Has Spain grown so much vs pre-crisis levels? Really?

Spain's economy real recoverySpain's economy

So not only are we still below GDP levels prior to the crisis (first quarter 2008), but we have no guarantee that once we have reached this level, the dynamism of the economy will be maintained. Because it should be said that the important gap is not with the 2008 level, but with what we would have reached if we had grown at normal rates since the crisis bottomed-out. Or in other words, if the jobless rate today was similar to that of before, and not double that.

Investment continues to be over 30% below 2008 levels – although this level should not be taken as an example because it includes the part corresponding to the property boom. But the stagnation in this investment is important and without its strong advance we cannot be confident that the growth in the last few quarters will be maintained. The improvement since 2013 is not strong enough after such a resounding drop: a rise of 11% in three years is nothing to write home about.

Investment is resisting a rise

In any event, we have not yet substituted the bricks and mortar industry for renovating sectors with real drive. Nor can we see enough dynamism in investment to inspire confidence. Why is investment in fixed capital important? It’s the source of employment, technology and productivity. So it’s the basic source of the solution to our most urgent problems: public debt, pensions and other social spending. Without advances in technology, and given the sharp slum in demography, it’s difficult to maintain the level of this spending. Logically it should be reduced as the State’s revenues are compressed or don’t grow enough, if we don’t want to see public debt crossing the red line.

So why is investment resisting this rise? Firstly, the crisis has caused investment demand to be weak because there is still uncertainty about when things will return to normal. And that is not just in Spain: it’s happening in all the advanced economies.

Secondly, the lethargy in household consumption is an indicator of a lack of confidence to which companies are sensitive in terms of investment, when they don’t know if they are going to sell all their consumer goods on offer or not. And the consumer, still with large debts, an unemployment rate of 20% and new jobs which are very precarious, has a sword of Damacles hanging over his head. Household debt has improved in the last few years but this has been compensated by the increase in public debt, which has been substituting private debt.

Don’t forget that Spain is the most indebted country in the world, with private and public debt representing 300% of GDP.

And thirdly, in Spain there is a strong current of corporate investment which is going to other countries. This is good because Spanish companies are conquering other markets, in some cases positioning themselves as the top global brands. But this good news is not being corresponded to with a large amount of direct foreign investment to compensate the outflow of capital.

Bear in mind that this weakness in consumption and investment is happening in the context of extremely easy financing conditions, but this easiness, as the interviewee says, is being used to finance “stock market games”.

In other words, confirmation of what is happening in the world: very accessible interest rates, over-valued equity markets, and a stagnation in real investment; which makes productive investment doubly difficult due to the fact stocks have become expensive.

This is what some people call “New Normal”, but it’s clearly not never-ending. It erodes the very ground on which it moves…slowly.


About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://http://www.miguelnavascues.com/