- On 30 January INE reported that the Spanish economy grew by 3.2% in 2016, the second consecutive year above 3%.
- It is among the most dynamic in the eurozone, but with unemployment still very high, which limits the spending of many households.
- A good cycle is the moment to tidy up the financial structure: reduce expensive debt, build reserves and consolidate savings.
On 30 January 2017 the national statistics office, INE, reported that the Spanish economy had grown by 3.2% in 2016, the second consecutive year above 3%. It is among the most dynamic in the eurozone, though unemployment remains very high. The figure confirmed that the recovery after the crisis was continuing and that the country was holding a growth rate above that of many of its European partners.
Sustained growth over two consecutive years changes the mood of business owners and families: postponed investment projects are taken up again, hiring picks up and banks become more willing to lend. But an aggregate figure is only a general snapshot, and it needs to be read with nuance so as not to take decisions based on an overly optimistic impression of reality. Experience shows that periods of prosperity invite a relaxing of prudence just when it is most valuable.
How to read the figure
Gross domestic product measures the value of what a country produces in a year. Sustained growth above 3% points to an expanding economy, with more consumption, more activity and, in general, better conditions for investment and hiring. This is an initial estimate, known as the advance figure, which can be revised later when more complete information is available.
Moreover, GDP measures how much is produced, not how it is shared out. An economy can grow strongly and at the same time have sectors that advance more than others, or areas where the improvement arrives later. So when assessing an economic environment, it is worth complementing growth with other indicators, such as employment, consumption, prices or the indebtedness of households and companies. A complete view avoids hasty conclusions, whether optimistic or pessimistic.
What the figure does not say
Aggregate growth does not mean that every sector or company experiences it equally. With unemployment still very high, part of the population does not yet feel the improvement, which limits consumption and shapes the decisions of many families. A business owner serving customers on tight incomes should bear this in mind when setting prices or payment terms.
Nor does it say how long the favourable phase will last. Economic cycles alternate periods of expansion and moderation, and the one now pushing forward can change direction because of internal or external factors. Making good use of the good moment consists, precisely, in preparing so that a future slowdown does not find the company or the family with a fragile financial structure. That preparation is quiet and unglamorous, but it makes the difference when the environment changes.
Making use of a good cycle
For a business owner, a favourable environment is the moment to tidy up the financial structure: reduce expensive debt, build cash reserves and review fixed costs. It is also the time to check that the company’s growth rests on solid margins and not only on higher sales volume, which may be easier to achieve in an expansionary phase than to sustain afterwards.
For a family, it is the occasion to consolidate savings, review the make-up of wealth and update wealth planning, including insurance and succession documents. Doing so calmly, when there is no pressure, makes for better decisions. An adviser can help adapt these ideas to each situation, bearing in mind that personal circumstances matter more than the national average.
Favourable cycles are better used with order than with exuberance.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
