Spaniards vote today, with opinion polls pointing to a change of government. Incoming conservative Prime Minister Mariano Rajoy faces unsustainably high sovereign bond yields, a depressed economy most likely sliding back into recession and, at 21.5%, the highest unemployment rate in the Eurozone.
While the European Commission's autumn economic forecasts, published earlier this week, forecast tepid GDP growth for Spain of 0.7% in 2012, most market economists are more pessimistic. Without further austerity measures, JP Morgan economist Greg Fuzesi expects a decline of -0.7% next year. With further measures, he forecasts GDP to fall by -1.1%.
What does this mean for jobs? In a research note published in the 18 November Global Data Watch (forthcoming), Fuzesi estimates what Okun's law - the relationship between GDP growth and unemployment - means for European labour markets. He forecasts that if the Spanish unemployment rate continues to move in line with its historic norm, it may reach a shocking 27% by end-2012. Why so high?
First, in Spain, the pace of growth needed to keep unemployment stable was very high at 3%, likely reflecting high immigration and rising labor force participation. The responsiveness of the unemployment rate to growth was also extremely high in Spain at almost one-to-one, likely reflecting a low responsiveness of the workweek to economic conditions and the dual labor market with rapid firing of temporary workers. Due to these two features, the dramatic increase in Spanish unemployment since 2007 has not been that unusual.
Rajoy and his Cabinet will have their work cut out for them...