Magazine article Global Finance

A New Sunrise for Spain?

Magazine article Global Finance

A New Sunrise for Spain?

Article excerpt

Although the hardships are far from over, the Spanish economy and banking system may finally be on the mend.

The Spanish economy is regaining its mojo. It is hard to pinpoint any one factor responsible for the newfound resilience, since several components interrelate in a virtuous cycle. Three elements, though, stand out: rebounding exports, consumer confidence, and commitment to reform geared toward economic adjustments.

The speed of recovery has taken many by surprise. Jordi Gual, chief economist at Spanish bank La Caixa, recalls it was "hard to defend" his bank's optimism two years ago, but "we were convinced the fruits of economic adjustments taking place would be reaped." Spanish authorities and European leaders worked in tandem, reinforced by the assurance of the European Central Bank that the eurozone's periphery economies would not be allowed to collapse. Concurrendy, Spain was boosting productivity, controlling unit labor costs and improving competitiveness, which together has led to a current-account surplus.

Consumer confidence underlies the new flush of health. "Spending climbed up off the floor during the second half of 2013. The government was clearly no longer contemplating continued austerity measures, as in 2011 -2013, except perhaps a bit more tinkering," says Raj Badiani, senior principal economist at research firm IHS Global Insight.

In late 2013 the government reintroduced its customary Christmas bonus for public-sector workers (normally two months' salary). By then employment was starting to pick up, driven by improved productivity. But how much of that improvement was derived from agreements between employers and unions and how much from government policies? "The jury is still out on that," says Antonio Barroso, senior vice president at Teneo Intelligence. In the auto sector, for example, Ford, Renault, General Motors and Volkswagen had already been transferring production from other countries, attracted by a comparatively cheap Spanish workforce. "Those car industry agreements preceded the government reforms," Barroso points out.

But the government has played its role, too, enacting legislation for 2012-2014 to moderate wages and increase internal flexibility. Collective bargaining, for instance, lets firms opt out of sector-wide bargaining to avoid the rigidity imposed across an entire industry. Work time can be more rationally distributed, say, over weekends and weekdays, to address fluctuations in orders. Rules for fair dismissal have been clarified. In addition, government programs for retraining and skill building are under way. The goal has been "to allow adjustment not by laying people off, but instead by adjusting wages," says Fernando Navarrete, chief financial officer at development bank Instituto de Crédito Oficial (ICO).

Other employment regulations promote new hires for small businesses. The incentives include one-year trial periods, tax breaks and more part-time flexibility. Barroso expresses some concern over the gap between those with fixed, protected contracts, severance pay and job security, and those with temporary contracts. "It has created a dual labor market," he explains. "It's hard to fire those with fixed contracts, so employers rely on short contracts and create precarious work."

The question now is: What economic growth rate-and in what areas-will encourage new jobs? During the bubble years, the economy was adding workers at an unrealistic rate, so those pre-crisis numbers no longer apply. "Historically, Spain needed several quarters with GDP [growth] over 2% for job creation," says Navarrete. This time, though, the recent labor reforms might help generate jobs at lower rates.

SUPPLY-AND-DEMAND EQUATION

The strengthening economy is now translating into investment demand, both for credit to support the export side and for internal demand across all sectors. Thus, supply and demand are rising together. "The banking sector has started to generate positive growth in new loans granted to the private sector, coupled with substantial improvements in funding conditions," Navarrete notes. …

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