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The recession is over

Spain has emerged from nine quarters of negative growth, but weak demand is hampering recovery

On Wednesday the Bank of Spain announced that the Spanish economy grew in the last quarter by 0.1 percent in quarter-on-quarter terms, though GDP shrank by 1.2 percent compared to the same three months in 2012. As such, the central lender has confirmed the general assumption that the recession is over. Behind us lie nine consecutive quarters of negative growth; but in the months to come, there is no expectation of any significant increase in the rhythm of the economy. Growth will not be sufficient to produce any appreciable reduction in the main imbalance of the economy: unemployment. But the recovery suggested by the figures released this week should not suggest that growth next year will exceed the rate of 0.7 percent, as the government has assumed in the macroeconomic hypothesis that underpins the 2014 budget.

The Bank of Spain report shows that almost all the indicators are less bad than those registered a year ago, and that the quarterly trend is also favorable. Employment is slowing its rate of descent, although containment of salaries is still the dominant trend. This, together with a rise (albeit more moderate) in productivity, explains the positive behavior of unit labor costs, which are essential for maintaining the international competitiveness of exports. Foreign trade is still the real driving force of recovery. According to the Bank of Spain, net external demand is playing a greater role in GDP, with a contribution of 0.4 percentage points.

But during the past quarter there has been no improvement in domestic demand, which is essential if the economy is to begin showing positive rates of growth. In fact, the fall in domestic demand appears to have been similar to that seen in the previous quarter, around 0.3 percent compared to the previous three months. The fall in disposable income alone is not enough to explain lower consumer demand, and the lukewarm recovery of corporate investment. There is also a lack of confidence in a future recovery.

Boosting profits

The gap between the statistical end of the recession and a return to growth, as experienced by the majority of households and companies, could end up being wide. Improvements in the job market, which are essential for the confirmation of the recovery, will be seen when companies perceive that there is demand for their goods and services. That will allow them to increase their hiring and boost their profits. And they would also be able to improve their solvency and contribute to the reduction to the current high levels of private debt.

The Bank of Spain is correct to point out that “low levels of income, the continuous negative outlook for the job market and the high levels of household debt do not augur a recovery of consumer spending in the short term.” If that recovery does not arrive, it is unlikely that statistical improvements in the coming quarters will translate into improvements in the standard of living and the confidence of the majority of the economic players.

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