The Spanish economy will plummet back into recession in 2012, declining by 1.5% in real terms, according to a Bank of Spain report published in the press today (see the chart).
The Bank of Spain, whose forecast was slightly more optimistic than that of the IMF (-1.7% decline in GDP for Spain next year), warned that further financial stresses could make the recession deeper, but also added that there was room for improvement if economic policies aided the adjustment process.
Employment would fall
The Bank warned that there would be no net job creation until the end of 2013 according to its forecasts, and that employment would fall by a further 3% in 2012 unless “additional measures” were adopted in the labor market (see the chart). If the Bank´s projected employment figures are correct, this would leave Spain with an unemployment rate of more than 24% by the end of the current year.
The Bank called for “a wide-ranging reform of collective bargaining mechanisms… and of labor contracts” not only to improve employment prospects in Spain, but to brighten expectations and stimulate growth.
Spain, US and Eurozona
The expected trends in Spain and the eurozone are in contrast to the U.S. economy, which is expected to bounce back this year to a growth rate of 2%, despite the reigning fiscal and political uncertainty. The eurozone, in contrast, is expected to grow by only 1% in 2012, after matching US GDP growth in 2011 (1.5%).
The difference cannot be blamed only on the severe fiscal austerity that has been imposed on the peripheral countries of the eurozone. In the United States, the impasse in Congress and the vicissitudes of an election year have also blocked any effective fiscal stimulus, leading to a fiscal stance that will be a drag on growth this year.
Policies of the Central Banks
The more important differences lie in the sharply contrasting policies of the central banks in the two areas, with the Fed taking a drastically expansive monetary stance to alleviate liquidity problems while the ECB has been slow and hesitant to react even as the crisis deepens. Another key factor is confidence, which keeps US interest rates low (recall the 0% interest rate offered in a recent Treasury auction, which was oversubscribed by the markets), while months of indecisiveness by eurozone leaders have left peripheral economies adrift, intensifying the contraction and the liquidity shortages that are plaguing businesses and destroying jobs. More flexible productive structures are also helping the private economy to recover in the United States.
What could Spain´s growth rate be with a more supportive monetary policy, effective eurozone leadership and a labor market reform that allowed private firms to retain and even hire workers? It is impossible to say. But it´s a fairly safe bet that if these conditions were different, Spanish unemployment would be at much more reasonable levels, and the recovery, if it had not yet arrived, would be on the immediate horizon.