Twelve months on from the first Grant Thornton Future of Europe report the situation in the eurozone remains difficult. Growth rates are flat, if not negative, and moves to integrate states more fully through a banking union – in order to break the link between weak banks and weak sovereigns – are not moving as quickly as many would like. The messy bailout of Cyprus and the rejection of austerity measures by the Portuguese courts have renewed fears that the eurozone could break up.
Spain's economy shrank by 0.8% in Q4 2012 and 1.4% for the year, with output still 5% below 2008 levels and a forecasted contraction of 1.6% this year. The government is working to control state and regional budgets, but net government debt is expected to reach 84% of GDP by year's end, up from 57% in 2011. The deficit is unlikely to meet the European Commission's 3% target until 2014. Unemployment is at 27%, with youth unemployment reaching 57%, second only to Greece.
There are positive signs in Spain's labor market despite the challenges. A 10% drop in unit labor costs since 2009 has boosted Spain's competitiveness. Nissan's €130m investment in its Barcelona plant, driven by trade union agreements on limiting wage increases and adjusting working conditions, is a prime example. Other car giants like Ford, Renault, and Volkswagen are also expanding production in Spain to leverage the country's low wages, making it an attractive hub for automobile manufacturing and exports.
Given the necessary fiscal adjustments, domestic demand alone won't drive Spain's recovery in the short to medium term. However, I'm encouraged by the growing global outlook of Spanish businesses. According to The Economist, the number of exporting businesses rose by 28.4% to 130,247 in 2012. Despite weak global demand, Spanish merchandise export earnings increased by 20.3% since 2007, outperforming Germany’s 13.7%. Additionally, Spain is reducing its reliance on its neighbors, with exports to the EU falling from 70.7% in 2008 to 62.8% in 2012. Our current account deficit has been cut to just 0.8%, and a surplus is expected in the near future.
To suggest that globalisation is the answer to all of Spain’s woes is too simplistic. Many challenges remain before growth and jobs return to the economy. And the solution for many of them will require further difficult negotiations between EU members. However, where others see a crisis, we at Grant Thornton see an opportunity. Spain is a great country, a fact our most dynamic business leaders are exporting all over the world every day.
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José María Fernández is Managing partner of Grant Thornton Spain.