Spain: Improved growth prospects and a stronger banking sector boost optimism in the market but Catalonia crisis remains a key risk to recovery

Spain’s economy and its banking sector were hit hard by the global financial meltdown and the recession that followed. Eight years on, it seems the country is finally turning the corner. The economy has been growing vigorously since 2015 and accelerating growth produced much-needed jobs. The Spanish banks have also repaired their positions and their slow recovery in conjunction with the stronger economy has led to the renewed optimism in the market.

On the road to economic recovery

The economy of Spain is the fifth largest in Europe and the fourteenth largest in the world based on nominal GDP - with exports making up a third of the national output. According to the World Bank data, the country’s GDP has been growing vigorously and over the past few months, rating agencies Moody’s, Standard and Poor’s, and Fitch have all upgraded Spain’s credit rating, with improved growth prospects and a stronger banking sector being cited as the main contributing factors. Spain has gone a long way since 2012 when major rating agencies downgraded its debt amid the crisis engulfing its banking sector, and Madrid was forced to accept a bailout from its European partners to recapitalise its banks.

Given the political tensions in Catalonia, it was feared that Spain’s robust recovery is at risk and its overall economic and budgetary performance would be hampered, but that has not been the case. The Spanish economy is on a roll, having grown at above 3% for the past three years, which places it well above the Eurozone average. Spain’s overall GDP increased by 3.1% in 2017 and the International Monetary Fund has raised its 2018 growth forecasts from 2.4% to 2.8%, in line with the Bank of Spain’s and the government’s forecasts. This means that its GDP growth will outpace the growth rates of other major European economies, including France, Germany and Italy.

Unemployment in Spain has dropped sharply from 26% in 2013 to 16% now, but it remains a major concern for the government as it is twice the Eurozone average and the second highest after Greece. Although the economy has grown significantly in the past three years, GDP is not much above the level it was in 2007 before the financial crash. 

Banking landscape affected by the crisis

Since the bailout, Spain’s banking sector has recovered, but not without a price. Many of the loans that were given out to home buyers and real estate firms that were later unable to repay them had to be written off as bad debt. In 2016, Moody’s valued the number of problematic assets still on the banks’ books at €350 billion.

The crisis affected the lives of many within the banking sector, with many branches disappearing alongside thousands of banking jobs as the banks moved to cut down costs and many smaller providers were absorbed by larger lenders in the wave of consolidations. According to BBVA Research, 27% of jobs (75,000 posts) and 36% of branches have disappeared over the course of seven years.

Many traditional branches were also deemed redundant as digitalisation of banking services reduced the need for extensive branch networks.

Recovery in the housing market

Boosted by the strong economic growth, it appears that Spain’s housing market has returned to pre-crisis levels with the number of property sales reaching close to 465,000 in 2017, which was the highest annual figure since 2008 and an increase of 15% from 2016. The housing sector made a significant contribution to Spanish economic growth prior to the financial crisis with the construction sector accounting for more than 10% of GDP.

Unlike GDP figures, housing data often provides more reliable clues as to where the economy is heading. Therefore, the increase in property sales figures is a good indication that the Spanish economy is likely to continue to expand. There has been an increased demand for loans from people looking to purchase a house with banks appearing to have relaxed approval criteria for mortgages. This is reflected in a 14% increase in 2017 in mortgage lending in Spain as a whole, with increases as high as 26% in the Basque Country and the Balearics.

There are several factors which have contributed to this new optimism in the housing market, with unemployment figures at a nine-year low, increased competition, better economic prospects and greater perceived creditworthiness of borrowers all playing a significant role. Externally, the decision made by the European Central Bank to keep interest rates low has also played a part in reducing the costs of mortgages. The demand for mortgages plays a vital role in the recovery of the banks as it remains the most important and profitable loan segment.

Catalan crisis

The uncertainty surrounding Catalonia has forced certain banks into making key decisions regarding their future. A successful quest for independence from Spain would result in a Catalonia exit from the Eurozone, which would have knock-on consequences for banks and businesses that hold their legal offices within the region. At the height of the crisis when the future of Catalonia in Spain was in serious doubt, several banks made the decision to relocate their legal offices to other parts of Spain to avoid the risk of finding themselves in a legal vacuum. Two largest banks in the region, CaixaBank and Banco Sabadell, relocated their offices. CaixaBank issued a statement in which it said it was necessary to redomicile as the bank was faced with a sell-off in its shares. Although there is still an air of nervousness surrounding the situation, Spain feels it put the worst of the crisis behind with business and consumer lending now increasing.

Conclusion

The property bubble burst in Spain had hit the country hard with the economy falling into recession and unemployment rising to 26%. This affected many Spaniards and particularly younger generations. However, Spain seems now to be firmly on the road to recovery. The economy is growing strongly, with its growth rates now among the highest in the developed world, and the unemployment has fallen sharply to 16%. As the economy has turned the corner, optimism returned to the market.

Banks are also now looking stronger; however, their recovery came at the cost of thousands of jobs, branch closures and disappearance of many smaller players. The housing market which had previously triggered the crisis in now recovering with property sales increasing. This increase is sales also boosted demand for mortgages, with mortgage lending increasing by 14% year on year, providing good cross-sell opportunities for banks. While many fear that the recovery is at risk from the uncertainty surrounding Catalonia’s future in Spain, despite heightened tensions in the region, the economic performance has so far not been affected.

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