Spain Economic Profile, Spanish Economy, Economy of Spain
The Spanish empire vied with the British for domination of the seas but failed to keep pace with the mercantile and industrial revolutions. It has come back from the Franco years to be a vibrant part of the European zone economy - yet dark clouds are gathering.
Spain has a population of 40m and a GDP (PPP) of $1.352 trillion in 2007, according to the CIA World Factbook, making it the thirteenth biggest economy, or the eight biggest by nominal GDP.
In the sixteenth and seventeenth centuries, the Spanish economy was one of the world’s largest. Spain vied with the British empire for global supremacy, and it navy conquered South America and the Philippines.
Weak rulers failed to counter British tactics and didn’t understand the power of the mercantile system, for which Spain was well suited with its still formidable navy. It also didn’t grasp the opportunity of the industrial revolution.
Spain stayed neutral during World War I and World War II, but it was wrecked by the civil war of 1936 – 1939 and the ascent of Franco and his fascist regime, which stayed in power until 1975.
Democracy therefore came late to the country, but the economic creativity of its citizens helped to make up for lost time. Spain joined the European Common Market in 1986 and became one of its fastest growing economies, posting 5% average annual growth until 1990. The European-wide recession slowed Spain down, but it continued to raise per capita levels of income until it matched the rest of western Europe.
In 1999 Spain was part of the first group of countries that took the Euro as their common currency. Growth has averaged more than 3 per cent annually since that time helping to keep Spain stable and prosperous. Spain’s economy grew 3.8 per cent in 2007, with services making up 67 per cent of the economy, industry 30 per cent and agriculture 3 per cent.
However Spain may face greater risks than some of its neighbours in the Euro zone. Its unemployment rate has been brought down from double digit levels but remains high at 8.6 per cent, and is likely to rise above 10 per cent by the end of the year. It is also challenged by an ageing population and declining birthrate. As with other European union members, the strength of the Euro means that exports are uncompetitive outside the Eurozone. This has been offset by the growth of trade within the region, but with growth stalling that may not continue to be the case.
Spain also has the largest trade deficit in the world in relative terms.
The housing market is a major concern. As well as domestic demand, for many years now Spain has benefited from an influx of money into resort towns and new developments of condominiums and holiday homes along its generous coastlines. Real estate prices in Spain grew 247 per cent from 1998 to 2005. It was estimated that in 2005, Spaniards needed 300,000 homes, whilst 100,000 homes were bought by foreigner investors and a further 100,000 by foreigners living in Spain.
However Spanish developers have consistently built more units than were being bought, on the premise that foreigners would continue to move to Spain in ever increasing numbers. Much of that money came from the UK, but with the British economy on the verge of recession, and with UK property values collapsing, buyers have disappeared. Many empty or half-built developments may no longer be sustainable, and house prices are looking like a major asset bubble that is currently popping. It is estimated that there are 3-4 million vacant properties in the country now.
Spain is particularly vulnerable to a property market collapse 80% of Spaniards own their own homes and usually have high loan ratios on variable mortgages. With the level of home ownership and the size of the property bubble, the property sector makes up much more of the Spanish economy than that of other developed economies.
Property prices are plummeting, inflation and unemployment are rising, and property developers are starting to file for bankruptcy.
A further challenge is income generated by EU structural funds. Spain and Ireland were the two major beneficiaries of EU funds used to help poorer economies upgrade themselves. Having achieved per-capita GDP levels of $30,000, just 10 per cent less than France, and with poorer member states from Central and Eastern Europe joining, those funds are being re-allocated. There will be a painful re-adjustment process needed.