaps, no more the country to relocate to at that time. The onset of the recession changed the whole scenario of the country. There was sudden fall in consumption patterns, fall in tourism, tension on the streetsand the country got into a big trouble of economy downfall. The impact on various macroeconomics variables was as follows:
3.1 Rising Unemployment
The ensuing credit crisis and global recession affected most sectors of the economy and had forced the government to slash infrastructure spending, cut public sector wages, raise taxes and restructure the financial system. These step tremendously increased the unemployment in Spain from 8% in 2007 to 11.3% in 2008 and the number has now grown to an alarming level of 20.9% in June 2010 (as per National Statistics Institute, Spain).
3.2 Inflation followed by Deflation
As Spain is dependent on the imports of fossil fuels due to lack of natural resources, In the rising prices situation in 2008 the inflation rate further boosted to a 13 year high of 5 % but with the sudden plunge in oil prices and bursting of the real estate bubble, soon the concerns shifted to the risk of deflation and as expected Spain saw its first ever negative inflation in 2009.
3.3 Tumbled property prices
With the burst of housing bubble the inflated prices of houses that rose to as high as 1.5 times higher from 1998, plunged to much lesser than their 1998 price. As the economy was contracting there was hardly any domestic demand of houses. The international demand of houses was also reduced by the growing strength of euro over pound during the period, thus making the situation even worse. The irony of the fact was that there were thousands of houses that were empty because there was no buyer, still there were thousands of people who did not have shelter on their head. The pre-recession speculation of housing prices created huge disparity between rich and poor.
3.4 Hampered GDP growth
The cumulative impact of all the factors like unemployment, manufacturing crunch and inflation is evident on the annual GDP growth of the country. After having a wonderful era of sustained growth of around 4%% every year, Spain’s annual GDP growth rate started falling with the arrival of recession and for the first time in the history of pact went negative in 2009 to as low as -4%.
3.5 Current Account Balance
Spain had the 3rd largest current account deficit as a percentage of GDP in 2004 and the deficit was continuously increasing till 2008. Continual current account deficits accumulate to the net international investment position and net external liabilities relative to GDP have soared to nearly 40 per cent in Spain.
3.6 Rise in Public Debt
The efforts to revive the economy by way of pumping money into it increased the Public Debt on Spain heavily. In a span of one year, Spain’s public debt increased from 39.7% in 2008 to 53.2% of GDP in 2009. This imposed a serious question mark on the effectiveness of the stimulus packages released by Spanish government.
In my next blog I will be writing about the steps taken by the government to cope up with this blow.