Spain’s Economic Crisis and Recovery in the 1990s
The Crisis of the 1990s in Spain
During the early years of the 1990s, a slowdown in economic growth was accentuated. This was due to the influence of the global economic crisis and the deterioration of traditional, unresolved imbalances in the Spanish economy. In Spain during 1993, the worst moments were reflected in GDP, consumption, investment, etc.
The evolution of GDP in the depressive phase of the economic cycle, which began in 1990, reached its lowest point in mid-1993. For the first time in many years, the annual growth rate was negative.
Consumption and public and private investment contracted remarkably in those four years. Private consumption, in real terms, dropped very sharply, becoming a significant sign of the period.
Public investment was reduced to try to correct the large deficit resulting from the events of 1992.
Private investment was affected by a reduction in benefits starting in 1990.
The unemployment rate for this period was 23.9%.
In short, the four-year period was characterized by the following six points:
- Fall in production.
- Historical decline in private consumption.
- Collapse of investment, accompanied by a sharp drop in employment.
- Very weak domestic demand, combining consumption and investment, and translating the negative effect of both components.
- Dramatic growth in exports and slowing imports.
- Imbalances in domestic markets for goods and services, public accounts, and the labor market.
Causes of the 1990s Crisis
There are three main reasons:
- The gradual weakness of growth in European Union countries as of 1992 ensued a state of recession in the second half of the year, and the dramatic crisis in the European Monetary System increased uncertainty, further intensifying the recession.
- The pessimism of families and businesses regarding the challenges of economic growth.
- The subjective crisis of families and businesses led to a downturn in consumption and investment.
Crisis Recovery in 1994
The recovery in Spain began by relying on the external sector, as the components of domestic demand were more reluctant to grow, with an expected GDP growth for 1995. This recovery was limited due to the weaknesses of five core indicators related to the EU:
- Inflation differential.
- Public deficit.
- Long-term interest rates were located with a difference of 2.7 points from the core countries, and 2.1 points from the European average.
- Labor market.
- Foreign markets.
The causes of the recovery from the crisis were of a structural type:
- The expectation of the creation of a monetary union.
- Liberalization of the service sector.
- Emergence of new technologies.
Positive expectations must be added.
Cyclical factors included:
- International economic expansion.
- Falling interest rates.
- Construction boom.
- Increased consumption and investment.
It is characterized by:
- High consumption.
- High investment.
- High income.
- Low interest rates.
The features of this expansion are:
- World economic growth (Europe at its peak).
- Credit expansion.
- Low interest rates.
- Increased borrowing by agents.
- Strong growth of assets (real and financial).
- Lack of financial control.