Spain has been on a tear since it joined the EU in 1986. Its GDP growth has averaged more than 3% a year, compared to 2% in Germany, and its GDP per head has jumped from 66% of the eurozone average to 92%. Over the past few years, a soaring housing market has underpinned growth, with prices more than doubling since 1997. Firms have used negative real interest rates to gear up their balance sheets and give profit growth an additional kick. No wonder its stockmarket has jumped by 33% since 2001, while the benchmark German and French indices have declined by 16% and 13% respectively.
But the outlook is now clouding over. Interest and mortgage rates are ticking up, putting the squeeze on indebted consumers, and economists are worried that the building spree is beginning to outstrip demand, raising the likelihood of a hard landing for housing in the next few years that would crimp overall growth. Spain may be heading for “a first-class beating”, one economist told The Wall Street Journal.
Eurozone interest rates are expected to head towards 4% next year, says Simon Rubinsohn of Barclays Wealth in The Business, and this will end the housing-led boom. But having ceded monetary policy to the European Central Bank, the government can no longer stimulate a lacklustre economy. In addition, the Spanish market is looking pricey on more than 14 times earnings, while the rest of Europe trades at under 13. Having loaded up on debt over the past few years, Spanish companies are vulnerable to higher rates. Over the next few years, Spanish stocks are set to lag Europe rather than lead it.