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The Spanish and Portuguese economies are currently in a key moment at the end of cycle towards their reactivation and thence sustained economic growth.
In the middle of 2013, the economies of Spain and Portugal are showing similar behavior with common problems, but with a different intensity and margin for maneuver to climb out of the crisis.
Both economies are still in the longest and deepest recession in recent history, although the degree of the deterioration in the public accounts has been different and this determined the kind of bailout granted by the Troika and their chances of reactivating their economies.
The Portuguese bailout was carried out on May 16, 2011, with the injection of 78,000 million euros (52,000 million of which came from the European Union and 26,000 million from the IMF). This represented 31.5 percent of GNP and came with a limit for action/return of three years.
Spain requested external financial aid on June 25, 2012, for a period of 1.5 years, and finally received 40,000 million euros (close to 4 percent of Spain's GNP) and at rates significantly below those of other bailouts.
Portugal began its structural reforms before Spain, intensely applying the pressure placed on its government by the EU and the IMF and with the resulting costs in social unrest and political conflict.
These reforms have produced a progressive reduction of the public deficit towards a target of 3 percent of GNP in 2014. It stood at 6.4 percent by the end of 2012 and the 2013 target is 5.5 percent. Nevertheless there are still eight months of reform and cutbacks ahead which will delay the reactivation of internal demand in Portugal.
Spain is also under a process of reducing its public debt within the targets set by the EU and ended 2012 with a deficit of 10.6 percent of GNP.
What the Spanish and Portuguese economies have in common is that they are both applying severe policies of fiscal cutbacks which combined with restricted credit to families and small and medium sized companies could slow down internal consumption and investment.
Consequently the two economies are relying on increased external demand, exports and tourism, in order to consolidate (Portugal) or begin (Spain) economic growth. What marks the difference between both economies is the speed of the reforms which have been carried out, the results which are appearing and their capacity to consolidate in the short term.
To see these differences we need to look at the components of demand in both cases and its macro-economic context at the end of the second quarter of 2013.
At the end of June, the Portuguese economy was showing signs of reactivation with an unexpected quarterly growth of 1.1 percent in GNP (the highest in the EU), which confirms the start of its climb out of a recession.
This growth is mainly explained by the pull of external demand, sustained in exports of goods and services, which grew by 5.2 percent in the second quarter, as well as a new positive signs in two basic elements of internal demand for the continuation of the reactivating of the economy. These are a significant growth and change in the tendencies of investment, with an increase of the formation of gross capital by 3.3 percent, which reflects the positive outlook of Portuguese companies, and signs of change in private spending to reflect an incipient recovery in the spending power of the country's families.
There is other favorable data pointing to a return to growth in Portugal: the existence of a low and falling rate of inflation, which stood at 0.98 percent in June, and the meeting of the target for the limiting of the public debt, which guarantees the following part of the bailout.
Nevertheless there are three negative signs which advise caution in respect to Portugal.
The country has suffered significant problems in finding external finance with a risk premium of over 500 points and an interest rate over 7 percent on Portugal's 10 year bonds.
Meanwhile the fiscal pressure has seen internal demand shrink while unemployment has risen to never before seen levels of 16.5 percent of the workforce and 37.4 percent in those aged under 25 (July 2013).
September saw the Troika carrying out its ninth evaluation of the program of adjustments which had been agreed with the Portuguese government, which has also promised new cutbacks in public spending which will reach a total of 4.7 billion euros during 2013.
Meanwhile, the Spanish economy presents a macro-economic profile which confirms the route towards the end of an economic cycle in quarterly terms and it is estimated that by the end of the year the country will have returned to growth. This is based on the fact that in the second quarter the economy shrank by 0.1 percent, while it fell by 0.4 percent in the first quarter. Meanwhile GNP was a -1.6 percent in June, compared to -2.0 percent at the end of March.
This slowdown in negative growth is based on the consolidation of the external sector thanks to the effect of Spanish exports, which grew by 9.2 percent between the two quarters and allowed the country to present a balance of payments surplus of 0.7 percent. However part of the reason for this is also the continued fall in internal demand, which shrank by 3.6 percent in the second quarter.
The fact the financial bailout for Spain, is expected to end in the third quarter of the year, with the fulfillment of the conditions demanded of the country has helped Spain find foreign finance with relatively few problems. The risk premium is below 250 points, which will presumably save the government around 5 billion euros in 2013 and this seems to confirm the generation of necessary conditions and confidence, for a return to sustained economic growth.
Spain still has several fundamental weaknesses which could slow down or stop this recovery. Banks are still not giving credit to families or small businesses, while there is a lack of control on the public debt, which is expected to be at over 90 percent of GNP in 2014, while the unemployment rate is still at an alarming rate of around 26 percent with over 50 percent of Spain's Under-25's looking for work.
In conclusion we are at a key moment for the Spanish and Portuguese economies, if they are to return to sustained economic growth.
While the Portuguese economy shows signs of recovery and a change of cycle continued intense reforms and budget cuts, the Spanish economy reflects a state prior to the start of economic growth and will hopefully find a favorable economic panorama next year.
In this context, the next decisions taken by the respective governments of these two countries will be the key to whether or not they sustain their departure from the crisis, so prudence is still vital.
