Spain's economy creeps back to health

Consumer demand has returned to Spain after the economy grew at its fastest rate in six years.

"Spain is back," says JPMorgan. In the final quarter of 2013, GDP grew by 0.3%, the fastest quarterly rate in six years. The number of unemployed has dropped for the first time in a decade.

"Growth in both the manufacturing and services sectors is creating new jobs, and consumer demand is creeping back," says The Economist. However, "the brakes on growth and job creation remain many".

The government is cutting back; public debt has jumped from 40% to 100% of GDP in the past six years, and last year's budget deficit target of 6.5% of GDP is likely to have been missed.

Households and companies are also weighed down by debts. Private borrowing is worth three times Spain's national income, and ongoing repayment of debt will hamper growth. The huge slack in the labour market hardly helps.

The unemployment rate is 26% and wages have been declining. Banks have had a capital injection but remain loath to lend as they are still exposed to the ailing housing market. As a result, the recent growth rate of domestic consumption is likely to abate, says Capital Economics.

Meanwhile, a renewed outbreak of the euro crisis, or general global market turbulence, would imply higher bond yields and hence borrowing costs throughout southern Europe, dampening growth.

But the upshot is that the Spanish market still looks cheap enough on a cyclically adjusted price-to-earnings ratio of ten to justify a bet on Spain's very gradual recovery with the iShares MSCI Spain Capped ETF (NYSE: EWP).

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