Rajoy's risky bet on Spanish economic recovery

Rajoy's risky bet on Spanish economic recovery,  Spain's Mariano Rajoy is making a risky political bet in claiming recovery is close at hand as a recent economic upturn is fragile and even if it persists an austerity-weary public may not feel much benefit, analysts and sources say.

For weeks, the government has tried to move away from the gloomy picture it presented in April when it updated its economic strategy, pointing at encouraging trade, labour cost and deficit numbers instead.

Ministers and officials have hammered home the message that the worst of the crisis has passed, the adjustment after a 2008 property crash is close to ending and structural reforms implemented last year will soon deliver growth and jobs.

More recently prime minister Rajoy and his top aides have talked up the prospect of a quicker than expected recovery with growth expected in the third quarter instead of the fourth.

The country has been in or close to recession for the past five years and was forced last year to take a 42-billion-euro ($55 billion) bailout for its banks, brought low when a decade-long property bubble burst.

"Our economy has turned the corner and we are at the start of a change in trends which will allow us, with effort, to create jobs again. The foundations have been laid," Rajoy said at an event last Sunday.

In private, however, senior officials acknowledge the risk of a backlash as people may not see any improvement in their living conditions and job prospects for another two years while many factors may set back recovery.

"The car has been fixed, the driver is in good shape but you never know what may stand in your way. Yes, there is a risk of an accident," said a senior government source on condition of anonymity. "If that happens, we'll see how we deal with it."

Spaniards are unconvinced there is light at the end of the tunnel, an image often used by the government which echoes the former socialist administration's "green shoots", which never materialised.

In a June opinion poll, 93.4 percent of 2,500 people surveyed said the economy was in the same or worse shape than a year ago. Some 75 percent believed the situation would not improve in the next 12 months.

Senior members of the socialist government of Jose Luis Rodriguez Zapatero say Rajoy is making the same mistake as the former premier and will regret it sooner or later.

While any backlash may jeopardise Rajoy's bid for re-election in 2015, the socialist opposition still has to capitalise on the PP's falling popularity as it is still perceived as mainly responsible for Spain's slump.

Corruption scandals have also crushed faith in both of Spain's two major parties and angered Spaniards suffering high unemployment, spending cuts and tax hikes.

SLOW RECOVERY

The vast majority of analysts, while insisting Spain's economic imbalances are being corrected, also think more pain is to be expected.

Unit labour costs have fallen to pre-crisis levels, the trade deficit is shrinking and industrial production is recovering. At the same time, however, unemployment keeps rising, retail sales still have to bottom out, the public deficit remains high and debt is surging.

"The main problem of the Spanish economy is the massive damage suffered by the labour market and the businesses, which will weigh heavily on any recovery," said Santiago Sanchez Guiu, economist at the Carlos III university in Madrid.

"We can't rule out a new slump because these factors will weigh so much," he said.

At best, analysts say the adjustment will not be completed until next year at the earliest, when the country is expected to grow at a slow pace.

At worst, unemployment will pick up after the tourist season, exports may suffer from lower growth in the euro zone and emerging countries and any flare up of the currency bloc's crisis - be it from a failure to move quickly towards a European banking union or renewed fears about Greece and Portugal - would hit Spain hard.

They also say Spain's tentative signs of recovery is partly due to central bank stimulus around the world and that an early tightening of monetary policy would spur market volatility and put the country back in the spotlight.

"If Spain is much less exposed than Germany to the idiosyncratic Chinese risk, it appears to be increasingly sensitive to emerging markets developments in general," Deutsche Bank (Xetra: 514000 - news) economist Gilles Moec said in a note to clients.

"Any disruption in emerging markets as an asset class following Fed tapering would be felt in Spain," Moec said, given that Spanish exports to Latin America and elsewhere would suffer.

Emerging markets have taken a battering since the Federal Reserve announced its exit plan from money-printing, which it expects to wind up by mid-2014. Spanish 10-year bond yields have risen by more than half a point in response.

The International Monetary Fund trimmed its global growth forecast on Tuesday for the fifth time since early last year due to a slowdown in emerging economies and recessions in Europe.

Spain's growth forecast for 2014 was also revised down sharply for next year to zero, from 0.7 percent previously, casting more shadows on Rajoy's optimism drive.

Rajoy's risky bet on Spanish economic recovery 2013-07-14T12:01:00-07:00 Rating: 4.5 Diposkan Oleh: My Videos Tube