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Spanish Bulls Shrug Off Doubters as Economy Keeps on Booming

Spanish Bulls Shrug Off Doubters as Economy Keeps on Booming

(Bloomberg) -- Spain’s economy is either running on fumes or powering ahead with a healthy boom, depending on who you talk to.

Growth is on track this year to outpace every Group of Seven economy apart from the U.S., building on an expansion that has already endured for half a decade. Its surprising strength recently prompted the Bank of Spain to raise its outlook for 2019 growth, predicting 2.4% -- twice what the European Commission forecasts for the euro zone.

Spanish Bulls Shrug Off Doubters as Economy Keeps on Booming

Those economic guardians in Brussels and International Monetary Fund officials in Washington can’t help worrying that such momentum is unsustainable. That’s a view contested back in Spain by both officials and some economists, who say a boom of five straight years with annual growth averaging nearly 3% has longer to run -- and shows no signs of excess.

“We’re generating jobs more than twice as fast as the euro zone and the U.S.,” said Ignacio de la Torre, chief economist at Arcano Partners in Madrid. “The fundamentals are good. There’s no problem with overheating or imbalances.”

De la Torre, a longtime bull who defied the consensus during Spain’s banking crisis of 2012 to predict the economy’s turnaround, says growth remains robust despite a global slowdown.

The country is still nursing scars of its crisis, with a jobless rate at 14.7%, well above the euro-area average. But that’s almost half what it was in Spain’s darkest hour. At the same time, an improvement in cost competitiveness helped exports. They now total around a third of gross domestic product versus a quarter before things started to go awry in 2008.

Such shifts amount to a structural change, according to Manuel de la Rocha, senior economic adviser to acting Prime Minister Pedro Sanchez, who says Brussels officials haven’t accounted for such a transformation.

“The models can’t capture that because they are based on past evidence,” he said in an interview. “Year in, year out, we are beating all the forecasts about how low unemployment can go. We keep bringing unemployment down and there are no inflationary pressures.”

Spanish Bulls Shrug Off Doubters as Economy Keeps on Booming

De la Rocha’s team sees Spain’s jobless rate falling below 10% by 2022. That steady decline underpins the government’s rosier medium-term outlook, which his economists put at around 1.8% in 2022.

Investors have also shown faith in Spain, keeping sovereign borrowing costs in check in 2018 as yields in Italy jumped. They shrugged off election uncertainty, budget haggling and concerns about Catalan independence.

The case against Spain’s growth dream is that it remains plagued by deep-seated problems such as a labor market that is still dysfunctional.

The European Commission and the IMF say the jobless rate is unlikely to fall significantly during the next several years, because it’s already bumping up against a structural limit of 13-15%. Officials warn that if unemployment falls below that, it could trigger higher inflation and wage increases that are out of whack with productivity, undermining overall growth.

That’s the basis for the Commission’s forecast that Spain’s economic exuberance will fade quickly and settle into an average rate of around 1.3% through 2023.

The debate about the slack in Spain’s labor market and wider economy has immediate consequences for fiscal policy tussles between Madrid and Brussels.

The Commission’s lower estimate of potential growth means it sees less fiscal space for the government. While Spain’s headline deficit is narrowing, the EU calculates the structural gap is going in the opposite direction, and it wants action to address that.

Read More from Bloomberg Economics: What Brussels Gets Wrong on Jobs

But fuller government coffers are one reason that Inigo Querejeta is bullish about growth. As chief executive officer of Contenur SL, a company selling garbage and recycling bins around the world, he sees the boom trickling through Spanish towns and cities, which are upgrading waste containers because “they have more money to spend than three or four years ago.”

Madrid officials acknowledge that changes are needed over time in order to boost productivity, but insist economic growth will continue to help chip away at the budget gap.

For Rafael Domenech, head of economic analysis at BBVA Research, that intention would be better addressed sooner rather than later. Spain needs to tackle structural problems regardless of arguments over how far unemployment can fall, he argues.

“We need to focus on how to be better prepared for the next crisis,” Domenech said.

To contact the reporters on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.net;Craig Stirling in Frankfurt at cstirling1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint

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