The Spanish economy is on a gradual cyclical rebound after a prolonged period of contraction materialized between 2011 and 2013. Real GDP expanded by 1.6% y/y in the third quarter of 2014, following an increase of 1.2% and 0.6% in the previous two quarters, respectively. As the Figure 1 shows, Spain experienced the fastest expansion rate amongst the largest economies in the euro area fuelled by both cyclical recovery dynamics and successfully executed structural reforms.
Spain is the world’s 16th largest economy, accounting for 1.4% of global GDP (measured in purchasing power parity terms). In terms of GDP size, it ranks right after Canada (15th largest). It is also Europe’s 6th largest economy ranking below Germany, France, United Kingdom, Russia and Italy. Driven primarily by strengthening domestic demand conditions, we estimate that real GDP will expand at an annual average rate of 2% in 2015-16 after a projected 1.2% expansion in 2014 (see Figure 2). External demand conditions in top-tier countries in the euro area coupled with recessionary dynamics affecting the Russian Federation will undoubtedly limit the contribution of exports to overall growth in the coming years. However, Spanish corporations are successfully diversifying export markets in highly competitive sectors such as infrastructure, financials, utilities and telecommunications.
Spain is in structural transformation mode. The government refers to the adjustment phase as “the internal devaluation” needed to recover growth, first through major employment contraction and aggressive deleveraging, and later through structural reforms and balanced external accounts. A prolonged financial and economic crisis triggered the adoption of a private sector-led economic development model to boost exports, improve overall productivity and foster the internationalization of Spanish firms beyond Europe. The economy will benefit from declining oil prices, a depreciating currency and a persistently low interest rate environment to offset the challenges of a still-fragile euro zone.