3% GDP Growth: Good For Spain, Bad For The World

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Fernando Barciela | The IMF and other international organisations including the OECD are very worried these days that the global economy will only grow 3.3% or less this year. On the other hand, they are very happy about Spain achieving the same level. Why? What makes the diference?

Well it’s basically that 3% growth is bad news for the world economy because it’s much less than normal and indicates a severe slump. Furthermore, the global economy has usually grown at a faster pace than Europe, at least up until now.

In contrast, the 3.3% GDP growth the Spanish government is forecasting for 2015 means Spain will be one of the fastest growing economies in the Europe Union. Once the sick man of the eurozone, Spain has been growing for 11 consecutive months and fuelling euphoria. Prime Minister Mariano Rajoy has labelled the country as the ‘Germany of southern Europe’ and Chris Williamson, chief economist at Markit, said: “It really is Europe’s leading light.”

While the EU economy advanced just 1.5% in the second quarter, Spain registered 3.1% growth.  This compares with Germany, only 1.6%, France 1.0% and the United Kingdom 2.6%. The outlook is so good for Spain that after years of dire predictions, international organisations say the country is expected to be the developed world’s biggest job creator this year and next. Its unemployement rate stood at 24.2% in August 2014 and is now running at 22.2%. Of course it is still very high in comparative terms. The average for OECD countries is under 7%.

What is happening in Spain is odd because the recovery in Europe remains very uninspiring. Some quarters back, a genuine revival in the euro area appeared to be under way but that possibility is fading. The European economy’s pace is like a trot compared with America’s 3.7%. It’s bad news that Germany, the region’s powerhouse, lost momentum last month with a slowdown in job creation. The manufacturing sector is set to report a slump in October owing to the Volkswagen scandal, according to analysts. Consequently, everybody expects the ECB to act when its Governing Council meets, announcing more stimulus.

But if Europe is failing to recover, the problem with the emerging markets is they are failing to meet prior expectations. Christine Lagarde, the IMF’s managing director, said its forecasts show global economic activity expanded by less than the 3.4% recorded in 2014, the weakest in six years. In fact Lagarde thinks growth could be below 3% this year.

This is because most of the emerging countries, up until now the growth driver, are rapidly slowing. China, with 10.6% GDP in 2010, could grow by less than 7% affecting all of Asia and Latin America.  Things are geting very bad in Brazil (the economy will contract by 1.5%), as well as in Turkey, Russia and many other countries. The worst performing region will once again be Latin America.  After growing at rates of 3%-4% in the past years, growth will slow to 0.5%  in 2015 due to lower commodity prices and the retreat of its main client, China.
In any event, things are geting worse, even in Spain. It seems more and more dificult for Spain to maintain its previous positive trend. The Bank of Spain said recently that it expects economic growth to slow to 0.8% in the third quarter from 1.0% in the second. China is to blame, more than Greece. But there is a new danger looming in Spain which has effects throughout the EU: namely the recent elections in Catalonia. The pro-independence parties almost grabbed a victory (they won the most seats, with 62, but not the absolute majority of the vote).
Don’t forget Catalonia contributes around 20% to Spain’s GDP. Investors fear this is an issue which will not go away, just as the Scottish independence referendum in the U.K. showed a year ago, and has pushed Spanish bond yields down.