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We’ve written a lot of research over recent weeks and months regarding the impact of austerity measures across Europe. Turning to Spain, we continue to identify three main fundamental drivers that should drag down growth prospects over the intermediate to longer term: 1.) one of the highest rates of unemployment across Europe-27, 2.) continued real-estate depreciation and supply overhang, and 3.) eroding consumer confidence and spending alongside austerity’s consumer squeeze. 

As a reminder, Spain’s €15 billion austerity package includes:

  • 5% average pay cut for all civil servants and a 15% cut on ministers’ salaries
  • €6 billion reduction in public works projects

Spain’s PM Jose Zapatero gained some credibility at home in sacking two wasteful ministries for housing and equality earlier this month, yet the government is still running against the lofty goal of cutting the deficit from 11.2% in 2009 to 6% in 2011, and to 3% by the end of 2013.

Notwithstanding this lofty deficit reduction plan, austerity’s squeeze on wages and jobs should further erode consumer confidence and spending, which is already depressed given the country’s 20.5% unemployment rate and uncertain growth direction following the bust in the country’s real-estate bubble.   

While we applaud countries that are working to reform years of fiscal imbalances for longer term health, we expect Spanish growth to feel “pain” from Austerity’s Bite.   

Matthew Hedrick

Analyst

Austerity’s Bite in Spain - sp1

Austerity’s Bite in Spain - sp2