Spain At A Glance January 2008
Welcome to the Spain Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data and which we hope will help the first time reader better assess and get to grips with the argument being presented here. The Spanish economy is now entering quite a significant economic downturn, and with it Spanish society one of those decisive turning points in its history. What happens next is bound to represent a tremendous challenge of the Spanish institutions and the Spanish people. I can only express the sincere hope that they will prove able to rise to the measure of the day. We now present charts for longer term Spanish GDP Growth, construction activity, house prices, inflation and interest rates, cement output, private domestic consumption, retail sales, immigration, fertility and age structure the rise and initiation of the decline in the 25 to 50 age group. Basically we hope you will find this background data useful in assessing the argument which we are presenting on this blog, which is basically the principal reason why Spain has not had a recssion since 1993 was the existence of negative interest rates via the Eurosystem between the spring of 2002 and the autumn of 2006. This phenomenon also coincided with a high point in Spain's demographic evolution where the 25 to 49 age group constituted a virtually unprecedented anywhere 40% of the total population. The combination of these two together served to fuel one of the longest running and strongest housing booms in history. It is this boom which is now in the process of unwinding and correcting itself. Please click on thumbnails for better viewing.
When we come to the fourth quarter we should expect this downward trend in domestic consumption to continue, and this is exactly what we are seeing in the data, first with retail sales, which are now steadily going down month by month, and then in the weakening of construction, and the fact that industrial output started to contract in December (going by the PMI).
Private domestic consumption peaked back in 2004/5, and the rates of increase have been slowing steadily ever since and we should expect this trend to continue. Even more to the point, in Q3 2007 private domestic consumption only grew at 0.37% over Q2, and we have to go back to Q1 2003 to get a slower rate than this.
2008 Forecasts:The Spanish government in December cut its economic growth forecast for Spain in 2008 to 3.1 % down from the previous 3.3% estimate. The direction of the adjustment is certainly the right one, but the value seems unrealistically high. The IMF were forecasting 2.7% in their October World Economic Outlook, but all of this is in the process of constant adjustment. The OECD dropped their expectation from 2.7% to 2.5%, also in December. The Economist Intelligence Unit don't really stick their neck out too far, merely indicating that "GDP growth is expected to slow to an average of just over 2% over 2008-12, from 3.9% in 2006. As a result of high indebtedness on the part of households and companies, domestic consumer and investment demand will grow less than in recent years." More interestingly the EU Commission is forecasting 3% growth driven by a 2.75% increase in private consumption (which seems rather high to me) and a 3% growth in Gross Fixed Capital Formation driven largely by government investment in infrastructure projects which seems much more realistic.
My own view is rather more downside than all of this. A lot really depends on factors outside Spain's control, such as the growth in demand in other European countries and the arrival of tourists across the year. However since I feel that crunch time for Spain is going to be coming in the midst of a more general European slowdown - the OECD for example cut anticipated eurozone growth from 2.6% to 1.9% in December, so I doubt this climate will be too favourable. Still the Spanish government will be spending on civil engineering projects as fast as it possibly can, so I will go for 1.5% growth in 2008, with downside risk, and slower growth to come as we enter 2009 and 2010. I think Spain will definitely see negative growth in at least one quarter, and as this may well turn out to be Q1, this forecast may well be subject to downward revision as and when we get that data. Evidently everything depends on whether or not we get a hard landing here, but to decide on that difficult topic we need to see a lot more real data.
This blog will not have daily update posts, unless events start to move at a pace which makes those desireable. There will be data updates from time to time, and extensive monthly reports, the next of which will be at the start of February. I also recommend my two recent extenisive summary posts:Some Background Charts On the Banking and Construction Crisis Developing in Spain
Spanish Consumer Confidence, Inflation, 3 month libor etc
Thursday, March 16, 2006
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