Population 46.254 million
GDP 1340.266 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
-0.3 |
0.4 |
-1.4 |
-1.5 |
|
Inflation (yearly average) (%)
|
2 |
3.1 |
2.4 |
2.4 |
|
Budget balance (% GDP)
|
-9.7 |
-9.4 |
-8 |
-6 |
|
Current account balance (% GDP)
|
-4.5 |
-3.5 |
-1.8 |
0 |
|
Public debt (% GDP)
|
61.5 |
69.3 |
91 |
96 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Major groups with an international presence
- Close links with Latin America
- Modernised transport infrastructure
- Wind and solar energy development
- Important tourism potential
- Revival of competitiveness due to fall in wages
WEAKNESSES
- Bloated construction sector
- Loss of productivity and competitiveness
- Energy intensive exports, mainly of low to mid tech products (food products, basic chemicals, metal articles, clothes, machinery and transport equipment)
- Heavy private debt
- Regional savings banks weakened by the property crisis
- Deteriorating public finances
- Very high unemployment, especially among the young
Risk assessment
The economy again in recession in 2013
Economic activity has been contracting since the fourth quarter of 2011 and the recession is expected to continue in 2013. Consumption is expected to be badly affected by the fall in household disposable income, itself linked to the reduction in public sector wages and the serious deterioration of the labour market (unemployment above 25%). Moreover, households have much less room for manoeuvre due to the drop in their savings levels. The housing sector has not yet bottomed out and residential investment is expected to continue its decline in a context where the stock of unsold houses remains significant. Weakening domestic demand, sluggish European trade and the burden of business debt (134% of GDP at the end of 2011) will continue to affect investment decisions. The austerity measures are expected to be felt strongly through a fiscal effort estimated at 2.7% of GDP in 2013. However, the contribution of external trade will remain positive due to the decline in imports and a slight rise in sales abroad.
Lengthy adjustment process
The adjustment process required to correct the imbalances accumulated until 2008 (property bubble, private sector over-indebtedness, weakening banking sector, current account deterioration) will take time, even though one can already observe a rebalancing of external accounts made possible by a contraction of imports, a revival of competitiveness and a rise in sales to non-European markets (North Africa and Asia). A big reshaping of the labour market, to be complemented by other reforms in the area of the market for goods and services and of the business environment, is, however, expected to stimulate potential growth.
The banking sector is at the heart of the crisis
Undermined by the property crisis and the deteriorating economic situation, the banking sector is suffering. However, noteworthy progress has been made since the summer of 2012 with the provision by the eurozone of significant aid intended for bank recapitalisation, the publication of stress tests conducted by an independent body and the announced establishment of a bad bank into which toxic property assets will be transferred at a large discount. The quality of bank assets continues, however, to deteriorate and bank profitability is declining.
Fiscal targets beyond reach
The authorities have adopted an extensive austerity package since the summer of 2012 and Brussels has eased the fiscal objectives. These targets will, however, not be achieved because of the recession and the difficulty in adjusting autonomous communities’ accounts. The State’s debt burden increased significantly in 2012, reaching over 90% of GDP. The cost of borrowing on the bond market, however, fell from September 2012 after the ECB announced a programme to buy unlimited quantities of sovereign debt (OMT). However, the authorities, which have managed their funding programme without difficulty in 2012, are late in seeking the intervention of the European Stability Mechanism, which is a prerequisite for the application of this plan. Social unrest, renewed nationalist demands and the country’s significant need for finance in 2013 could, though, force them to do so.
Businesses greatly weakened
Businesses are in a particularly difficult situation, confronted not only with a fall in domestic sales but also with a shortage of finance, higher taxes and the ending of subsidies, while, at the same time, their debt burden weakens their ability to withstand shocks. In the current context of falling European demand, the exporting sectors are attempting to turn to alternative markets. Payment delays recorded by Coface and the number of bankruptcies continued to increase sharply in 2012. While small businesses were most hit in the first phase of the crisis (2009), bigger businesses are affected today. As in the case of bankruptcies, a large part of payment failures are concentrated in the construction sector. But other industries are also weakened, among them food processing, electric equipment, chemicals and non-specialised trade.
