Spain has a spring in its step as jobs grow

July 30, 2016

By Holly Ellyatt, CNBC

Positive unemployment data and bank earnings from Spain bode well for next week's growth data, but analysts warned that more needed to be done to cement economic recovery in the country.

Analysts welcomed an unexpected fall in Spain's unemployment rate, which slipped for the first time in two years in the second quarter, according to data from the country's National Statistics Institute released on Thursday.

"We have created 200,000 new jobs in this quarter. Thinking seasonally, this is a very good number. It could be a new green [light] for the recovery of the economy," Sara Perez-Frutos, country manager at Brunswick Capital, told CNBC Europe's "Squawk Box."

But she warned that the country's banks, businesses and government needed to do more to support its nascent recovery. "The government needs to keep up with reforms. The labor market is not as flexible as the companies need, and permanent contracts in this quarter have decline by 50,000 while temporary contracts have increased," she said.

Spanish bank earnings on Thursday also boosted hopes of a strengthening economy, with lenders -including bailed out Bankia – posting bumper profits for the first half of 2013.

Yet Perez-Frutos said Spain's banks should improve lending to small and medium-sized enterprises and consumers. "Now we have a pure credit crunch in our economy. The banks are improving their numbers but now we need credit," she warned.

Raj Badiani, an economist at IHS Global Insight, said that despite the decline in the jobless rate, "unemployment is projected to remain high."

"Very low consumer confidence will weigh down heavily on spending during 2013 and 2014,adding further tensions to a faltering economy, "he said in a note on Thursday. "[This] presents a significant obstacle to any recovery impetus, as Spain is set for a deep and prolonged recession."

His comments contrast with a more optimistic tone from Spain's central bank earlier this week. On Tuesday, it forecast that the country's economy shrank by 0.1 percent in the second quarter,quarter-on-quarter, following a contraction of 0.5 percent in the first three months of the year. Spain's preliminary second-quarter gross domestic product (GDP) data is due on Tuesday.

Though a 0.1 percent contraction would technically mean Spain remained in recession, Miguel Cardoso, head economist for Spain at BBVA, said it would bode well for a return to economic growth.

"This number… increases the likelihood that we're going to see some positive growth in the second half of the year," he told CNBC on Thursday.

Spain's services sector and export growth was also improving, he added, and the country was benefiting from an increase in tourism, as a number of its euro zone counterparts struggled with political uncertainty.

But Cardoso cautioned that Spain's recovery would be closely linked to that of Europe's largest economies . "For us, it is key to have a recovery in Germany and France," he said. "If you look at the historical data, no recovery has come in Spain without a recovery in Europe."

Boris Schlossberg, managing director of BK Asset Management,agreed that although Thursday's data implied"green shoots" for economic growth, ultimately, the fate of Spain lay in the hands of Germany.

"The real story in Europe is going to come down to Germany," he told CNBC. "It's not going to be Portugal or Madrid or Rome, it's going to be what happens after the German election… and whether Frau Merkel will lead Europe with much better fiscal stimulus as they go forward."