Economy of Spain - Recent Developments

Recent Developments

After a strong recovery from the global recession of the early 1990s, Spain experienced a property boom from 1997 to 2007. At its peak in 2007, construction had expanded to a massive 16% of the total gross domestic product of the country and 12% of total employment.

According to calculations by the German newspaper Die Welt, Spain's economy had been on course to overtake countries like Germany in per capita income by 2011. However, the downside of the real estate boom was a corresponding rise in the levels of personal debt; as prospective homeowners had struggled to meet asking prices, the average level of household debt tripled in less than a decade. This placed especially great pressure upon lower to middle income groups; by 2005 the median ratio of indebtedness to income had grown to 125%, due primarily to expensive boom time mortgages that now often exceed the value of the property.

A European Commission forecast had predicted Spain would enter a recession by the end of 2008. According to Spain’s Economy Minister, “Spain faces its deepest recession in half a century”. Spain's government forecast the unemployment rate would rise to 16% in 2009. The ESADE business school predicted 20%.

Due to its own economic development and the recent EU enlargements up to 28 members (2007), Spain had a GDP per capita of (105%) of EU average per capita GDP in 2006, which placed it slightly ahead of Italy (103%). Three regions were included in the leading EU group exceeding 125% of the GDP per capita average level: Basque Country leading with Madrid and Navarre. According to the growth rates post 2006, noticeable progress from these figures happened until early 2008, when the 'global financial crisis' burst Spain's property bubble.

The centre-right government of former prime minister José María Aznar had worked successfully to gain admission to the group of countries launching the euro in 1999. Unemployment stood at 7.6% in October 2006, a rate that compared favorably to many other European countries, and especially with the early 1990s when it stood at over 20%. Perennial weak points of Spain's economy include high inflation, a large underground economy, and an education system, beside UK and the United States, which OECD reports place among the poorest for developed countries.

The property bubble that had begun growing in 1997, fed by historically low interest rates and an immense surge in immigration, imploded in 2008, leading to a weakening economy and soaring unemployment. However, the Spanish economy is very diversified among the most important emerging countries. These features, despite negative credit ratings, have allowed Spain to resist the onslaught of the crisis and the severe economic measures implemented in 2012 by the Mariano Rajoy government.