- The Spanish fiesta is over – Was it too much Sangria? What are the consequences? Following a huge economic boom, the financial crisis is now taking its toll on Spain.
- Investment, especially housing investment, has been a driver of the Spanish economy. The housing market is now in the midst of a severe correction, which is expected to drag the economy down through the construction sector and lower household spending.
- Private domestic demand will be severely constrained as both investment and consumption are at very low levels. Increased public consumption will help to mitigate some of the negative impact of the crisis.
- We expect a global recovery in 2010 will lead to net exports being a key driver in ending the recession in Spain. Spain has a huge trade imbalance of near -10% of GDP; an improvement in this balance is necessary for Spain to recover.
- We expect the Spanish economy to contract 3.8% in 2009, and grow just 0.4% in 2010, compared to an average of 4% over the last 15 years.
The Spanish story
The Spanish downturn began in the middle of 2007, simultaneously with the financial crisis. Since then unemployment has exploded and economic activity has deteriorated rapidly. We note, though, that the Spanish economic downturn was not caused by the financial crisis, but was magnified and probably emerged faster because of it. The fundamental cause was rather due to years of too high growth and the inevitable slowdown of an overheated Spanish economy, and in particular an overheated Spanish housing market. The domestic housing market actually began cooling before the global crisis emerged.
