July 30, 2013 9:14 am

Spain’s economy on track for return to growth

A pedestrian walks past a store advertising sales in Bilbao, Spain©Bloomberg

The Spanish economy may finally be about to turn the corner, with official estimates showing that gross domestic product fell by just 0.1 per cent in the second quarter – the slowest rate of decline in almost two years.

The estimate, released on Tuesday by Spain’s national statistics office, comes as the clearest sign yet that the country is on track for a return to economic growth in the second half of the year. Government officials have insisted repeatedly that the country’s painful two-year recession is about to end, as a surge in exports gradually offsets still-insipid domestic demand and the continuing fall in public spending.

Several analysts said the government’s prediction was indeed likely to come true. But they also cautioned that Spain was heading for a sluggish recovery at best, with the economy still weighed down by high unemployment, lack of credit and fast-rising levels of public debt.

“The recession is over but the crisis continues,” said Edward Hugh, a Barcelona-based economist and blogger. “Spain’s deep-seated problems are not going to go away because you have a few decimal percentage points of growth,” he added.

Antonio Garcia Pascual, chief southern Europe economist at Barclays, struck a similar note: “I think it is quite likely that we will see the next quarter either flat or positive. But a key question is at what pace will Spain come out of this recession. And that pace will very likely be low for a long time.”

He added: “The reason is essentially twofold: Spain is emerging from the recessions with an overleveraged and credit-starved private sector.”

Though the estimate makes clear that Spain’s recession-plagued economy continues to shrink, the pace of decline has been falling sharply over the past three quarters. In the last three months of last year, GDP fell 0.8 per cent, the worst rate of decline since the start of the crisis 2009. The first quarter of this year then saw a fall in GDP of 0.5 per cent, while output in the second quarter appears to have been almost flat.

The economic news offers a rare bit of comfort to the embattled government of Mariano Rajoy, who is embroiled in a party slush-fund scandal and has suffered a dramatic drop in popular support.

Spain’s prime minister is due to appear in parliament on Thursday, to answer allegations that his Popular party operated a slush fund fed by illegal donations from construction companies and other businesses. Mr Rajoy has made clear, however, that he also wants to discuss the current economic situation – reflecting the government’s new-found confidence in the state of the Spanish economy.

Mr Rajoy and his ministers have faced a sharp public backlash against their economic policies, which have centred on labour market and other structural reforms coupled with painful cuts in public spending. They argue that the reforms have helped restore the competitiveness of Spain’s private sector, and boosted the country’s export performance over the past year.

But analysts say the criticism is unlikely to abate as long as Spaniards do not see a sustained recovery in the labour market. Almost 6m out of 47m Spaniards are without a job – or a quarter of the workforce – and many labour market economists believe that those numbers are unlikely to change dramatically even once Spain returns to growth.

Mr Garcia Pascual pointed out that the number of long-term unemployed is already approaching 60 per cent of all jobless Spaniards. “[That] represents a major challenge for the government and its labour market policies,” he added.

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