With the end of an extraordinary growth spurt a recession in Spain is inevitable. But to what extent will it affect Spain and its exchange traded fund (ETF)?
It seemed like it was just yesterday that Spain’s improvements in living standards and employment knew no bounds. In the last decade, Spain’s economy grew at an average annual rate of 3.6% and unemployment dropped from 24% to 8%, according to The Economist.
Spain was credited with the creation of one in every three new jobs in the euro zone. In 2006, Spain became the world’s ninth-largest economy measured at market exchange rates and twelfth-largest in purchasing-power parity (PPP).
But investment is slumping and unemployment in August was 11.3%. The economy had its slowest growth rate since 1993 with an increase of just 0.1% between the first and second quarters.
As the European Central Bank raised interests last year, it marked the burst of the Spanish housing bubble. Spain also saw the effects of high oil prices, decreasing disposable income and an inflation rate at 5.3% in July.
It is good news to say that no Spanish bank has reported any difficulties. Financial services make up 38.3% of iShares MSCI Spain Index (EWP).
Government forecasts state that recovery will start toward end of 2009. Economists and businesspeople say the government was slow in responding to the swift economic descent into recession. They claim recovery will not begin until another two years while true pessimists believe a harsher economic environment will involve even more rises in unemployment and years of stagnation.
The pessimists state that instead of a V-shaped recession, with a swift recovery, the Spanish economy could face an L-shaped depression.
But officials rebut that compared to 1993 budget deficit of 7% of GDP, in 2007 it had surplus of 2.2% with public debt down from 68% in 1996 to just 36.2% of GDP. There is also the matter that over the past 15 years a larger amount of powerful Spanish multinationals has emerged.
The impending prolonged recession may be reflected in the growth or lack thereof in EWP, which is down 42.7% year-to-date.