A STONE’S THROW from the bustling arcade of Atocha railway station in central Madrid are the offices of Spotahome, a startup that matches tenants and long-term rentals. Set up five years ago, it lists 65,000 properties in 11 European cities and employs more than 300 people. An example of Spain’s small but fast-growing startup scene, its success reflects an economic resurgence in Madrid and some other European cities. The supply of rental properties has grown since Spain’s deep housing crisis, notes Alejandro Artacho, its boss. Demand comes from exchange students, as well as an expansion that has lured foreign businesses and workers. Spain’s population fell after recession struck for the second time in three years in 2012, as more people moved abroad than came in, but that trend reversed in 2016.
Since 2018 a slowdown in trade and manufacturing, concentrated in Germany and Italy, has cast a pall over the euro area. But matters would be far worse had other countries and sectors not held up. Spain alone accounts for a tenth of the zone’s GDP, but in recent years has contributed a fifth of growth and an outsize share of new jobs. Across the bloc sectors that rely on domestic demand have expanded, as recovering labour and credit markets have boosted household and business spending.
In the growth league table, the euro area’s newer members in central and eastern Europe come top (see chart). But these make up just over 1% of the zone’s economy. The big four—Germany, France, Italy and Spain—make up three-quarters. Although France has grown more slowly than Spain, surveys of activity there have been buoyant. Daniela Ordonez of Oxford Economics, a consultancy, points out that it is the only country where such indicators were both above their historical average and strengthening in the second quarter, perhaps as business sentiment recovered from the worst of the gilets jaunes protests in 2018.
France and Spain have certainly felt the slowdown in global trade. According to a preliminary Purchasing Managers’ Index survey released on July 24th, manufacturing activity in France stagnated in July. But their factory sectors have held up better than Germany’s, which is more dependent on exports and appears to be in recession. They have also been helped by what Raymond Torres of Funcas, a think-tank in Madrid, calls a “virtuous loop”, connecting an improving labour market to rises in consumption and investment.
Across the euro zone 2m jobs have been created since early 2018. The unemployment rate has fallen to pre-crisis levels. Wage growth, though still modest, is picking up and, courtesy of a dip in the inflation rate in the past year, real incomes are accelerating. Ms Ordonez expects them to grow by 2.5% in France this year, the fastest pace since 2007. Banking reforms in Spain mean credit is flowing more freely. Companies are investing more in equipment. Investment in housing has also risen. No wonder that output in retailing and construction has risen steadily across the bloc since 2018. Even in Germany domestic demand has been healthy, thanks to the lowest unemployment rate in decades—but not quite healthy enough to make up for the industrial slowdown.
The fear, however, is that as external gloom deepens, the positive loop will go into reverse. The slowdown in manufacturing, at first dismissed as temporary by economists, has persisted: the threat of American tariffs on European cars and a disorderly Brexit still loom. Trouble in exporting industries can easily spill over into domestic demand, as it did during the financial crisis, by encouraging businesses and households to save rather than spend.
In Germany, industrial weakness is starting to be felt in the labour market. Second-quarter profits at BASF, the world’s largest chemicals firm, were down by 47% compared with a year earlier. The company plans to cut costs and jobs. According to the Ifo Institute for Economic Research in Munich, the number of manufacturers planning to introduce short-time working over the next three months is expected to reach its highest level since 2013. That weakness could spread: research by Jean Imbs of New York University Abu Dhabi and Laurent Pauwels of the University of Sydney Business School, presented at the European Central Bank’s annual conference in June, finds that services are ever more integrated across European countries. The bank’s staff expect geopolitical tensions to weigh on investment.
The central bank, which was due to hold its monetary-policy meeting on July 25th as The Economist went to press, is expected to indicate further policy loosening. Even if fears of a trade war fade, it expects domestic demand to lose some of its lustre. Much of Spain’s sparkle, for example, reflects pent-up demand following its deep crisis, which will level off as the economy nears capacity and job creation slows. And yet, by the central bank’s projections, that recovery is not enough to return euro-zone inflation to its target of “close to, but below” 2%. More stimulus will be needed if the bright spots are not to go out.■