This week I was asked by Euro Insight how much do I think the Spanish economy will grow in 2016. I am a qualitative political economist, so I am very reluctant to give any firm predictions (economics it not a hard science). I usually work with different scenarios so these where my answers:
1. Spain is registering the strongest growth in EMU. Will this also be the case next year? Why?
The average estimation is that Spain will grow around 2.5-2.7% next year. This puts it among the fastest growing economies in the Eurozone. The strengths will be similar to this year, continuous strong performance of exports (due to a relatively low euro, cheap oil, and further internationalisation of Spanish firms), restocking in machinery and equipment and private consumption. However, growth will be less than this year, due to a number of reasons: further fiscal contraction, and presumably a gradually appreciating euro.
2. What are the biggest dangers to the Spanish economy? External or Internal? Why?
Externally, the biggest risks are that lower growth in emerging markets will hamper global and European growth. Spain is quite isolated from Greece, China, and Latin America (the biggest worries of the global economy) because it exports little there, but lower growth there might spill over to other regions, which then affect Spain. This is the case of Europe, especially, but also Turkey and the Gulf where a lot of recent exports where destined. A higher euro and higher oil prices can also be a drag on Spanish growth. So can be the overall contraction in world trade, and possible volatility in global financial markets, which can affect market sentiment.
Internally, the biggest risks are first of all political. The acceleration and strengthening of the independence process in Catalonia or the fragmentation of the Spanish political system so as to make a stable government unlikely can damage market sentiment. Excessive fiscal expansion can also increase overall public debt to over 100% (a psychological tipping-point) and scare away international investors, although this threat will not be visible (for now) in bond spreads due to the ECBs QE policy. Another worry is that the deleveraging of households and non-financial corporates might not progress as rapidly as desired, keeping the external net debt position high, and therefore Spain overall more exposed to a possible international credit contraction.