World economies

Published April 25, 2016

Spain

SPAIN is a notable example of how a country should try to recover from an economic slump. Just a few years back, Spain ranked second after Greece as a figure of the eurozone’s huge debt crisis and economic slowdown. The country’s unemployment had climbed to a huge 27pc.

Things have dramatically changed now as Spain shines in the EU’s listless recovery, although without a formal government for months following a split election and a political deadlock.

Spain’s economic growth resumed in 2013 and recovery was strengthened in 2015, with a growth of 3.2pc. The growth was mainly driven by robust domestic demand from strong private consumption supported by improved labour market conditions and increased purchasing power.

Spain has been able to achieve, for the first time in almost 30 years, a current account surplus in a period of positive growth.

Growth is expected to remain somewhat robust but with downward risks to this year’s outlook mainly stemming from the external sector. Specifically, growth could be negatively affected by a more pronounced slowdown than expected in some main emerging economies.

However, unemployment--- stuck at above 20pc since the height of the economic crisis in 2010--- is expected to continue falling. The central bank sees job creation rising at ‘high levels’ in relation to GDP growth. Unemployment is seen slightly above 18pc by the end of 2017.

The Bank of Spain has raised its 2016 growth forecast to 2.8pc. But the Spanish economy minister has lowered its 2016 and 2017 growth forecasts to 2.7pc and 2.4pc, citing global deceleration.

Despite the lower forecasts, Spain had fulfilled its financial obligations and carried out a great deal of reforms. It expects to create 900,000 jobs in 2016 and 2017. The government debt, estimated at over 100pc of GDP in 2015, is projected to peak in 2016 before decreasing in 2017.

The IMF has revised its forecast for GDP growth to 2.6pc for 2016 and 2.3pc for 2017. The change represents the largest upward revision among the world’s biggest economies. Spain’s growth in 2016 is expected to surpass that of the US, Japan and Canada.

According to the Bank of Spain, the economy continued to grow solidly in early 2016, with balanced GDP developments boding well for the rest of the year and 2017.

The central bank estimates that the real GDP grew by 0.7pc quarter on quarter in the first-quarter of 2016, slipping below its gains of 0.8pc in the final two quarters of 2015. Meanwhile, the real output was up 3.3pc (year on year) in the first quarter.

Private sector debt continues to decline but remains high, making the country vulnerable to shocks. While in recent years, debt reduction took place mainly through negative credit flows, it is now mainly driven by nominal GDP growth, as credit has started flowing again.

Accordingly, the negative impact of debt reduction on growth has eased significantly. The general government deficit has continued to narrow in 2015, mainly against the backdrop of strong GDP growth. According to the EC economic forecast, the deficit is projected to amount to 3.6pc of GDP in 2016 against an estimated 4.8pc in 2015.

Public debt is expected to continue to increase from 100.7pc in 2015 to 101.2pc of GDP before starting to decrease in 2017.

Netherlands

THE Dutch economy still bears the hallmarks of its post-crisis experience. While the initial fall in economic output in 2009 was sharp and driven by a collapse in foreign trade and fixed investment, a short-lived recovery set in from 2010 onwards, punctuated by a renewed decline in GDP in 2012 and 2013.

Private consumption declined alongside fixed investment, aggravated by the pronounced downturn in the housing market from 2010 onwards and by rising uncertainty regarding pension benefits and contribution levels in the country’s large second pillar pension system.

The scars of the recent crisis still remain visible in households spending and fixed investment levels which in the fourth quarter of 2015 remained below their respective pre-crisis peaks.

The economic recovery is firming up. Positive growth of 1pc recorded in 2014 is estimated to have accelerated to 2pc in 2015 and is expected to be maintained in 2016 and 2017.

Rising economic confidence, faster wage growth and a housing market recovery are expected to boost domestic demand through private consumption and investment.

While the labour market continued to improve in 2015, inflation remained very low. Public finances weathered the crisis comparatively well, but face new challenges. The fiscal deficit is estimated to have remained broadly stable at around -2.25pc of GDP.

The economy returned to growth in 2014 and 2015 is driven by domestic demand, fuelled by real wage growth, upbeat consumer sentiment and rising housing prices. Investment growth was dynamic throughout 2015.

The EC projects a growth of 2.1pc in 2016 and 2.3pc in 2017. Although labour market conditions have improved, the unemployment rate is falling only slowly. After three consecutive years of decline, employment growth turned positive in 2015 and is estimated to have increased by 0.9pc year-on-year.

According to the OECD, the Dutch economy is able to create jobs, even at moderate growth levels. It forecasts a 1.7pc growth this year and 2.1pc in 2017. The budget deficit would keep declining, reaching 1.9pc of GDP in 2016 and 1.5pc the next-year, showing a better fiscal sustainability. The organisation has stressed the need for more investment on research and development as the Netherlands is yet to reach its national target of 2.5pc of GDP or the EU target of 3pc of GDP.

The IMF expects a modest economic recovery, with domestic demand getting stronger. Unemployment will drop from 6.9pc to an estimated 6.6pc in 2016 and then remain stable in 2017.

Published in Dawn, Business & Finance weekly, April 25th, 2016

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