The End of the Recession

Rafael Pampillón. Professor. IE Business School

3 December 2013

Spain came out of recession in the third quarter, and next year we are likely to see a greater rise in consumerism that will hopefully set in motion a virtuous circle of rising levels of production and employment.

Recently, The Spanish Institute of Statistics announced that Spanish production of goods and services (Gross GDP) rose by 0.1% in the third quarter of 2013 with respect to the second quarter. Thus a long recession came to an end, having spanned nine quarters. Since the onset of the recession five years ago, Spain’s GDP has dropped by 7.5%, while the destruction of employment for the same period was far higher, standing at 18.5%.

If you examine data from the third quarter of this year as compared to that of the second,  you will see that nearly all the components driving internal demand are positive: a) household consumption after five consecutive quarters of reduction went up by 0.4%: This is the most it has risen in 4 years; b) consumption in public administrations also went up (0.1%), which means a step back in the very necessary process of reducing public deficit; and c) investment in consumer goods went up by 1.1% for the third consecutive quarter. The only component of internal demand that went down was investment in public works and residential construction, but it fell at a slower rate (-1% for the quarter, the lowest fall in two years).

The most surprising thing about the data published for the Spanish Institute of Statistics  for the third quarter is that the rate of growth of export of goods and services has weakened quite clearly, rising by 2.2% compared to  6.4% in the second quarter. Moreover imports grew by 2.8% in the third quarter, which means they are growing at faster rate than exports. It is the first time that this has happened since the beginning of the crisis.

However, these apparently negative data for the external sector hide positive factors.

a) The increase in imports and the moderate growth in exports signal that consumerism and investment are now recovering in Spain. It is known that when an economy grows it needs to import a greater quantity of goods and services, while recovery also brings more opportunities for national firms to sell within the domestic market.

b) The exportation of goods and services has grown at a lower rate, but nevertheless it has continued to grow at a higher rate than national production. Exports made up 24% of Spain’s GDP in 2009, rising to 35% in the third quarter of this year. The internationalization process of the Spanish economy would appear to be here to stay, and we can therefore expect the rise in the number of exports to continue throughout 2014.  In short, the crisis has provided the impetus for many Spanish companies which had hitherto never looked beyond the Spanish border to venture into international markets, which in turn has brought to their attention the many business opportunities that exist in other countries.

c) Although the level of exports of Spanish goods has grown less this year, is still growing at a higher rate than the world average. Hence in 2013, Spain will have gained a greater share of the total world exports of goods. During the first 9 months of the year the export of goods rose by 7% in comparison with the same period in the previous year, while world trade grew by 2.5 % over the same period.

d) When a country like Spain attains high levels of exports, it isn’t easy to keep increasing them at the same rate over a long period of time. Hence we should expect to see a trend whereby exports continue to grow, but at slower rates. Something else that should be taken into account is that the rise in export levels is necessary for economic recovery but is not enough in itself. External demand cannot be the only engine driving growth.

e) Production for domestic growth, particularly where service production is concerned, tends to generate more employment than the export sector. It is no coincidence that according to national accounts, when comparing the third quarter to the second, jobs were no longer being destroyed (although unemployment only dropped by 800 people).

We are on the right track. The rise in the number of exports has resulted in greater investment in consumer goods and more use of production capacity to meet international demand. This increase in production will translate sooner or later into a rise in employment levels. For the moment, jobs are no longer being destroyed. In the future, probably around the second quarter of next year, the favorable evolution of the job market will generate rises in disposable income and expectations of more income in the future. This situation will lead to a greater increase in consumption. Higher levels of consumption will in set off a virtual circle of increased production and employment.

In order to speed up the process of economic growth and make it more sustainable, changes in economic policy are needed. These include lower rates of income tax that would make for higher domestic demand, a tightening up of labor reform to make employment levels rise faster, and a competition and privatization policy that will drive growth that will last for the long term.

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