Spain Imports Growth

Breaking news: Not every eurozone nation is growing at the same clip. Or even growing, for that matter. (We presume this strikes most MarketMinder readers as a blast of the obvious, but we see this referenced over and over with the suggestion it’s a major worry.) While the eurozone in total emerged from recession in Q2 2013, some peripheral countries still contracted. Like Spain! While Spanish GDP contracted less than expected in Q2 2013, contraction is still contraction, and it was the eighth quarter of falling output—clearly, recessionary territory. But on Wednesday, the Spanish central bank released preliminary data showing Q3 GDP growth will be positive, completing the leap into expansionary territory and ending its two year stint in recession. Now maybe leap is a strong word—GDP is expected to swing from Q2’s -0.1% to +0.1%. Of itself, a noteworthy change to an extent. But more importantly in our view, improved conditions in the periphery are yet another example of a broader theme: Over the course of the past three years, talk has run wild of the eurozone dragging down the world economy. That still seems to be the sentiment reaction whenever you utter the word “eurozone.” But the reality is different. A growing world is pulling up the eurozone—including Spain. And the acceleration in various economic data series we’ve seen lately is a powerful and underappreciated sign of continued growth ahead—bullish for stocks globally.

This is not to argue the Spanish swing to headline growth is a sign economic fundamentals there are muy bueno. A closer look at the numbers suggests Spain is likely still far from surging. The Bank of Spain expects private consumption to grow a tepid 0.1% in Q3, likely a signal consumers have been burdened by the value-added tax increase in 2012 and the influence of sky-high unemployment, among other factors. Imports are seen falling -0.7% q/q, showing domestic demand (-0.3% in total) is still relatively weak. And while we believe decreased government spending isn’t necessarily economically bad, GDP counts it as such and Spanish government spending is forecast to fall -0.3%, detracting from GDP. The primary saving grace for Spain—the reason GDP is expected to bump up from negative to positive territory—export growth. That’s right—strong foreign demand is the largest contributing factor to Spain’s returning to growth in Q3. But to us, this isn’t surprising. After all, Spain is still adapting to and implementing many structural reforms which likely boost the domestic economy and the country’s global competitiveness in the long run—the latter being a vital piece of the economic growth puzzle. But for now, the world economy is giving Spain the cyclical boost it needs. In the short term, cyclical factors can overwhelm even major structural woes. Global growth is healthy, and foreign demand is following suit. This is just one of the many reasons we’d suggest a global reacceleration is in motion.

Fellow peripheral countries (each at one point or another feared to be the cause of an “inevitable” eurozone breakup) like Ireland and Portugal returned to expansionary territory this year—also further proving the eurozone isn’t headed for catastrophe as previously thought. Elsewhere, China continues to see steady growth and avoid the widely feared hard landing. Q3 GDP came in at 7.8%—a modest acceleration. UK growth has quickened and broadened since QE ended there in November 2012. And US economic data continue to outpace expectations—a trend likely to continue after QE ends. In fact, since US long-term yields influence many long-term bond rates globally, less US bond buying could steepen yield curves worldwide—a powerful incentive for banks to lend and better support growth.

Spain is by no means out of the woods yet when it comes to long-term economic growth. After all, it’s still expected to contract -1.3% y/y this year and grow a rather meager 0.7% y/y next year. But rather than the eurozone dragging global growth down, the reality seems the reverse. Investors, however, still seem entrenched in their eurozone-as-major-risk mentality. That implies there is a big potential positive surprise still ahead—fueling the bull market further.