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the euro zone

Weak foundations

The state of Spain’s GDP has been much on the mind of Luis de Guindos this week. On Wednesday, during a debate in which the country’s absurdly delayed 2017 budget was finally approved, the Spanish economy minister told congress that GDP growth might well exceed the official prediction of 2.7% this year, perhaps even matching 2016’s expansion of 3.2%. This optimistic revision came just a few days after his announcement at an economic forum in Catalonia last Friday that Spain’s economy would do even better if the average size of Spanish companies was increased.

We know by now, of course, that when members of the Popular Party government start throwing about GDP statistics, their aim is usually to convince critics and doubters that the Spanish economy is back on track. De Guindos said that his off-the-cuff revision of the official growth forecast for this year is based on the fact that Spain’s GDP started 2017 “at cruising speed”; according to the economy minister, this means we can expect expansion of “around three per cent” by the year end.

Vague as De Guindos’ reasoning may seem, there’s good reason to think this is true. If anything was demonstrated by the political stand-off of last year, it was that Spain’s macroeconomic expansion is speeding along at cruising height, regardless of what’s happening down on the ground. The first quarter of this year was the 14th consecutive quarter of GDP expansion in Spain. The problem, though, is that this apparently-dazzling macroeconomic performance is not supported by strong foundations.

Part of the foundational weakness is owed to the plight of Spanish small-to-medium-sized enterprises (SMEs), as De Guindos said at last Friday’s economic forum. The majority of Spanish companies are SMEs - defined as companies with up to 249 employees - and they have been having a tough time of late: in a report released last September, the OECD revealed that almost four times as many SMEs closed in 2015 as in 2007. The success of SMEs is crucial to Spain’s productivity levels and employment situation; in other words, that they thrive rather than fail is vital to sustainable economic expansion in Spain.

This is hardly news, though. At the end of 2015, a research document released by BBVA said exactly what De Guindos said last Friday: that Spain needed to expand the average size of its companies, identifying the difficulty and expense of securing funding as one reason for SMEs’ current woes. Helping SMEs grow and become more productive is, as De Guindos reiterated last week, crucial to stabilising the Spanish economy. What he didn’t say is that this must not be at the expense of stability and protection for employees - the lack of which is currently the Spanish labour market’s fundamental weakness.