From Abnormal To Normal: Spain's economy

Winter, rather than spring, is in the air, but the economic trees are bearing the first shoots of economic recovery. Come real spring and the economy will bloom into a magnificent display of vibrant greenness, its pollen wafted on the breezes to regenerate the barren lands of the past five years. Life will return. Everything will be as it once was. Everything will be normal again.

The Spanish economy is showing signs. They may only be small signs but they are signs nonetheless. Imports grew in September by 4.7%, so suggesting an improvement in domestic demand. Exports, which have been reasonably buoyant anyway, were up by 8.3%. The OECD, taking note of this performance, has issued a more positive forecast for Spain: growth of 0.5% in 2014 rather than 0.4%. Hallelujah. Unemployment is expected to have fallen to 26.4% (as a whole-year figure) rather than be 27.3%. It should fall a further percentage point in 2014. More hallelujahs.

Before we get carried away, however, the OECD, and it is not alone, has identified factors which will continue to pull the economy back, namely the requirement for fiscal consolidation (otherwise known as increased taxes) and a lack of credit. With Spain expected to fail to meet its budget-deficit targets this year and over the next two, then the Rajoy government still needs to find some pretty hefty savings, though how far it dare go with public-sector restructuring, which would certainly help in this respect, is open to question, especially with the elections looming in late 2015.

Those elections are beginning to look even more important than they might normally be. The Partido Popular maintains a lead in opinion polls but that lead (in one poll) is down to three points over PSOE. As things stand, an election could throw up all manner of confusion and potential chaos from the cobbling-together of coalitions, amidst which would be the Catalonia question. Assuming the Catalans haven't by then succeeded in finding a way of seceding from Spain, both of the major parties would be deeply reluctant to admit the Catalonian CiU into any coalition, which also assumes that the CiU doesn't lose further ground to the left.

The Rajoy government will talk up the weak signs of recovery for all they are worth, because in truth they will be all it has to talk up. The hope that IVA and/or income tax might be reduced ahead of the election looks to be as much of a pipe dream as it has been ever since taxes started rising. The pressures for there to be fiscal consolidation (and more of it) and for there to be greater inroads into the budget deficit simply do not permit a reversal in tax policy. Rajoy could badly do with being able to make such a reversal. His political future might be said to depend on it, as it would be the one thing that might convince the electorate.

Other things will not. Very weak growth won't and nor will very moderate falls in unemployment. It should be remembered that pre-crisis the unemployment rate was between 8 to 9%. Such a figure is not going to be attained any time soon. In fact, the bigger question is whether it might ever be attained.

For the foreseeable future, it is impossible to see the construction industry helping out with employment and its own percentage of the employed being brought back to the 14% level that it was at pre-crisis. While there are so many hundreds of thousands of unsold properties and there is so little credit, the property market is going nowhere and so nor is the supply of jobs for house-building. Governments can't help with construction either, as they once did with such profligacy. What about Spain's green economy? That also can't help either. It has been an unmitigated disaster. What about the new "knowledge" economy? What about it, when educational levels are as low as they are in Spain as a whole? What about the public sector? Not a chance. There have to be more cuts to tackle the deficit, though making them in areas of the country where government is the biggest employer will be very difficult, so talk of local and/or regional government reforms - true, tough reforms - are very unlikely.

At the top of this article, I imagined everything being normal again. But what is normal? Increasingly, distinguished economists are arguing that normality will be much like we have at the present. Things may improve by small amounts but not great amounts unless massive bubbles, such as those in housing markets, are manufactured and permit some move towards greater employment. The point is that, even before crisis and before the bubble burst, the employment rate was only reasonable not outstanding, and remember that this was a bubble blown by out-of-control bank lending, especially that by the crony-filled regional savings banks.

I myself have said before that there should be a realisation that possibly things will be never be "normal" in the way they once were, and so demand will remain that much lower than was the case. Perhaps, pre-crisis, things were in fact "abnormal". If so, it is about time that governments, not least the Spanish Government, appreciate this.