A Macro Economic Briefing on Spain
The purpose of this report is to provide an economic assessment of the Spanish economy through an Investigation of the historical GDP growth, unemployment rate, inflation rate and identification of the business cycle through accessing the data of the statistical bureaus of Spain the IMF, OECD and World Bank Data bases. Developed economies typically experience fluctuations in their economic performance (Romer, 2018). These fluctuations include periods when unemployment is low and economic output is high and periods where unemployment rates are high and economic output is low (Romer, 2018). These fluctuations comprise the business cycle of a given economy (Romer, 2018).
Historical Gross Domestic Product (GDP) Growth
The Spain’s GDP is the 14th largest in the world, with its Gross Domestic Product (GDP) of $1.36 trillion (World Atlas, 2018). Only France, Italy, Germany, surpass Spain in terms of GDP and the UK (World Atlas, 2018). The Spanish Gross Domestic Product (GDP) was 1311.32 billion US dollars during 2017, this GDP value is accounts for 2.12 percent of global GDP (Trading Economics, 2018). The Spanish GDP had an average value of 540.86 USD Billion between 1960 and 2017, reaching a peak in 2008 of 1635.02 USD Billion in and recording a low of 12.07 USD Billion in 1960 (Trading Economics, 2018). From this data, it can be that Spain has experienced substantial GDP growth since the 1960. (Trading Economics, 2018). However, it seems to be similar to other developed countries in suffering the effects of the 2008 global financial crisis. In recent times, real GDP growth for 2017 in Spain was 3.1 % while recent years have seen, the real Spanish GDP growth undergoing substantial fluctuation in recent years, in particular it tended to decrease through 1998 – 2017 before ending at the period with a growth in GDP of 3.1 % in 2017 (Knoema, 2018). In recent times, Spain’s GDP has exceeded its pre-GFC growth during the earlier part of 2017. Spain experienced a GDP growth of 3.3 percent during 2016; this was nearly twice the average euro rate (IMF, 2018).
It should be noted, that it was not until this years’ second quarter that the level of pre-GFC growth was realised (Financial Tribune, 2018).In terms of the GDP which is sometimes used as an alternative to the CPI as an inflationary measure. Spain’s, GDP deflator in the year 2015 is 100.863 using an Index, Base Year as per country’s accounts of 100 (Economy Watch, 2018). This figure is no 177 in world rankings according to GDP Deflator for the year 2015 (Economy Watch, 2018). The average global GDP Deflator value is 427.87 with the Index, Base Year according to national accounts set at 100, Spain is 327.01 points under the average value. (Economy Watch, 2018).
Figure 1. Real Gross Domestic Product for Spain Source: Federal Resrve Bank of St Louis, 2018
Figure 2 Spain GDP current prices source National Statistical Institute (INE) Economy Watch, 2018
In spite of strong economic growth as seen increases in real and nominal GDP. The level of unemployment in Spain remains at a very high level. According to the IMF (2018) the Spanish unemployment rate as a percentage of total the total workforce was 17.23 percent in 2017, decreasing from 19.64 percent of total labor force in 2016. This compares very unfavourably with the Euro area Feburary 8.5% unemployment rate adjusted seasonally which had decreased from 8.6% in January 2018 and 9.5% during February 2017 (eurostat, 2018). Starting this year the second quarter, unemployment rate was 15.3% under the first quarter figure of 16.7% the lowest reading since the fourth quarter of 2008 (Focus Economics, 2018). This was a real number decrease from 3.80 to 3.49 million jobless during the period. By comparison the period preceding the 2008 GFC saw an unemployment rate of approximately 8 per cent (The Local, 2018).
Figure 3 Unemployment in percentage of active population.
Source: National Statistical Institute (INE) (As cited in Focus Economics), 2018 Focus? Economics,
Historically Spain’s inflation rate was an average 6.72 percent between the years of 1955 and 2018, the inflation rate peaking at 28.43 percent in August of 1977 with an all-time low of -1.37 percent during July of 2009 (Trading Economics, 2018). According to the IMF,(2018). The Spanish inflation rate stands at 1.7%. Recent trends have inflation rates rising from January 2018 rate of 0.6 percent with a recent rise in inflation to 2.2 percent, which is comparable to the data for the last three months (Trading Economics, 2018). Food and non-alcoholic beverages at 20 percent of the total weighting, utilities and housing at 13 percent, hospitality including hotels, cafés and restaurants at 12 percent and transport 15 percent, comprise the main categories of the Spanish consumer price Index (CPI), (Trading Economics, 2018). Recreation and culture 9 percent; miscellaneous goods and services 7 percent and clothing and footwear at 7 percent are also part of the index (Trading Economics, 2018). The rest of the index comprising 18 percent of total weight. Including, household fittings and maintenance, furniture; health, communications; alcohol and tobacco products (Trading Economics, 2018). Recently there was a 0.1 percent rise in consumer prices, this came after a 0.7 percent fall in from the previous month, the initial estimate was of 0.2 percent this was less market predication of a rise of 0.2 percent. Housing comprising 0.6 percent, recreational and cultural activities at 0.7 percent, the hospitality at 0.2 percent and transportation at 0.2 percent (Moya, 2018).
Figure 4. Inflation in Spain last Year Source: Global- Rates, 2018
Assessment of present economic Situation
In broad terms, the Spanish economy seems to have made substantial progress in the areas of GDP growth, controlling the inflation rate and to a lesser extent decreasing unemployment. This performance met projections and compared favourably with other European countries, who underwent a slow-down in growth after an increase earlier in the year (Ampudia, 2018). According to the OECD, (2018) the Spanish economy has expended at 3% during the previous three years, with a projected moderate growth but consistent growth for 2018 and 2019 (OECD, 2018). Positive job growth and a promising financial environment can be expected to bolster private demand domestically (OECD, 2018). GDP growth will be further supported by net exports (OECD, 2018). Overall in terms
Of growth measured by GDP appears that Spain has made substantial progress in recovery from the 2008 GFC. Unemployment is still very high; however, this is a vast improvement over 27 percent levels recorded during 2013 according to the Spanish megabank BBVA macroeconomic analysis department, (as cited inThe Local, 2018). It notes that employment growth in Spain is remarkable especially considering that 86 percent of the jobs that disappeared during the GFC have now been filled (The Local, 2018).
The recovery is broad encompassing, consumption, net exports and investments (IMF news, 2017). A quarterly seasonally adjusted growth in GDP showed consecutive growth rate of 0.7%, the first quarter of this year, which comes after three successive periods of growth (Ampudia, 2018). The employment growth was particularly centred on the services industry with an additional 371,400 jobs recovering well from the losses in the previous quarter (Focus Economics, 2018). Other sectors, which showed strong employment growth, were the construction an increase of 63,400 and industrial increasing by 46,400 sectors (Focus Economics, 2018). Sectors which lost jobs were in agriculture the finish of winter cropping saw jobs down by 11,300 (Focus Economics, 2018).
Temporary positions increased to 233,700 in the 2nd quarter, a little higher than the 231,400 full time positions created (Focus Economics, 2018). The total workforce increased to 163,900 in the second quarter up to 22.8 million during this period (Focus Economics, 2018). However, as has been shown Spain’s economy has lagged behind the Eurozone as a whole in being unable to bring unemployment levels down to the levels, which had existed prior to the GFC, despite experiencing significant growth in GDP. It appears that while Spain has made some improvement in reducing unemployment it still has so way to go to achieve employment levels that existed prior to the GFC when unemployment levels were around 8%. Then as now however, Spain has lagged behind the rest of Europe in this area, which is an issue, which will be looked, in greater depth later. About inflation Spain compares favourably with the rest of the Eurozone inflation figure released by Eurostat on 17 August, harmonized inflation was recorded at 2.1% in July its highest level since February 2017 (Focus Economics, 2018). This was a slight increase over the of 2.0% for June and aligning with preliminary estimates. As a result, inflation is slightly higher than the European Central Bank’s target of just below, 2.0% (Focus Economics, 2018).
The aggregate supply and demand curve for Spain
?2 Equilibrium Price
In the present economic climate, Spain is producing at less than its optimum output. This is largely due to a problem with its education system and a lack of skilled workers, which has resulted in the short run aggregate supply curve being, positioned to the left of its optimal position at output level Y1 to output level Y2 and a corresponding rise in inflation to rise from ?1 to ?2. Addressing these problems of structural unemployment will cause the short-term aggregate supply curve to shift to the left causing an increase in output to Y1 and a decrease in inflation to ?1. At this position, short-term supply curve will intersect the long term with the aggregate demand curve at its optimum long-term output level Y1.
Spain the Main Economic Issue
From the economic data, it can be seen that unemployment remains the most pressing economic issue. High unemployment persists despite relatively low inflation and increasing real GDP levels and a high level of net exports (Financial Tribune, 2018). The reason for the persistent high unemployment rate can be found in part in the nature of the Spanish economy itself (Financial Tribune, 2018). Spain’s economy is highly dependent on seasonally based industries such as tourism and to a lesser extent construction (Financial Tribune, 2018). Another if somewhat less significant factor is due to the statistical aberration caused by a high level of emigration which has the effect of shrinking the denominator (labour force denominator) while the numerator number of unemployed remains high (Financial Tribune, 2018). In fact, temporary positions account for around 25% of all employment in Spain and is higher among younger employees higher in addition, about 29% of the individuals who did not hold their first job were unemployed in 2009 (Juan Acosta-Ballesteros, 2013).
A persistent problem to centre on early termination of education, there also appears to be lack of correlation between demand and supply at different education levels, or a high level of structural unemployment, which complicates youth access to employment negatively affecting the employment prospects for young people (BBVA, 2011). At one level, 22.7 % still finish education early, although this is down from 36.7% in 2006 while at the graduate level least two-thirds of graduates find that they are overqualified for the positions they obtain (Financial Tribune, 2018). Although the last two decades has seen Spain being widely recognised for its high percentage of early school leavers, it is only since the onset the GFC that this factor had a significant effect on unemployment among youth (Financial Tribune, 2018). For example, there was a 30 percent increase in the unemployment rate among youth with the most basic education level during the years between 2007 and 2010 to 49.6%; this was 15.3 percent higher than job seekers who completed secondary education and 20.7 percent higher than graduates (BBVA, 2011). Although Spain has seen traditionally high levels of unemployment, events that are more recent have exacerbated the problem. The 2008 GFC had thrown many workers out of work who had left school early to obtain jobs in the construction or tourism industries. (Financial Tribune, 2018).
To illustrate this point construction industry hires in 2006 starts were 856,561 this coincided with an early rate 18-24 of school leaving of 36.7 percent in 2014, the respective numbers were 34,873 and 25.6% (Financial Tribune, 2018). The higher increase in pay levels for labour intensive unskilled positions lead many youths to contend that there was no need to higher or further education (Financial Tribune, 2018). However many of this construction industry job which an unsuitable housing industry boom fostered were lost during the GFC (Financial Tribune, 2018). This pool of unemployed workers combined with the total of those who sought unskilled work in the tourism and construction industries created a large pool of unskilled young people with little employment prospects. To make matters worse this a situation which has persisted until present (Financial Tribune, 2018).
Although the Spanish economy is somewhat broad based with substantial employment in industries such as tourism, manufacturing including motor vehicles and pharmaceuticals, agriculture and electricity and energy (World Atlas, 2018). A more viable long- term economic strategy would be to shift the focus of the economy away from seasonally based industries such as tourism, agriculture and construction. A change of emphasis into developing more stable less seasonally based industries may bring about greater economic stability and growth into the future. In order to achieve this the country will have to remedy its persistent problem of high levels of structural unemployment. Since industries such as manufacturing and energy are more technically exacting than the unskilled positions many young people take up in construction and tourism industries. This would require more young people to stay in education longer in order to gain the skills needed to be able to find employment in these industries. A strategy like this would lead to the avoidance of the present existence of a large pool of unskilled and probably unemployable retrenched workers.
Other measures, which could be used to rescue Spain’s chronic unemployment levels, include streamlining and simplifying the engagement and termination process, which the government has already introduced in 2012 (Financial Tribune, 2018). Other measures, which could prove beneficial, include job creation and training schemes and employment subsidies.