The Spanish economy is facing many difficult challenges.
Housing Boom and Bust. Despite a relatively prudent banking sector, Spain experienced a real boom in the housing market. This was partly caused by foreign demand for holiday homes. House prices rose and there was also a boom in construction. Construction accounted for a large part of the Spanish economy. However, now that demand and prices are falling, builders are sitting on many unsold properties. Construction has ground to a halt causing a steep rise in unemployment. The surplus of properties means that prices will fall considerably and take a long time to recover. over 400,000 new properties came on the market in 2008 alone These falling house prices will continue to depress the economy and consumer spending.
Lack of Flexibility
- Being a member of the Euro, means Spain cannot set interest rates. The ECB have to balance inflationary pressures against a deep recession on the periphery of the Eurozone.
- Spain cannot devalue its currency to improve competitiveness.
- Geographical immobilities mean it is difficult for unemployed Spaniards to find employment in other parts of the EU
- Limited scope for fiscal expansion. Due to large government borrowing and fiscal and stability pact, the scope for fiscal expansion is limited. Yet, government borrowing is still forecast to rise to 7% of GDP by 2010, far above the 3% limit of the EU
Spanish economy in 2009
aAlready high at the start of the recession. In 2009, Spain is likely to experience a significant rise in unemployment from its current base of 14% or 3 million.Rising unemployment brings with it a risk of social unrest, and higher government debt.
The government have plans to create 300,000 jobs, but event this scheme is likely to get overrun with a rising tide of unemployment. The strength of the Euro will make exports difficult and combined with weak consumer demand make for a difficult 2009