A look at Spain's growth

Spain's Q2 GDP data released on 30th July indicates a steady recovery from recession as the economy accelerated to 3.1% yoy in Q2, 2015 from -2.7% at the end of 2012.

After an initial spurt from net trade, the recovery has broadened out to domestic demand, with  household spending and investment both expanding strongly. Some of this reflects real  improvements in economic fundamentals. Historical and international comparisons suggest that household debt has fallen back to sustainable levels and that the property market has bottomed out. Spanish firms have also strengthened their finances. 

Meanwhile, as domestic demand recovers, Spain looks set to maintain the competitiveness that it has clawed back in recent years.  But Capital Economics suspects the economy to slow down again due to the following reasons.

• First, recent expansions in domestic demand reflect the sharp drop in energy prices and fiscal loosening ahead of the general election later this year. These effects will fade, and perhaps even reverse, over the coming years. 
   
• Second, given the subdued outlook for external demand and the fading effects of last year's depreciation in the euro, exports are unlikely to offset a slowdown in domestic demand. 
   
• Third, despite recent reforms, there remain significant structural problems in the Spanish economy. As the cyclical recovery starts to fade, Spain's potential growth rate may still be pretty weak. 

"The country's GDP growth rate will be above 3% this year, but may fall to only half that by 2017. As a result, unemployment and the budget deficit will fall much more slowly than the Government expects", says Capital Econimics in a research note.