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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Sunday, April 06, 2008

If Construction Is Falling in Spain, What About The Motor Industry?

Spain's construction industry isn't the only part of the Spanish real economy which is currently in difficulties. Years of higher than desireable inflation and low productivity growth has produced a less than desireable situation in many areas which has to some extent been hidden behind the apparent affluence created by many years of property boom. The motor vehicles sector is just one example, but it is a good one since it is currently being squeezed by stalling sales at home (as domestic demand drops) and cheaper rivals abroad (especially in the rapidly growing Eastern Europe sector ). All of this is only going to add to the pressure which is currently falling on policymakers to speed reforms and to develop a workable plan to find long term alternatives to construction dependence and an unsustainable external trade deficit.

March was a pretty bad month for the Spanish motor industry, since according to Spanish car manufacturer association Anfac, new car sales in Spain fell by 28.2% to 124,698 vehicles compared with 173,716 cars in March 2007. In the first quarter of 2008 taken as a whole the position was marginally better, since 347,734 cars were sold, which is only a 15.3 percent drop over the first quarter of 2007, but it does also give us another indication that the rate of deceleration in the Spanish economy increased significantly in March.

"The economic situation has darkened since the start of the year, unemployment is worse than expected and people don't have much disposable income given their debt levels and the increasing cost of basic goods," said ANFAC, Spain's car makers association.

The newly re-elected Socialist government hopes reforms to improve productivity will help the sector and reduce Spain's dependence on the construction and services sectors. But many analysts say they are going to have their work cut out for them as not only Spain but all of western Europe battles cheaper labour markets to the east such as Poland and Romania, to say nothing of burgeoning auto production in India and China.

Spain has one of the lowest productivity growth rates in the euro zone and wages as high as any in western Europe, putting its future as an auto manufacturing centre in doubt. Top carmakers in Spain include General Motors, Ford, Renault, Daimler and Nissan, who all rushed into Spain in the 1970s and 1980s to benefit from what was then a cheap labour force as well as proximity to Europe's largest car markets in Germany, Britain and France.

But the now comparatively high wages have sparked plant closures and job cuts as factory after factory has headed east. Even absenteeism seems to have become a problem with the industry lobby estimating absenteeism cost the sector 26 billion euros ($41 billion) between 2000 and 2007.

Absenteeism of 7 percent last year was equivalent to 6.7 million labour hours and compared to just 3 percent in Romania, for example, Spanish car manufacturers' association Anfac said. It said the high rate was mainly caused by unjustified sick leave.

Jose Vicente de los Mozos, head of Nissan's Spanish operations has been making the point in the press that inflation is an even bigger problem, and he argues that if Spain's annual inflation rate stays around the current 4 percent, Nissan would have to improve productivity by a whopping 8 percent every year until 2010 to remain competitive.

Spanish inflation was 4.6 percent in March, far above a record 3.5 percent for the euro zone.

But according to the most recent data from Spain's INE, producer prices in Spain were increasing even more rapidly than consumer prices in February - at a year on year rate 6.6%, a very hefty clip, especially given the rate at which the economy is decelerating, and very bad news in the sense that it seems the increase into consumer prices is working its way back upstream into production.

Clearly with domestic demand in freefall exports from cars built in Spain is the key to growth in the sector, and Anfac hope to achieve a production rise of around 1-2 percent this year - to around 3 million vehicles -- a level it hopes to keep in the medium term. Yet Spain already exports 80 percent of its output and if nothing is done about the relative cost situation it is hard to see a significant increase in exports. And it simply gets worse and worse, since the car industry accounts for almost a quarter of Spain's exports, employing more than 9 percent of its workforce and accounting for about 5 percent of Spain's economy. So any strategy for turning round the Spanish economy into an export driven one will have to pass through cars, and address the endemic problems of the sector.

And of course the key to turning this round is productivity, but higher productivity in Spain now will mean ramping up growth without job creation, and a substantial period of wage restraint (after the end of the German property boom in 1995 German real wages barely budged in a decade). So while a rise in productivity is crucial to the industry's (and the Spanish economy's) survival, ironically in the short term this may only add to and not alleviate the pain. I suppose at this point it is a bit late to say this, but what we have here is a clear example of why it would have been better never to have gotten into this situation in the first place.

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