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Spain - Economy

Spain has the world's eighth largest economy and is the second largest international tourism destination and eighth largest auto manufacturer. Spain's economic recovery largely weathered the political uncertainty of 2016, with a thriving tourism sector fueling a jobs spurt that in turn kept consumer spending on track. In July 2016 the acting government raised growth prospects for 2016, though it also trimmed its outlook for 2017 as worries mounted over the fallout from Britain's vote to leave the European Union. Economists also believed fading tailwinds, including the low oil prices currently favoring energy importers like Spain, would make for a more challenging 2017.

After almost two decades of consistent economic growth, Spain went into recession at the end of 2008. The financial crisis was preceded by the collapse of the property market, which had previously known a booming period. Regions had invested large amounts in infrastructure and public works. In this context, corruption allegations in the urban development sector, and in some instances involving illegal financing of political parties and embezzlement of large amounts of public money, have been regularly investigated in Spain in recent years. Studies estimated that the shadow economy reached 19.2% of the GDP in 2012. In the aftermath of the economic crisis, anti-corruption policies have been given more prominence in the public agenda, complementing measures targeting economic adjustment.

Spain is slowly recovering from the throes of the global financial crisis, but Spaniards still have painful memories of that time. At the same time, there's no doubt that the country is on the recovery track, especially with consumption and exports picking up, following government efforts to boost the economy, including fiscal and market reforms. As a result, Spain's growth has outpaced that of most of its EU counterparts, even though it's expected to weaken slightly in the coming months.

The Spanish economy was expected to grow in the mid-2-percent range in 2017, slowing from growth of over 3 percent in 2016. While it still maintains recovery momentum, it faced a slowdown in job creation, rising consumer prices and an array of external uncertainties. Spain's unemployment rate stands at almost 19 percent, the second highest in the EU after Greece.

Job growth has been slow and job quality, poor. That combined with high inflation could take a toll on consumption going forward. Spain is also facing a raft of uncertainties from abroad, including Brexit, although the impact is yet to be seen, and the recovery in global oil prices.

By January 2015 Spain had officially come out of its six-year recession, though unemployment remained at a staggering 23.7 percent. However, the Spanish economy appeared to be on an upward trajectory, expanding at its fastest pace since 2007 in the fourth quarter. Gross domestic product jumped 0.7 percent from the last quarter, and 2 percent from the previous year.

By late 2011 Spain was fighting to avoid slipping back into recession for the second time in two years. Unemployment was close to 22 percent, the highest in the European Union. By late 2012 over 25% of the Spanish workforce was unemployed, the highest in the 17-nation euro currency bloc.

Spain's economic growth rate ground to a halt in the third quarter of 2012 after growing only a tiny 0.2 during the previous three months. Indicators available for the final months of 2012 showed a slight moderation in the contractionary trend of the Spanish economy, in a context where domestic demand is constrained by the worsening labor market, general uncertainty and the fiscal consolidation process. In this context, the OECD published its growth projections for Spain, forecasting a drop of 1.3% in real GDP for 2012, and of 1.4% for 2013, estimating an increase of 0.5% in 2014. Spain's unemployment rate shot up to a record 26.02 percent in the fourth quarter of 2012, leaving almost six million people out of work, with a shocking 55 per cent of young people out of work.

At the start of 2013, Spain was in the throes of its second recession in just over three years following the collapse of its once-booming real estate sector in 2008. Along with Italy, Spain was considered too big a country to bail out the way the European Union and the International Monetary Fund helped Greece, Portugal and Ireland.

By early 2013 Spain had an unemployment rate of 27 percent, but by mid-2013 Spain’s unemployment rate dropped from around 27 percent to 26 percent, the biggest improvement in five years. In April 2013 Spain said its economy was worsening and that it would take two years longer than first thought to meet Europe's deficit target. Madrid said it expected its economy would shrink 1.3 percent in 2013, instead of the one-half of one percent figure it projected earlier. The government said it expected the Spanish economy would begin to grow again in 2014. At the same time, Spain - the fourth largest economy in the euro currency bloc - said its deficit would fall in 2013 to 6.3 percent of its national economy. That is a sharp improvement over 2012, but still more than double the three percent target set by the European Union.

Traditionally, Spain has been plagued with high unemployment rates that, especially in the 1970s, threatened the new democracy's stability. Unemployment has continued to be a problem in the 1980s. In addition, Spain has been plagued in the past with inflation and a lack of productive investments. In 1977, Spain's inflation rate was 26.4 percent: investment was negative, and both interest rates and unemployment rates were high. The prospects for a healthy economy were brighter in 1985. Although unemployment was still the highest of any industrialized country (22 percent), economic growth in 1985 was the strongest since 1977 (at 2.1 percent); investment grew by 5.5 percent; and inflation had been gradually reduced. After Spain joined the EEC in 1986, Spain's economy was characterized by rapid expansion that was for a time the most exciting period in Spain's economic history since economic reforms of 1959.

Spain's accession to the European Community -- now European Union (EU) -- in January 1986 required the country to open its economy to trade and investment, modernize its industrial base, improve infrastructure, and revise economic legislation to conform to EU guidelines.

These measures helped the economy grow rapidly over the next 2 decades. Unemployment fell from 23% in 1986 to a low point of 8% in mid-2007. The adoption of the euro in 2002 greatly reduced interest rates, spurring a housing boom that further fueled growth. The strong euro also encouraged Spanish firms to invest in the United States, where several Spanish firms have significant investments in banking, insurance, wind and solar power, biofuels, road construction, food, and other sectors.

The end of the housing boom in 2007 and the international financial crisis led to a recession that began in the second quarter of 2008. After 15 years of rapid economic growth, the end of a long construction boom led to surging unemployment (almost 13 percent by 2008). The international credit crisis aggravated the situation, as Spain's high current account deficit left it dependent on now-scarce crossborder lending. Housing sales and construction declined dramatically, and the unemployment rate was more than 20% in the first quarter of 2010, the second-highest in the European Union after Latvia.

The Spanish economy grew by 0.1% in the first quarter of 2010, the first positive growth in 2 years. This was mostly attributed to an increase in public demand, while private demand dropped. GDP growth for all of 2010 was -0.1%. The budget deficit has been growing rapidly since the Zapatero government introduced high spending on public works and unemployment benefits to combat the recession, though the debt-to-GDP ratio is low due to a surplus maintained several years before 2008. The EU, IMF, and U.S. were among those that urged Spain to take the steps necessary to restore confidence in the Spanish economy.

In May 2010, the Zapatero government introduced austerity reforms aimed at reducing the fiscal deficit to sustainable levels that reduced government employees' salaries, froze pension funds, and suspended public works. This legislation is designed to reduce the deficit to 7% of GDP in 2011, and Spain has pledged to reduce it to below 3% by 2013. In mid-June 2010, the government issued a decree implementing labor market reform to reduce rigidity in hiring and firing workers. Due largely to outstanding bad loans to the construction sector, Spanish regional saving banks (cajas) have been undergoing a series of mergers to increase liquidity and put the sector on a sound footing.