Spain and Italy outperformed economists’ predictions in March 2024 with quicker growth, according to business surveys published this week by S&P Global. A Greek manufacturing gauge showed a similar pattern. Because of this, the currency bloc index was able to stop contracting for the first time in ten months.
According to Hamburg Commercial Bank, “Spain and Italy offered the greatest boosts, with their growth rates surging to the strongest for over a year.”
This assisted in counteracting long-term output declines that started in the middle of 2023 in Germany and France.
Mediterranean countries referred to as the “periphery” have gained an advantage in the euro area due to a rise in tourism since the COVID-19 pandemic, rising exports, and decreased energy prices brought about by renewable energy sources and a reduced dependency on Russian gas.
At a recent conference in Athens, Bank of Greece Governor Yannis Stournaras stated that “tourism is doing extremely well in the European south” following the pandemic.
However, Stournaras noted that the fundamental reason for the region’s more robust growth is that southern European nations have “fixed their imbalances, so now they are developing at a healthy rate without macroeconomic imbalances” after many years of imbalances.
Said to be stingy and less productive, these same nations were at the centre of a debt crisis that threatened the very existence of the currency just over ten years ago. The European Commission projects that in 2024, Spain, Portugal, and Greece’s economies will rank among the best in the 20-nation regional block.
In contrast, the French government recently announced a budget deficit significantly higher than anticipated for 2023 and decreased its growth estimate for 2024, forcing it to seek spending cutbacks of tens of billions of euros. Germany is probably nearing the conclusion of a brief recession due to cautious consumer spending, lacklustre demand from outside and expensive borrowing.
Investors, such as JPMorgan Asset Management, Vanguard Asset Management, and Neuberger Berman, have been acquiring southern European government bonds in large quantities, capitalising on a recent rise that has significantly reduced the premium compared to Germany and France.
For instance, from a peak in mid-2022, the difference between 10-year Portuguese bonds and bunds has nearly halved to approximately 65 basis points.
Particularly since the COVID-19 crisis, Spain’s economy has distinguished itself from the others due to an explosion in exports of everything from manufacturing to financial services.
According to Bloomberg, Jesus Castillo, an economist at Natixis, said, “It won’t be a new Eldorado, but it’s a country that will continue to attract investment.”
Apart from the advantage of being less vulnerable to increases in the price of fossil fuels, he stated that Spain might reap “enduring benefits” such as reduced labour expenses in comparison to France, Germany, and Italy, a proficient working force, and an efficiently operating healthcare system. Additionally, he stated that companies that are reshoring production will benefit the nation.
In addition, domestic demand is still robust since debt levels among consumers and businesses have dropped to levels not seen since before the 2008–2012 financial crises, and the jobless rate is currently at its lowest point since 2007.
Ales Koutny, head of foreign rates at Vanguard, said, “We highly favour Spain. We believe that the market is still not adequately pricing the fundamentals there. Although everything in Spain appears to be going well, over the long run, we can see that there is a lot of opportunity for compression between Spain and France, especially with the data that we recently received from France.”
From a peak in mid-2022, the margin between the yields on 10-year Spanish and French bonds has more than halved, to just over 30 basis points.
According to the government, tourism in neighbouring Portugal generated record revenue in 2023 of 25 billion euro (USD 27.2 billion), up from 21 billion euro the year before. The nation’s exports, which have historically comprised textiles and autos and auto components, have also been steadily rising. It has been the largest bike manufacturer in Europe since 2019.
It has also developed into a popular destination for overseas purchasers of real estate. In addition to hotels and residential real estate, wealthy investors have been acquiring commercial properties recently.
Portugal has also been successful in lowering its reliance on gas for electricity generation because of an increase in wind turbines and a rebound in rainfall. Around 25% of the total electricity demand was satisfied by wind energy last year, 23% by hydropower, and 19% by gas-fired facilities.
Germany has found it particularly difficult to wean itself off the gas because, in the decades before the invasion of Ukraine and the accompanying energy crisis, it had grown accustomed to supplying its heavy industries with inexpensive imports from Russia.
Since the pandemic, Greece, which regained its investment-grade status in late 2023, has witnessed record levels of tourists each year. This industry makes for about 25% of the economy, and in 2023 its revenue increased by 15.7%. One major factor driving development is construction, which saw over 56% more building permits issued in 2019 than in 2018.
Greece’s biggest IPO in almost 20 years was the selling of a 30% share in Athens International Airport two months ago, another indication that the country has moved past its debt problems.