Economy of Spain

The economy of Spain if the fifth largest in the European Union and, in absolute terms, the eighth largest in the world.

The Spanish economy experienced a long and remarkably intense period of steady growth since the mid 1990s. This trend has been interrupted and eventually reversed starting with the 2008 financial crisis.

Transition to a modern economy

What is now the 8th largest economy in the world has evolved from the regulated economy of Francoism as the latter started to fade out in 1975.

Starting with the "Stabilization Plan" of 1959, Franco's regime initiated a set of deregulating moves away from its initial total control of the economy; these, along with large infrastructure projects and a gradual opening to tourism, resulted in the paramount economic growth almost overnight which came to be known as the "Spanish Miracle".

However, by Franco's death and the dawn of the constitutional monarchy, interventionism was still widespread: basic products like bread and sugar had their prices fixed by the government, large public firms controlled all sectors regarded as strategic (Telephone, tobacco, petrol, etc.), shops had fixed opening and closing times (although this also occurred in other European countries such as Germany), both passive and active interest rates were fixed by the government, etc. All these rigidities and more were made obvious by the 1973 oil crisis, which terminated the previous expansion cycle and unleashed a period of severe industrial crisis which lasted approximately a decade (1975-1985). This blow stressed the need to modernize the economy and join the European Community.

Spain's accession to the European Community, now European Union (EU), in January 1986 ushered the country into opening its economy, modernize its industrial base and revise economic legislation. The EU, with amounts of funds from the European Regional Development Fund- Spain greatly improved infrastructures, increased GDP growth, reduced the public debt to GDP ratio, reduced unemployment from 23% to 10%, and reduced inflation to under 3%.

1992 crisis and late 1990s economic boom

Following peak growth years in the late 1980s, in 1992 the Spanish economy was finally touched by the late 1980s recession; that happened, tellingly, in the year when the Barcelona Olympics were held and all the construction investment and feasts were finished. The economy, however, recovered during the first Aznar administration (1996-2000), driven by a return of consumer confidence and increased private consumption. Unemployment at 7.6% (October 2006), represented a significant improvement from the 1980s levels and a better rate than the one of Germany or France. Devaluations of the peseta during the 1990s made Spanish exports more competitive.

In 1999 Spain was amongst the leading group within the EU to adopt the Euro as their accounting money in preparation for its launching as a physical currency, which happened on January 1, 2002. On that date Spain terminated its historic peseta currency and replaced it with the euro, which has become its national currency shared with 15 other countries from the Eurozone. This culminated a fast process of economic modernization even though the strength of the euro since its adoption has raised recent concerns that Spanish exports outside the European Union are being priced out of the range of foreign buyers. However, this has been offset by the facilitation of trade among the euro nations.

The Spanish economy was credited for having avoided the virtual zero growth rate of some of its largest partners in the EU (namely France, Germany and Italy) in the late 90's and at the beginning of the 21st century in a process which started with former Prime Minister Aznar's liberalization and deregulation reforms aiming to reduce the State's role in the market place. In 1995 Spain started an impressive economic cycle marked by an outstanding economic growth, with figures around 3%, often well over this rate.

Map showing regional variation in European GDP (PPP) per capita in 2006. Figures from International Monetary Fund

This has steadily closed the economic gap between Spain and its leading partners in the EU over this period. Hence, the Spanish economy was regarded as one of the most dynamic within the EU, even able to replace the leading role of much larger economies like the ones of France and Germany, thus subsequently attracting significant amounts of native and foreign investment. Also, during the period spanning from the mid 1980s through the mid 2000s, Spain was second only to France in being the most successful OECD country in terms of reduced income inequality over this period.

Convergence with the European Union

Due to its own economic development and the recent EU enlargements up to 27 members (2007), Spain as a whole exceeded (105%) the average of the EU GDP in 2006 placing it ahead of Italy (103% for 2006). As for the extremes within Spain, three regions in 2005 were included in the leading EU group exceeding 125% of the GDP average level (Madrid, Navarre and the Basque Autonomous Community) and one was at the 85% level (Extremadura). According to the growth rates post 2006, noticeable progress from these figures happened until early 2008, when the Spanish economy was heavily affected by the international economic blow.

In this regard, according to Eurostat's early estimates for 2007 GDP per capita for the EU-27. Spain happened to stay at 107% of the level, well above Italy who was still above the average (101%), and catching up with countries like France (111%) .

Current events: a downward scenario

AZCA, Madrid

Spain continued the path of economic growth when the ruling party changed in 2004, keeping robust GDP growth during the first term of prime minister José Luis Rodríguez Zapatero. However, by this time fundamental problems in the Spanish economy were self-evident. These were, according to the Financial Times, Spain's huge trade deficit (which reached a staggering 10% of the country's GDP by the summer of 2008), the "loss of competitiveness against its main trading partners" and, also, as a part of the latter, an inflation rate which is traditionally higher than the one of its European partners, lately affected by house price increases of 150% from 1998 and a growing family indebtedness (115%) chiefly related to the Real Estate boom and rocketing oil prices.

As Spain enters the second term of prime minister Rodríguez Zapatero, it has been seriously hit by the world liquidity crisis stemming from the credit crunch of 2008 which became fiercely apparent in Spain by April 2008. The new situation affecting the Western economies is predating on Spain, among others, by means of the burst of the Spanish property bubble, which used to account for much of the Spanish growth since 2001.

The rate of new residential construction has virtually halved in less than a year, coming to a halt in some areas. On the other side, due to the lack of own resources, Spain has to import all of its fossil fuels, which in an scenario of record prices added much pressure to the inflation rate. In this regard, gasoline and diesel were in June 2008 17% dearer than in January of the same year, and almost 20% more expensive than the prices of June 2007. Then, when international oil prices plunged, rises were much more moderate by September 2008 (gasoline 2.7% higher and diesel 6.7% compared to prices of January of the same year)

During the first quarter of 2008 the Spanish economy rate grew less than that of the third quarter of 1995, which marked the last quarter of the 1992-1993 recession. By that time, the Spanish economy had had five quarters in a row with a negative growth, and then, by 1997 it started a vigorous growth cycle. Also, during the first quarter of 2008 the Spanish economy grew less than EU major economy (namely Germany) for the first time in a decade. The outcome of this slower pace is that of effective reduced convergence with the European bigger economies, in contrast with the gains in convergence of the last decade.

Spanish exports in 2006

The Spanish government official GDP growth forecast for 2008 in April was 2,3%, according to the estimate released. This figure was unlikely to be reached should the current rates maintained or, more likely, worsened during the remainder of the year. Indeed, in July, a new official estimate reduced the GDP growth forecast for 2008 to 1.6%. Most forecasters estimate rates around 0.8%, far below the outstanding 3% or higher average GDP growth during the 1997-2007 decade.

In June 2008 the inflation rate reached a 13 years high of 5.00%. GDP growth was a mere 0.1% in the second quarter, but still, better than other EU-economies which had contractions like Germany which had -0,5% or France or Italy, which got both a -0,3% ((ref 14)). The context was not the best, the EU economy contracted as a whole, and other countries who had property bubles have in fact entered recession, like Denmark or Ireland. Economic minister Pedro Solbes ruled out the possibility of Spain entering stagflation. Then, with the dramatic decrease of oil prices that happened in the second half of 2008 plus the confirmed burst of the property bubble, concerns quickly shifted to the risk of deflation instead. During the third quarter of 2008 the Spanish economy contracted for the first time in 15 years making very unlikely the latest government estimate of a 1.6% GDP growth for 2008.

The Spanish banking system has also been credited as one of the most solid and best equipped among all Western economies to cope with the worldwide liquidity crisis, thanks to the Spanish banking rules and practices, that obligue banks to have very high provisions.

As for the employment, after having completed substantial improvements over the second half of the 1990s and during the 2000s which put a few regions on the brink of full employment, Spain suffered a severe setback in October 2008 when it saw its unemployment rate surging to 1996 levels. During the period October 2007-October 2008 Spain saw had its unemployment rate climbing 37%, exceeding by far the unemployment surge of past economis crisis like 1993's. In particular, during this particular month of October 2008, Spain suffered its worse unemployment rise ever recorded and, so far, the country is suffering Europe's biggest unemployment crisis.

Internationalization

Main article: List of companies of Spain

Ever since the 1990s some Spanish companies have gained multinational status, often, but not only, expanding their activities in culturally close Latin America.

Some of these companies lead in various international scenarios, such as Telefónica (telecom and media), Inditex (retail, owner of brands like Zara), Banco Santander and BBVA (banking), Gamesa (renewable energies), Indra Sistemas (IT and defence), Pescanova (fisheries) or Repsol YPF (oil refinery).

Statistics

GDP: purchasing power parity - $1.358 trillion (2007)

GDP - real growth rate: 3.8% (2007)

GDP - per capita: purchasing power parity - $33,221 (2007)

GDP - composition by sector:
industry: 30.1%
services: 66.5% (2003 est.) One of the main services served is tourism; Spain is the second country in the world in the ranking of both tourist arrivals and incomes from tourism, having received in 2006 alone 58.5 million tourists and 51.1 billion dollars respectively
agriculture: 3.4%

Population below poverty line: 19.8% (2005 est.)

Household income or consumption by percentage share:
lowest 10%: 2.8%
highest 10%: 25.2% (1990)

Inflation rate (consumer prices): 4.3% (2007, end-of-period)

Labor force: 18.5 million (2006)

Labor force - by occupation: services 64%, manufacturing, mining, and construction 29%, agriculture 7% (2001est.)

Unemployment rate: 13.9% January 2009

Budget:
revenues: $105 billion
expenditures: $109 billion, including capital expenditures of $12.8 billion (2000 est.)

Industries: metals and metal manufactures, textiles and apparel (including footwear), food and beverages, chemicals, shipbuilding, electronic devices, automobiles, machine tools, tourism.

Industrial production growth rate: 0.6% (2003 est.)

Electricity - production: 222,500 GWh (2001)

Electricity - production by source:
fossil fuel: 50.4%
nuclear: 27.2%
hydro: 18.2%
other: 4.1% (2001)

Electricity - consumption: 210,400 GWh (2001)

Electricity - exports: 4,138 GWh (2001)

Electricity - imports: 7,588 GWh (2001)

Agriculture - products: grain, vegetables, olives, wine grapes, sugar beets, citrus; beef, pork, poultry, dairy products; fish

Exports: $192.5 billion f.o.b. (2006 est.)

Exports - commodities: machinery, motor vehicles; chemicals, electronic devices, foodstuffs, other consumer goods

Exports - partners: France 19%, Germany 11.4%, UK 9.6%, Portugal 9.5%, Italy 9.3%, United States 4.6% (2002)

Imports: $289.8 billion f.o.b. (2006 est.)

Imports - commodities: fuels, chemicals, machinery and equipment, semifinished goods; foodstuffs, consumer goods (1997)

Imports - partners: France 17%, Germany 16.5%, Italy 8.6%, UK 6.4%, Netherlands 4.8% (2002)

Debt - external: N.A.

Economic aid - donor: ODA, $1.33 billion (1999)

Currency: 1 euro (€) = 100 cents Exchange rates: euros per US dollar - 0.67 (2008), 0.83 (2006), 0.82 (2005), 0.81 (2004), 0.89 (2003), 1.06 (2002), 1.12 (2001), 1.09 (2000), 0.94 (1999)

Fiscal year: calendar year

References and notes

14. http://www.finfacts.com/irishfinancenews/article_1014454.shtml 15. OECD http://stats.oecd.org/wbos/Index.aspx?QueryId=480

See also

• Banco de España
• Economic history of Spain
• Economy of Europe

External links

• Banco de España (Spanish Central Bank); features the latest and in depth statistics
• Statistical Institute of Andalusia
• National Institute of Statistics
• Statistical Institute of Catalonia
• Statistical Institute of Galicia
• OECD's Spain country Web site and OECD Economic Survey of Spain
• Article: Investing in Spain by Nicholas Vardy - September, 2006. A global investor's discussion of Spain's economic boom.