Spain in the eye of the storm, says F&C

Spain is likely to remain in the eye of the storm even after its banks will have been recapitalised, with the economy of the country seemingly falling into the same abyss as Greece.

The country is facing three major challenges, says Ted Scott, director of global strategy at investment management group F&C: the weakness of the property market, which is causing a deflationary impact on the economy; banks’ balance sheets vulnerable to further losses that could exacerbate the credit crunch; and the government’s austerity measures contributing to a deepening recession.

In a research paper “Can Spain save itself from the financial collapse?”, Scott says the first quarter GDP figure released on April 24 confirmed that Spain has relapsed into recession. The official government forecast for 2012 is for a negative GDP growth of -1.7%, but the risk is on the downside, according to Scott.

“While a bank rescue package would provide relief to markets, it would not yield a sustainable and permanent solution, just as the bailouts of Greece, Ireland and Portugal have failed to resolve the debt issues in those countries. Unless there is a radical policy change, this is likely to be too optimistic and the recession will deepen as unemployment climbs towards 30%. This downward spiral is the situation that has confronted Greece over the last two years that has required two bailouts and a significant restructuring of its debt including large haircuts for private sector government bond holders,” he said.

Like other peripheral countries of the Eurozone, Spain suffers from a chronically weak economy combined with excessive debt and the lack of competitiveness.

In April, the country’s purchasing managers’ index (PMI), a composite indicator designed to measure the performance of the manufacturing economy, saw the fastest monthly decline in activity since June 2009, according to data published by information services company Markit.

PMI of manufacturing companies stood at 43.5 in April, down from 44.5 in March, following a full year below the 50 level that would signal growth in activity. 

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