Spain's economy is the 13th largest in the world by nominal GDP and one of the largest by purchasing power parity. Spain is a member of the European Union, the OECD, and the World Trade Organization and has a mixed capitalist economy.
Based on nominal GDP statistics, the Spanish economy is the fifth largest in Europe, after Germany, the United Kingdom, Italy, and France, and the fourth largest in the Eurozone. In 2012, Spain was the world's 12th largest exporter and 16th largest importer.
Spain is ranked 25th on the United Nations Human Development Index and 28th on the World Bank's GDP per capita, thus classifying it as a high-income economy and among the very high human development countries. According to The Economist, Spain has the 10th highest quality of life in the world.
Following the 2007-2008 financial crisis, the Spanish economy entered a recession and entered a cycle of negative macroeconomic performance compared to the European Union and the United States. On average, the Spanish economy entered recession later (it was still growing by 2008), but it remained there for longer. The economic boom reversed in the 2000s, leaving more than a quarter of Spain's workforce unemployed by 2012. Overall, Spain's GDP fell by approximately 9% between 2009 and 2013.
The economic situation began to improve in 2013 and 2014. During that time, the country managed to reverse the record trade deficit accumulated during the boom years, achieving a trade surplus in 2013 after three decades of deficits. The surplus continued to strengthen during 2014 and 2015.
In 2015, Spain's GDP grew by 3.2%, a rate not seen since 2007, before the crisis; this growth rate was the highest among the largest European Union economies for that year. In just two years (2014-2015), the Spanish economy recovered 85% of the GDP lost during the 2009-2013 recession, leading some international analysts to refer to Spain's current recovery as a "demonstration of structural reform efforts."
Strong GDP growth was also recorded in 2016, with the country growing at a rate twice as fast as the Eurozone average. In this regard, the Spanish economy is expected to remain the best-performing major economy in the Eurozone in 2017 as well. Spain's unemployment rate fell significantly from 2013 to 2017, although the true unemployment rate is much lower, as there are estimated to be millions of people working in the gray market, who are considered unemployed or inactive but still hold jobs. Spain's real GDP is also approximately 20% larger, with the underground economy moving an annual €190 billion (US$224.2 billion). Of any high-income European country, only Italy and Greece have a larger underground economy than Spain, thus boasting greater purchasing power and a lower GINI coefficient. Like other struggling countries such as Greece, Spain has requested aid from the European Stability Mechanism (ESM) due to its ongoing crisis. Due to the recent crisis, 10.2 million people in Spain live below the absolute poverty line, equivalent to a poverty rate of 22.3 percent. This makes Spain the third-highest inequality country in the EU.
HISTORY
When Spain joined the European Union in 1986, its per capita GDP was approximately 72% of the average for its member state.
In the second half of the 1990s, the center-right government of former Prime Minister José María Aznar successfully secured admission to the group of countries that launched the euro in 1999. Due to its economic development and the EU's expansion to 28 member states, by 2007 Spain had achieved a per capita GDP of 105% of the EU average, slightly ahead of Italy (103%). Three regions are included in the leading EU group with GDPs exceeding 125% of the average per capita GDP: the Basque Country leads, Madrid, and Navarre. According to calculations by the German newspaper Die Welt, the Spanish economy was on track to overtake countries like Germany in per capita income by 2011. Unemployment stood at 7.6% in October 2006, a rate that compares favorably with many other European countries, especially with the early 1990s when it reached 20%.
Persistent weaknesses in the Spanish economy include high inflation, a large underground economy, and a deteriorating education system, along with the United Kingdom and the United States, which the OECD ranks among the poorest developed nations.
Growth from 1997 to 2007 was driven by a real estate bubble fueled by historically low interest rates, massive foreign investment (during which time Spain became a favorite of other European investment banks), and a significant increase in immigration. At its peak in 2007, construction expanded to 16% of the country's GDP and 12% of total employment. During that period, Spain ran a massive trade deficit, financed by capital inflows—including short-term speculative investment—directed mostly to consumption and property rather than long-term fixed assets such as manufacturing plants and the like.
The downside of the real estate boom was a corresponding rise in personal debt levels. As potential homeowners struggled to meet asking prices, the average household debt level tripled in less than a decade. This placed significant pressure on low- to middle-income groups; by 2005, the average debt-to-income ratio had grown to 125%, primarily due to expensive boom-time mortgages that now often exceeded the value of the property.
This remarkable progress continued until early 2008, when the "global financial crisis" burst Spain's real estate bubble.
The European Commission predicted that Spain would enter a global recession in late 2000 by the end of 2008. At the time, the Spanish Minister of Economy was quoted as saying, "Spain is facing its deepest recession in half a century." The Spanish government predicted that unemployment would rise to 16% in 2009, and the ESADE business school predicted 20%.
By 2017, Spain's per capita GDP had fallen to 95% of the EU average.
The Economic and Financial Crisis
Spain continued its path of economic growth when the ruling party changed in 2004, maintaining strong GDP growth during the first term of Prime Minister José Luis Rodríguez Zapatero. However, some fundamental problems in the Spanish economy became apparent. These included, according to the Financial Times, Spain's rapidly growing trade deficit, which had reached 10% of the country's GDP by the summer of 2008, "a loss of competitiveness against its main trading partners," and, partly, an inflation rate that had traditionally been higher than that of its European partners. At the time, house prices had risen by 150% since 1998, and household debt (115%) was rising, primarily linked to the Real Madrid real estate boom and rising oil prices.
In 2011, the deficit reached a record high of 8.5%. For 2016, the government's deficit target was around 4%, falling to 2.9% for 2017. The European Commission requested 3.9% for 2016 and 2.5% for 2017.
The Spanish government's official GDP growth forecast for 2008 in April was 2.3%. This figure was subsequently revised downward by the Spanish Ministry of Economy to 1.6%. Retrospective studies by most independent forecasters estimate that the rate actually fell to 0.8% instead, well below the robust 3% annual GDP growth rates of the decade 1997-2007. Then, during the third quarter of 2008, national GDP contracted for the first time in 15 years, and in February 2009, it was confirmed that Spain, along with other European economies, had officially entered a recession.
In July 2009, the IMF worsened its estimates of Spain's contraction for 2009, to minus 4% of GDP for the year (close to the European average of minus 4.6%). In addition, it estimated that the Spanish economy would shrink by a further 0.8% for 2010.
Property Boom and Bust (2003-2014)
The adoption of the euro in 2002 led to lower long-term interest rates, which led to a surge in mortgage lending that more than quadrupled from 2000 to its peak in 2010. Growth in the Spanish property market, which began in 1997, accelerated and within a few years developed into a property bubble, largely financed by regional banks, known as "cajas," which are regional savings banks under the supervision of regional governments. Fueled by historically low interest rates and massive immigration, this boom was driven by the economy, which is credited with avoiding virtually zero growth for some of its largest EU partners in the months leading up to the Great Recession.
The Spanish economy created more than half of the new jobs in the European Union over the five years ending in 2005. At the height of the property boom, Spain was building more homes than Germany, France, and the United Kingdom combined. House prices rose by 71% between 2003 and 2008, along with a credit explosion.
The bubble burst in 2008, causing a collapse in Spain's real estate and construction sectors, resulting in mass layoffs and a collapse in domestic demand for goods and services. Unemployment soared.
Initially, Spain's banks and financial services avoided the early crisis of their international counterparts. However, as the recession deepened and property prices fell, the mounting bad debts of smaller regional savings banks, or cajas, forced the Spanish central bank and government to intervene through a stabilization and consolidation program. The regional cajas were either taken over or merged, and finally received a bank bailout from the European Central Bank in 2012, specifically targeting banking and cajas.
After the 2008 peak, house prices fell by 31% before bottoming out in late 2014.
Real Estate Recovery
By 2017, after several months of rising prices, homeowners who had been renting during the economic recession began putting their properties back on the sales market. In this regard, home sales are expected to return to pre-crisis levels (2008) in 2017.
Overall, the Spanish real estate market is experiencing a new boom, this time in the rental sector. Of the 50 provinces, and compared to May 2007, the National Institute of Statistics recorded higher rent levels in 48 provinces, with accumulated rent inflation in the 10 most populated areas ranging between 5% and 15% since 2007. This phenomenon is most pronounced in major cities like Barcelona and Madrid, which are experiencing new record prices, driven in part by short-term rentals for tourists.
The European Debt Crisis
In the first weeks of 2010, renewed concern about excessive debt levels in some European Union countries, and more generally about the health of the euro, spread from Ireland and Greece to Portugal, and to a lesser extent, Spain.
Many economists recommended a combination of policies to control the rise in public debt caused by the recessionary collapse in tax revenues, combining strict austerity measures with higher taxes. Some German policymakers went so far as to argue that emergency bailouts should include harsh penalties for EU aid recipients such as Greece. It was noted that the Spanish government's budget had been in surplus in the years immediately preceding the global financial crisis and that its debt was not considered excessive.
At the beginning of 2010, Spain's public debt as a percentage of GDP was still lower than that of Britain, France, and Germany. However, commentators noted that Spain's recovery was fragile, that public debt was growing rapidly, that troubled regional banks might need large bailouts, that growth prospects were weak, thus limiting revenues, and that the central government had limited control over regional governments' spending. Under the shared government responsibilities structure that has evolved since 1975, much of the responsibility for spending was devolved to the regions. The central government found itself in a difficult position trying to secure support for unpopular spending cuts from the rebellious regional governments.
On May 23, 2010, the government announced further austerity measures, consolidating the ambitious plans announced in January.
As of September 2011, Spanish banks had raised a record €142 billion in Spanish national bonds. The December 2011 bond auctions were likely to be oversubscribed, according to JPMorgan Chase.
Until the second quarter of 2012, Spanish banks were allowed to report real estate assets with a higher non-market value. Investors who purchase these properties should be aware that Spanish homes cannot be sold at the book value of the land after being vacant for years.
The Employment Crisis
Although the sheer size of Spain's underground economy somewhat masks the true situation, employment represents a long-term weakness of the Spanish economy. By 2014, the structural unemployment rate was estimated at around 18%.
After significant improvements during the second half of the 1990s and throughout the 2000s, Spain achieved a record-low unemployment rate of around 8% in 2007, with only a few regions close to full employment. Spain then suffered a severe setback in October 2008, when unemployment rose to 1996 levels. Between October 2007 and October 2008, the unemployment rate exceeded the levels of previous economic crises, including 1993. In particular, during October 2008, Spain experienced its worst unemployment rise on record.
July 2009, it had shed 1.2 million jobs in a single year. The massive construction and housing industries were a major contributor to the high unemployment rate. Since 2009, thousands of immigrant residents began leaving Spain, although some remained in the country due to the poor conditions in their home countries. Overall, Spain reached an unprecedented unemployment rate of approximately 27% in early 2013.
Youth Crisis
During the early 1990s, Spain experienced a period of economic crisis as a result of a larger economic cycle across Europe that led to high unemployment rates. Many young people in Spain found themselves trapped in a cycle of temporary jobs, creating a subset of workers with reduced wages, job stability, and advancement opportunities. As a result, many Spaniards, mostly young, single men, migrated to other countries to pursue employment opportunities and improve their standard of living, leaving only a small number of young people living below the poverty line in Spain. Spain experienced another economic crisis during the 2000s, which also led to a rise in the number of Spanish citizens migrating to neighboring countries with greater job stability and better economic standing. Youth unemployment remains a concern in Spain, leading researchers such as Anita Wolf to suggest that Spain could reduce unemployment by making labor market programs and job search assistance more accessible to the most disadvantaged young people. She also hypothesized that this would improve Spain's weak youth labor market, as problems with school-to-work transitions made it difficult to find long-term employment. As a solution, Wölfl suggested making improvements by matching their skills with companies.
Employment Recovery
In May 2012, a radical labor reform was implemented to create a more flexible labor market, making layoffs easier and boosting business confidence. By the second quarter of 2014, the Spanish economy had reversed its negative trend and began creating jobs for the first time since 2008.
This began a trend of consecutive positive employment records. The second-quarter reversal was surprising and unusual given that the number of jobs created recorded an absolute positive figure for all quarterly employment statistics (the series begins in 1964). The labor reform appeared to play a significant role; one piece of evidence cited was that Spain began creating jobs at lower rates of GDP growth than in the previous period: in previous cycles, employment rose when growth reached 2%, and this time the gain came during a year when GDP increased by only 1.2%.
On the other hand, labor unions and left-wing parties are criticizing the reform and want it repealed, arguing that it tilts the balance of power away from employers. Moreover, most new contracts are temporary.
Stronger-than-expected GDP growth has paved the way for further declines in the unemployment rate. Since 2014, Spain has recorded a steady annual decline in official unemployment figures. During 2016, unemployment in Spain experienced its largest ever decline. By the end of that year, Spain had recovered 1.7 million of the more than 3.5 million jobs lost during the recession. By the fourth quarter of 2016, Spanish unemployment had fallen to 18.6%, its lowest rate in seven years. In April 2017, the country recorded the largest single-month drop in unemployment claims in the entire historical series to date. Job creation accelerated. In this regard, May 2017 was the best May to date for social security claims since records began in 2001. During that month, unemployment claims fell to their lowest level since June 2009.
At 17.2% in the second quarter of 2017, unemployment fell below 4 million for the first time since 2008, marking the country's largest quarterly drop in unemployment to date (the series began in 1964). In 2018, at 14.6%, the unemployment rate did not exceed 15% for the first time since 2008, when the crisis began.
In 2019, the Socialist government of Pedro Sánchez increased the minimum wage by 22% in an effort to boost employment and encourage spending. Opposition members argued that this increase, from €736 to €900 per month, would negatively impact 1.2 million workers due to their employers' inability to cover the aforementioned increase.
