With yet another promise about to go up in smoke (that of PM Rajoy's claim that Spain will be out of recession this quarter), we thought it worth a brief reflection on just what a disaster the nation is and how much it is weighing on the entire EU. Spain has been in recession for seven quarters in a row and survey indicators suggest it will extend to eight. House prices continue to collapse. Government revenue to GDP is among the worst in the union. But unemployment is where Spain has its peers beat - at 6.2 million unemployed, Spain accounts for almost one-third of the entire unemployed population of Europe. With expectations that the unemployment rate will break above 28% next year and a government embroiled in scandal, Rajoy's planned address to discuss the politicial and economic situation to his nation in August may just be the catalyst for the social unrest that has laid relatively dormant for so long. Is Spain the new Detroit?
GDP is unlikely to grow until next year and probably contracted 0.3 percent in the second quarter, according to Bloomberg’s monthly survey published on July 11. The economy has shrunk in 15 quarters during the past five years. The Bank of Spain is scheduled to release its second quarter growth estimate this week while the official figure from the statistics agency will be released on July 30. The services PMI is likely to remain below 50 in July.
A lack of economic growth may have pushed up unemployment to 27.2 percent in the second quarter, a Bloomberg survey shows, as seasonally adjusted figures strip out any rise in temporary jobs as a result of tourism. That is the highest unemployment rate since the country returned to democracy in 1975. About 6.2 million people are out of work, accounting for almost a third of those unemployed in the euro area. The OECD forecasts unemployment will surpass 28 percent next year.
Government debt is rising and a series of tax increases failed to generate the required revenue as the economy weakens and a growing number move into the shadow economy. One million Spaniards have jobs in the underground economy, according to last week’s report by the Foundation for Financial Studies. The study estimates the shadow economy is equivalent to 20 percent of Spanish GDP. That is higher than every country in the EU apart from Italy, with 21 percent.
Domestic demand is likely to remain weak as house prices continue to fall and a 10th of households have no breadwinner. House prices are down 35.5 percent from their peak, having fallen 15.7 percent in real terms in 2012. A 7.6 percent decline in the house price index last quarter suggests prices have further to fall. House prices may drop by 13 percent in 2014, according to S&P.
Source: Bloomberg Briefs (@EconomistNiraj)