The following article is taken from Eye on Spain, www.eyeonspain.com

The Spanish Economy Facing Strong Headwinds

The past few years we have heard so much about the Spanish economy. Is Spain headed in the right direction? What do the facts reveal about the state of the economy?

ZapateroThe government was optimistic when forecasting their economic growth for 2011 of 1.3% although analysts see only a 0.8% growth rate. With these numbers they are confident the job market will improve. But will this slow economic growth cause a drop in the unemployment rate to a level where we will see light at the end of the tunnel?

What the U.S. economy accomplished in 2010 will help put everything in perspective.

In January 2010 the joblessness rate was 9.7%. The U.S. economy grew 2.9% in 2010 yet the unemployment rate only dropped 0.7% to 9.0%. Using this as a yardstick, the economic growth forecast of 1.3% won't jump start the economy in 2011 and I doubt that it will in 2012.

The housing market is still in shambles. Buyers are reluctant to make a long-term commitment. As a result of the housing bubble crash with prices plummeting 20% or more there are 320,000 homeowners owing more on their mortgage than their property is worth (underwater mortgage.) With prices predicted to drop again this year that number will increase and more than likely we will see an increase in the default rate.

A strong euro is taking a toll on the economy. Although some might think that a strong euro is positive for the economy it is not. It only makes Spain less competitive as exports become more expensive. Also, Spain can't devalue their currency to become more competitive like the United States or Great Britain.

Another problem is the debt crisis. Spain, ranked seventh in a list of 10 countries seen as most likely to default on their debt, must refinance €192 billion in 2011. Borrowing costs will be high as more investors become risk averse. For example, issuance of 10-year bonds in December had an average yield of 5.446%. The prior month 10-year bonds had an average yield of 4.615%. Although it might not seem like much, if you multiply the yield difference by 1.78 billion euros, they had to pay a hefty amount in December.

The most recent debt issuance of three and five-year notes saw a drop in the yield rate to 3.297% from 3.797%. However, the biggest enemy right now in the bond market is inflation which erodes bond values. If investors expect higher inflation they will demand higher yields to offset inflation. The inflation rate rose to 3% in January. For Spain, another obstacle to overcome.

Finally one of the biggest concerns lately is stagflation. It is defined as slow economic growth coupled with a high rate of inflation and high unemployment. The economy stalled in the third quarter of 2010 and in the fourth quarter grew 0.2%. Joblessness is over 20% with long-term unemployment increasing and inflation is at 3%. Japan, after many years of strong economic growth, saw their economy stagnate in 1990 with disastrous consequences. Is Spain the next Japan?

In a nutshell, Spain faces strong headwinds in the future. Only time will tell if Spain can dig itself out of this deep economic hole.

 


Comments:

CommentDateUser
China has DELAYED the fall of Spain from the euro by buying a chunk of the Spanish debt. However a time WILL come when the ONLY answer will be for us to leave, or have a two tear euro. 15/02/2011 20:10:00midasgold
very interesting, thanks.28/02/2011 20:41:00coupdefoudre
The Spanish goverment does not have their priorities in place. Their priority is to help small scale businessmen from any field who employ , 1 to 5 workers who really are the people who work min 12 hrs daily to pay salaries and taxes to the goverment. Another problem is the youth of Spain the laziest , as the socialist make sure they get money even though they do not work or play act to work, demanding every cent from his employer with laws that are unfair.A small scale businessmen works to pay and really is the one who contribiutes in the biggest way to the Spanish economy. The socialist have to see the one who creates job by risking his entegrity going and asking for a loan ,making things happen , who work hours together to make his business work not like the employed ,who know exactly he has leave on the dot, who knows that he has 40 days sick leave and knows how to organise his calendar. Who goes on a 1 month paid holiday while his boss does not know what a holiday is. As long as a goverment who knows how to make money comes into power, Spain is doomed. 14/06/2011 11:31:00Jitu Chugani
Can´t agree more with Jitu. The real problem in Spain is that government has a mania about small enterprises, lodaing them with taxes, while these small business are the 80% of employment in the country. Yet they allow big ones to do has they like, and also those same politicians have no problem (or shame)to join the staff, well payed ,of those same companies. Mean time small bussiness are practicaly in siege state by tax agents. THEY LIVE IN A DREAM.. Si no ganas.. ¿por qué gastas? 28/07/2011 02:53:00Nicolas
So Spain is finally recovering and its a great news the awesome facts presented in your article is great and really makes the post content great ,though the government is not taking wise reforms still the country is recovering but with a slow pace 18/08/2013 18:14:42MichaelVisser
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