The Spanish economy is on the road to recovery, judging from the recently published positive data. This news have penetrated Fund on the of investment banks around the world, keen to highlight the reforms that have enabled Spain to exit a two-year recession and take advantage of the great business opportunity.
-JP Morgan believes that Spain is “the next case of success of Europe”.
-HSBC stresses that the economy “wins competitiveness and is coming out of recession”.
-Citi believes that it is “interesting to invest in Spain”, at least as long as the current monetary policy of the Federal Reserve.
-RBS acknowledges that it was launched to invest in our country in March 2013, relying primarily on corporate debt.
-Allianz says that “there are many opportunities in Spain for foreign capital”, thanks to the fact that our country “is already stabilizing”.
-Morgan Stanley launches a “Viva Spain!” to signal that the country “will be marking a departure from the periphery of the euro” and consolidate its recovery.
-Deutsche Bank says that “the improvement of the balance sheets of the companies” will boost the recovery, a trend that will be strengthened if the accounts of the State persevere.
-Credit Suisse believes that “Spain is experiencing one of the greatest transformations in economic history”.
-Société Générale believes that there are three main axes driving improvement of the Spanish economy: “estimations of the stock market, the high rates of fixed income and the surprises that can be reached in 2014 in the macro data”.
-Axa notes that “the stock market anticipates recovery”.
It should be noted, moreover, that international financial institutions are also taking positions in our country: Berkshire Hathway, Blackrock, Fidelity, Goldman Sachs, HIG… Moreover, firms such as NAM, Nomura and Schroeders optimists are also displayed.
JP Morgan Chase declares “Spain Is Back”
The Spanish economy will grow by 1 per cent on 2014, based on “encouraging” results in industrial production, exports and consumer spending and confidence. That is 0.3% more than what the Spanish Government itself expects, 0.5% more than both S&P and the European Commission forecast and 0.8% more than the IMF experts said in October.
JPMorgan now believes the Spanish economy has “healed enough”, the report literally says, despite banks remaining reluctant to grant credits and the problems still hampering the construction sector. Domestic demand has improved, people consume more: a 1.6% increase. And so do companies, whose consumption rate rose by 3.2%. In addition, firms are still investing in machinery. The country is ultimately recovering its economic activity after a deep crisis that battered all productive sectors.
Another positive factor: the troika considered the banking sector bailout finished in 2013 and the exit has been praised as clean. The report said Spain’s banks were “well capitalized” and have improved their liquidity situation. However, they still must make provisions to cover bad loans and clean up their balance sheets.
A brighter picture that nevertheless still shows ugly spots, systemic problems: the indebtedness of the public sector, the lack of credit to companies that will not let them expand, and an over 26% unemployment rate that will hardly change in 2014. As JPMorgan puts it:
“The drag from weak bank credit and high lending rates to corporates will not fade quickly. But, we believe the available evidence suggests that there is sufficient dynamism in the economy to resume growth even in the absence of a significant improvement in financing conditions.”
In a January research note, JPMorgan Chase praised the Spanish economy’s “remarkable adjustment” since mid-2013, raising its real gross domestic product (GDP) forecast for 2014 to 1 per cent from 0.7 per cent previously.
This vote of confidence is significant given the US-based financial services firm’s long-time interest in Spain and the influence its “buy” or “sell” recommendations have on investors.
So why is JPMorgan betting on Spain again?
Key factors include improved Purchasing Managers’ Index (PMI) data in both the manufacturing and service sectors, the uptick in domestic demand and strong export growth.
PMI data, Exports Underpin Bullish Outlook
Strong PMI data over the last three months has shown that improved sentiment in industry, services and retail is offsetting continued depressed construction activity. Spain’s last economic boom was fuelled by a construction and property bubble which burst in 2007-2008. The global recession and the European sovereign debt crisis compounded the problem.
The Service Sector, which closely reflects domestic demand, made a positive start to 2014 as activity and new orders continued to expand. The service industry’s recovery is good for exports, which together with a revival in consumer spending helped pull the economy out of the doldrums in the third quarter of last year.
Exports accounted for 33 per cent of Spain’s GDP in 2013, up from 17 per cent in 2007, driven by increased competitiveness due to lower labour costs.
So is it time to run with the bulls again?
While there are still some headwinds, like high unemployment and a continued credit squeeze, JPMorgan believes conditions for growth are in place. Last month, Spain´s Economy Minister Luis de Guindos said GDP would expand by close to 1 per cent this year compared to the current official figure of 0.7 per cent.
Headwinds remain, but Manageable
A plus point for Spain’s economy is the private sector’s progress on deleveraging. Banks and companies have sold off property and other assets to cut debt and clean up their balance sheets. Nevertheless, bank credit remains in a stranglehold and high lending rates continue to curb corporate expansion.
Despite these financing restrictions, JPMorgan is confident Spain’s economy has sufficient dynamism to grow this year.
Unemployment remains a key concern, particularly amongst youth, but most analysts agree there is traditionally a lag between economic growth and job creation. Spain’s unemployment rate stands at 26 per cent, which the government hopes to trim down to 25 per cent or less by end-2014.