This was the slowest second quarter growth since the 1993 recession, and marks the latest stage in the steady downward march in the Spanish GDP growth rate. As negative growth in Q3 now seems all but assured it seems clear that at the latest, the Spanish recession will have started on 1 July 2008 - of course there is always the possibility that this preliminary figure will be subsequently revised downwards, and we may yet actually open our papers one fine morning to discover that the recession actually started on 1st April.
The 0.1 percent growth followed a 0.3 percent expansion in the first quarter, according to the National Statistics Institute last Thursday. From a year earlier the economy grew 1.8 percent, the slowest since 1996. We will now have to wait till August 27 to see the detailed breakdown of the data.
Inflation At 16 Year High
The National Statistics Office have also confirmed thius week that Spain's year-on-year inflation rate hit a 16-year-high of 5.3 percent in July.
However as the economy starts to contract, and oil prices fall back from their July peak (they were down today at $111 a barrel, or 24% off the July 11 record of $147) then this current high level of year on year inflation may well become a very short-lived phenomenon. It is important to note that on a month-on-month basis the July CPI dropped by 0.5 percent from June, pushed downwards mainly by a summer sales fall of 11.3 percent in clothing and footwear. With cheaper oil costs on the horizon, and housing costs about to fall significantly, as overcapacity extends across the economy it is quite possible that 1 year to 18 months from now falling rather than rising prices will be the principal tendency, and should this possibility be confirmed it will then present the ECB with a whole new set of monetary policy headaches.
More Money From The ECB To Help The Spanish Banks
The European Central Bank lent a record 49.4 billion euros ($73.6 billion) to Spain's banks in July, with lending to Spain rising from 47.1 billion euros in June and 18 billion euros a year ago, according to the most recent data from the Bank of Spain. Investors currently demand higher rewards to buy bonds backed by Spanish mortgages than for any other home loan bonds in Europe - with the spread for Spanish banks now being at 2.5 percentage points over interbank rates for AAA notes, according to data from UniCredit.
The Spanish government this week also announced further measures to combat the economic decline, eliminating Spain's wealth tax and approving 20 billion euros ($29 billion, around 2% of GDP) of financing for businesses and consumers.
The measures, which follows the 18 billion-euro ($27 billion) stimulus package approved in April, have the objective of reducing bureaucracy, increasing competition and speeding-up public works projects. The plan's objective is proclaimed to be returning economic growth to a 3 percent rate by 2010, an objective which may well be laudible but not very realistic, especially since the plan does nothing substantial to address the root causes of the current crisis, which is the structural financing problem in the banking sector, together with the consequent looming banruptcies in the construction sector.
Full of good intentions is possibly the best that could be said of the present plan, although even this tag might have to be withdrawn from the proposal to loosen environmental criteria to enable more rapid implementation of public works. Spain is currently suffering from too much construction, and not too little. Basically much of this money would be a lot better spent closing down builders who are now no longer going to be needed, and retraining their workforces for other activities. Basically Spain urgently need a national construction industry "downsizing" plan, and the current proposals seem to be living under the really naieve illusion that what we have is simply a slowdown in the construction sector, and that things will return to normal by 2010.
As part of the plan, the government will also make an additional 20 billion euros in financing available in 2009-2010 for small businesses and families trying to buy public housing.
Another question I am asking myself in the face of all these numbers is what the fiscal deficit implications of them all are. If the government are working with the kind of unrealistic forecasts as they seem to be, many of their calculations may be way out of line. We need to remember that as the economy slows, VAT receipts reduce and unemployment payments rise accordingly.
Now we have already learned that Spain had a first half fiscal deficit running at 1% of GDP annual rate between January and June 2008, and as I suggest each 20 billion euros being spent is another 2% or so of GDP, so we are very soon going to hit the EUs 3% deficit limit at this pace. And while I certainly wouldn't be going out of my way to complain about that given the gravity of the situation, getting up to the limit without doing anything useful to resolve the underlying structural issues seems rather foolish to me. Indeed this would seem to be an exact repetition of the sorts of errors the Japanese were making during the early 1990s when they were also in denial about the full extent of their crsis. And to close all this I will just drop in one more strange coincidence in all this. Spanish corporates currently are indebted up to the level of around 120% of GDP. Households are indebted up to another 80% or so of GDP, and the Spanish government has an accumulated debt (not counting not-covered future outsanding liabilities in the social security system) of around 50% of GDP. Add all this up and we get total national indebtedness as a % of GDP in Spain of 250% of GDP. And what was the level of total national indebtedness in Japan when the property bubble burst in 1992 - yes you got it, 250% of GDP.
And Japan's misjudgement has cost them very dear indeed, apart from the years and years of price deflation which have followed, government debt was (according to OECD data) only 68.6% of GDP in 1992. By 1998 it had risen to 114.3% of GDP (these were the years of maximum denial) and by 2006 it had risen to a whopping 179.6% of GDP (again OECD numbers): all that cement and concrete comes at a very high price at the end of the day, as does all the dithering and failing to face up to reality.