Glimmers of hope for Spain's economy

After shrinking for nine quarters in a row, Spain's economy grew by 0.1% in the third quarter. The increase was driven by exports, where signs of improvement have been evident for months.

In the first eight months of 2013, exports from the port of Barcelona jumped by 8%. Container traffic to Brazil and Mexico rose by a respective 15% and 13%. Exports are expected to rise by 5% next year.

Spain's firms have become more internationally competitive thanks to Madrid's efforts to clamp down on costs. A "sweeping labour market reform" made it easier to fire people and gave companies more scope for striking wage deals at factory level, said Tobias Buck in the Financial Times.

Since 2008, labour costs have fallen by 5% in Spain, while in Italy and Germany they have climbed by around 10%. Exports in lucrative sectors such as pharmaceuticals and chemicals are rising, as are sales to fast-growing states outside the eurozone.

Nonetheless, exports still only comprise 35% of GDP. To gather speed from here, Spain will have to rely on the domestic economy, and the outlook on that front is less auspicious.

On the plus side, foreign direct investment has picked up, reflecting improved competitiveness. It doubled from last year's low levels in the first eight months of the year.

However, the credit squeeze endures. Bank lending to small and mid-size enterprises has slumped by 66% from pre-crisis peak levels, says Raphael Minder in The New York Times. Banks' capital has been topped up, but they remain exposed to the bombed-out housing market and reluctant to lend.

In the meantime, households and companies are weighed down with debt worth 200% of GDP, while high unemployment of 26% is also a big hurdle to any significant jump in consumption.

Then there's government debt, on course to grow to 100% by the end of next year. "With households, companies and the public sector all deleveraging at the same time, domestic demand is unlikely to return to growth until 2015," says Buck.

Meanwhile, Spain is vulnerable to any fresh panic over other peripheral countries, such as Italy or Greece. Higher bond yields would raise borrowing costs, hampering growth. Span's cyclically adjusted p/e is cheap enough to make it a potential recovery play for the brave. But Spain faces a long, slow slog.