Spain's General Industrial Production Index (IPI) was down by 9.5% in June 2008, in comparison with June 2007, according to data out from the National Statistics Office this morning. Adjusting for calendar effects the inter-annual rate of the IPI was estimated at a drop of 9.0%. The variation rates with respect to June 2007 was -9.6% for consumer goods (-21.1% for durable consumer goods and -7.4% for non-durable consumer goods), -10.8% for capital goods, -12.6% for intermediate goods and 1.8% for energy. After adjusting for calendar effects, these inter-annual rates were estimated at -8.9% for consumer goods (-20.2% for durable consumer goods and -6.7% for non-durable consumer goods), -10.2% for capital goods, -11.9% for intermediate goods and 2.1% for energy.
And if we take the purchasing managers survey seriously (which I think the balance of evidence suggests we should), then Spain's manufacturing sector continued to shrink in July, and at the fastest rate ever seen in any European Union survey of the sector. The Purchasing Managers Index for Spain slipped to its lowest level since the survey began in February 1998, the organizers of the survey, Markit economics, said. The Markit Research Manufacturing PMI index contracted for the eighth consecutive month to 39.2, down from 40.6 in June. Any PMI figure below 50.0 shows contraction while figures over 50.0 show growth.
11 comments:
Dear Mr Hugh,
Can you please comment on what actions you think the spanish government can apply to mitigate the recession. Monetary policy is in the hand of the ECB, and you made a good point saying that this policy has been too lax for spain in the boom years, and it is now probably too tigth. (eventhough Greenspan says it is due to asian savings) It will be interesting to see if countries like portugal and spain can now pay the price to remain in the euro, or if euro policies will have to be changed.
What can be done to increase the liquidity to banks and to other businesses, as banks are hoarding cash and not lending?. Also as you may be aware, prices for houses have gone down on the "costa" ( second residences), but in major cities (at least in madrid) prices are very resilient. Until we see prices go down, there will not be any buying. People in spain do not want the government to bail out the real state companies, as this would prevent readjustment of prices, but on the other hand, construction, tourism and consumption are the engine of the spanish economy, and if nothing is done, the slump will eventually touch all part of main street and will create a feedback loop that will be very dificult to stop. We can for the future lay the basis of alternative engines ( alternate energy ressources, added value industries....) but this takes time (at least 4/6 years in the best case which I am not sure we're in), so I do not think it is wise to let the construction engine crash, but rather it should be fased out slowly.
Do you think more fiscal rebates, with a more controled budget can help? Fiscal rebate done in june has not helped much, as the data for july is abismal...Furthermore in order to be able to gain competitivity, syndicate should be willing to tone down their demands, and this is not for now the case (remember the meating "patronal " and syndicate).
I would apreciate your comments or maybe a post on this.
MDM
And over on Reuters, report on Habitat in trouble with 1.6 Bil,in debt.
Here in Spain, we do rather like these very Large numbers, The report mentions, Colonial with 8.9 Bil, Makes Llanera with approz 800 mil owing rether small now.
In my little town of Pilar de la horradada in Alicante, or Murcia--currently fighting about it now, our high street is like a Mercedes, Audi, BMW show room.Shiney metal, we have it all, Debts-- Any amount of it. In fact-- Debt is what every one has in abundance.
The frighting aspect of this debt is --- The debt holders are poorly educated, manual or blue collar workers with very little training or experience in the service industry that most work in and did I mention corruption--- boy we have that as well,
Time of reconing is still some way off yet, availeble credit is tightening-- unemployment is growing and at this time when we need strong leadership- to tell the people that-- ALL WILL BE WELL-- We have Solbes and ZPT saying weakly- What can we do? absolutly nothing, What these politicians have faild to undertand is that ,- With power comes responsability. The Excuse-- He's only human- we all make mistakes is not sufficient excuse, In Hitler's day, British " Peace in our time" HITLER's a nice man statement is in the same catergory.
The Spanish people are suffering, something has to be done- SOON. How about that military coup now?
Love your writings Hugh. PLEASE keep on.
Best regards
Please excuse me, I meant to address you as Senor Hugh or Edward.
Please accept my apologies
Sincerely
Miguel
Hello MDM,
"Can you please comment on what actions you think the spanish government can apply to mitigate the recession."
First off, this is no longer simply a recession, it is a slump (I mean look at the way industrial output is falling). The difference isn't very apparent now, but it will become so.
Secondly my proposals fall into two categories really:
a) an immediate injection of cash to save the banks from failing
b) a negotiated set of restructuring proposals to put the country and the economy back on its feet again. And I say negotiated, since this will need to be, if and when it finally comes, in the form of an old IMF style rescue (Spain simply doesn't have the money alone, it could involve anything between 30 and 50% of annual GDP, depending on when they act, and how much damage they allow to occur before doing anything), and the appropriate body in this case would be the EU commission. So this is where the second stage structural reforms would need to be hammered out.
And effectively you raise a third point which needs to be discussed, and that is how the workings of EMU can be modified to prevent something like this happening again.
Each of these three topics on its own is enormous, and since I am not a "one man think tank" you will forgive me if I don't have detailed responses to all three. All I have at the moment are thoughts and suggestions to chip in to what really needs to be a collective debate. But this debate - frighteningly - doesn't even seem to have gotten started yet in Spain.
"It will be interesting to see if countries like portugal and spain can now pay the price to remain in the euro, or if euro policies will have to be changed."
Look. I would say that the situation which is brewing in the eurozone is potentially much more serious than you are imagining.
I think we could divide the EU into 4 groups here:
1) Southern Europe
2) Eastern Europe
3) Germany and Austria
4) The rest
Now basically we are about to see quite big problems in 1,2 and 3.
I wouldn't say group 4 are without issues - Ireland and the UK are clearly about to get a very bumpy ride on the housing front, and Swedish Banks can take quite a hit in the Baltics and Ukraine, and Denmark has its own housing issue etc, but in terms of the hospital they are all in normal wards, and not in intensive care.
Now, it may surprise you to see Germany pencilled in for a bed in the emergency wing, but this is just it, this is just the problem that (one more time) few see coming.
Basically Germany has negligently let itself get far to old in population terms. Germany has (like Italy and Japan) a population median age of around 43, which makes these three countries the oldest societies on the planet (ever), and their ages are rising reasonably rapidly.
Now, and this is the part many don't seem to get, this ageing has important macro economic consequences following Franco Modigliani's theory of life cycle savings and consumption (for which he got a nobel).
Basically, as you move through the age groups svaing and borrowing patterns change, and this explains why, in the case of the three abovementioned societies, we haven't seen any sort of real property boom since the mid 1990s (they all have had "blow outs" at one point or another, yet during this whole recent boom their house prices have remained strangely flat).
So countries like Germany and Japan who have not - like France and Sweden have - paid attention to their long term sustainability in terms of fertility now face important structural problems, since they cannot depend on internal demand, but need export growth to be able to pay their mounting pension and health service bills.
At this point enter Spain and Italy. The German economy is now heading rapidly into recession, since the slowdown in exports to Southern Europe which started last summer has set in motion a whole chain reaction - the Czech Republic, which is highly interlocked with Germany is slowing fast, and industrial output in Hungary was negative year on year in June for the first time in I don't know how long - which is gradually causing the well oiled German export machine to seize up.
All of this is even being noticed in China (although obviously Spain is only one very small part of the whole picture here) where the manufacturing PMI was negative in July, again for the first time since this survey existed. So Germany can't expect to compensate by more sales to China (which is in any event largely a Japan show) at this point.
So the German economy hobbles on one leg (the export one) and is hence inherently unstable. For more details on all this please follow my posts on RGE Europe EconMonitor. Austria is a similar case except they are into business services out in the East rather than manufacturing.
Now if we move on to Southern Europe, it is very important to realise that this is not homogeneous. There is basically Spain/Greece and Italy/Portugal. Only the firstv two had recent housing booms which are now about to unwind. The other two need to live from exports, but since they have a competitiveness problem they can't, so they get very little headline GDP growth. Spain and Greece are in the middle of a credit crunch driven correction.
I only have a superficial impression about Greece at this point, but it does seem to be heading down fast. I will try to do a study for RGE in the coming weeks. On Portugal I have a study in preparation.
Then there is the East. This is becoming a big mess. Again we seem to be able to divide the countries into two:
1) The Baltics, Bularia, Romania, Slovakia and Poland
2) Hungary, Slovenia, the Czech Republic
The first group all seem to be on some sort of "boom-bust" path. And part of the explanation is that they have been caught up in the slipstream of (compulsory) eurozone membership. In this case - apart from the fact that some of them have been pegging to the euro - the key seems to be the excessively high credit rating they have been given based on the perceived existence of an effective guarantee from Brussels and Frankfurt.
Now, the point I am raising is: what happens if we get the (entirely possible I think) nightmare scenario that all of these go wrong at once. Well, I won't speculate at this point, but the risk is there, and this is one of the reasons I would be trying to stop the Spanish debacle in its tracks, and doing it now.
"People in spain do not want the government to bail out the real state companies, as this would prevent readjustment of prices"
Well MDM I think the problem is here that people just don't understand the risks, since no one is really explaining them to them. Oil prices are now trending down - I don't knwo any more than anyone else does where they will settle in the short term (in the mid term they will be back up again), but $80 might not be a bad guess just to say something.
So with oil and housing prices both set for a sharpish drop, DEFLATION not inflation is the coming issue in Spain, and while people may not mind seeing builders go bust, are they equally happy to see their salareies reduce by 5% a year for the next 3 to 5 years? Because it may well be something of that order that we are in to here.
"and if nothing is done, the slump will eventually touch all part of main street and will create a feedback loop that will be very dificult to stop. We can for the future lay the basis of alternative engines ( alternate energy ressources, added value industries....) but this takes time (at least 4/6 years in the best case which I am not sure we're in), so I do not think it is wise to let the construction engine crash, but rather it should be fased out slowly."
I absolutely agree, although what you are going to do with all the construction workers during the transition phase isn't that easy to see at the moment. The last thing we would seem to need are more houses. Obviously we could follow Turkey's intelligent example of funding massive irrigation projects, since agriculture is one area we can develop for exports, but first you need a consensus among the Autonomous Communities that this needs doing, and again, ignorance of the fix we are all in is leading people to continue to play games on this one.
"Do you think more fiscal rebates, with a more controled budget can help? "
This is basically the mistake Japan made, and one of the reasons they now have a debt to GDP ratio of 170% or so. This is not cyclical (as it wasn't in Japan), so normal cyclical demand management techniques don't work. You just end up with cement everywhere and a huge national debt.
Financial resourecs are now precious and they need to be targeted, which means they need to go to the banks, and maybe to buying up and "reclassifying"surplus land (eg back to agriculture). So until all of this is put up on the table, we are simply pussyfooting around, and time is precious.
"Furthermore in order to be able to gain competitivity, syndicate should be willing to tone down their demands, and this is not for now the case (remember the meating "patronal " and syndicate)."
Well look, one way or another, wages are coming down. Everyone is talking about the 70% or so indexing there is in the national wage agreements, but are these symmetrical? I mean if prices fall do wages and pensions fall with them??? This is likely to become the main issue.
If they don't, then the only thing I can see moving forward are massive "regulaciones de empleo" (redundancies, and early retiremment, but watch the structural fiscal deficit with all the early retirements) and a huge growth in the sunmerged economy.
Which brings me to my last point, where are all the Spanish workers? Basically following this point from Miguel:
"The debt holders are poorly educated, manual or blue collar workers with very little training or experience in the service industry that most work in"
I mean just how employable are a lot of the unskilled Spanish nationals who are now about to pour into the labour market. As I walk the streets of Barcelona the main people I see working in menial jobs are migrants. This has to change, or does it?
I mean, if the Spanish want 1,000 euros, and the migarnts work for 600 or less, then how many Spanish people will find jobs? That is IMHO there is a very real possibility of a scenario where the migrants in many cases lower their expectations and find work, and Spanish people don't, and end up on the dole.
And if this did happen, what would be the political ramifications.
I rule out of court all Miguel's speculations about military coups etc (sorry Miguel, and please do call me Edward, everyone), but we could see some sharp and nasty changes in the political climate going forward. At the very minimum Zapatero's days in the Montcloa are now evidently well and truly numbered.
Well, sorry this has been so long, but you did ask for a fuller picture.
I recommend you read the two posts I have on the Spanish economy on the RGE European EconMonitor, and here in conclusion are my most recent list of immediate suggestions.
****************************
Basically, and on the basis of all the above, I would like to now put forward a five point "rescue" plan for the Spanish economy. It would look something like this:
1/ Set up a national land agency, to buy up land and to irrevocably convert it to other uses (agriculture wouldn't be a bad bet where possible given present food prices). This to include the proviso that such land could never again be zoned. 2/ Buy out and close down the bankrupt builders as part of a general restructuring programme such as the one which was developed for the shipyards and the mines. 3/ Buy up and burn immediately ALL outstanding cedulas hipotecarias. Well, I'm exaggerating here, but something very decisive needs to be done to take these things out of circulation in the longer term, or we will never ease Spain out from under this. 4/ Establish a programme to help immigrants in difficult circumstances, and offer training etc to prepare for the future. Abasic focus of policy needs to be on trying to persuade migrants to stay. 5/ Restructure all existing mortgage contracts - which will involve every one paying more - in order to put mortgage financing in Spain back on a sound footing. This will obviously require legislative intervention, and will equally obviously involve breaking the direct tie with one year euribor. It has been following euribor up and down which has gotten the Spanish mortgage market into this mess in the first place.
OK, I warned you. I said none of this was going to be popular. And none of these propsals should be consider as carved in stone. Better ones could well, I am sure, be put forward, but in the absence of anything credible in the way of alternatives I am putting them forward now. As I said at the start, there is no point in agreeing to have your own throat slit just to see people you don't like have their's slit first.
It is very, very important that some form of "corta fuegos" (fire break) is put in place, and put in place now, otherwise the whole of Spain could very easily burn down in just the same way the Liceu opera house did here in Barcelona, simply because some chump decided to do on-stage soldering repairs with the safety curtain up! Risk sir, there's no risk here. It's all as safe as houses.
An American Perspective
1. Our house prices have gone down as much as 30% and in some areas more. The slump isn't over and will probably continue for several months. I suspect the house prices in Spain will eventually go down as much as 50%. From what I have read, this hasn't even begun yet.
2. Our real income has gone down for the past 3 years and will probably continue for another 2 years. Keep in mind that I am talking about the USA, the worlds largest economy. If I were in Spain I would prepare for real income to go down 2 - 3 % per year for, at least, the next few years.
3. The euro has to come down significantly. I would think we'll see a euro/dollar exhange rate of 1:1.15 before the end of 2009.
We, here in the USA, have already come to the conclusion that we are a lot poorer than we were 6 years ago and that our wealth has been reduced 20 to 35% (not just in housing, look at the stock market !!) So, my spanish friends, you better get ready because I think your situation will be much worse than ours.
PS: Please let me know when house prices start to tank, I really do want to move to Spain !!!!!
So mr flanders, you mean that something like that is coming to Spain:
"The system is going through a last round of tests. The players feel pretty secure that it’s leak-proof, but they want to be certain.
Once the final tests are done, we’ll see a system emerge into the open that closely resembles the symbiosis of corporate rule and political power advocated by Mussolini: "Fascism should more properly be called corporatism because it is the merger of state and corporate power."
The system controls itself; there is no outside intervention possible after all the leaks are sealed. Hence we see a blank $800 billion check donated by Congress to the Treasury, which will be used to cover gambling losses of the corporations.
The Treasury, in turn, then hires one or more of the main corporations to help it decide how the loot shall be divided among the corporations. It won’t be for saving the share price of Fannie and Freddie.
Thirdly, the financial corporations, united in the Counterparty Risk Management Policy Group, published a report named "The Road to Reform", which examines how best to get rid of the $700+ trillion in derivatives that threatens the existence of the players.
As Washington and Wall Street will soon have become a completely developed two-headed animal, these losses also will be transferred to the public vault. Taking hold of the last large chunk of public money, the pension funds, is the next step the two heads are planning.
And as much as one may hope that Henry Waxman’s investigation of the White House as an active player in bringing down Fannie and Freddie will succeed, the chances are as infinitesimal as the amount of information that returns from a black hole.
The system has been tested."
http://www.washingtonpost.com/wp-dyn/content/article/2008/08/06/AR2008080602899.html?hpid=topnews
Student
It must be noted that this 9% drop was partially caused by the transport strike that lasted a week and heavily impacted industrial production. If not for the strike, the drop would probably have been similar to the one in May (-6%)
Javi
Hi Javi
"It must be noted that this 9% drop was partially caused by the transport strike that lasted a week and heavily impacted industrial production. If not for the strike, the drop would probably have been similar to the one in May (-6%)"
Yep. That's a fair point. With so many things happening I'd forgotten about the lorry drivers strike. If there is any impact from that we should see some slight upside in July, although the July manufacturing PMI (see chart in post) was even worse than ever. So it is very hard to say what would have happened without the strike.
1. Quote> "Secondly my proposals fall into two categories really:
a) an immediate injection of cash to save the banks from failing"
Q: Implicidly you believe that this is a consequence of the rollout of the current situation.. (I share your view incedently, but its a gut feeling rather than a properly evidenced position. )
I find my own expeience and anecdotal evidence quite at odds with published comments from Spanish Banking sources including the Bank of Spain on both the integrity of the loans executed and the domestic banking industries exposure to their own home brewed subprime.
Do you have a view on the criteria for identification of those in most jeopardy.. in this scenario ?
Without prejudice of course..LoL
2. Flanders0508 noted that a consequence of the current rollout would be a reversion of Euro Dollar exchange rate to popular trade wighted estimates of 1.10 /1.20. What is your view on that prognosis. I appreciate that currency exchange rate prediction is fraught.. As Greenspan said "you might as well spin a coin"
Nevertheless your model assumes certain exchange rate consequences / drivers .. Can you be more specific on how and where you see these fall out in the various scenarios implicid in your prognosis.?
Hi Anonymous:
"Q: Implicidly you believe that this is a consequence of the rollout of the current situation.."
Yep. I think this is evolving with a force which means you can't simply sit back and watch and wait for it all to happen, or the damage will be enormous. That is my opinion.
"I find my own expeience and anecdotal evidence quite at odds with published comments from Spanish Banking sources including the Bank of Spain on both the integrity of the loans executed and the domestic banking industries exposure to their own home brewed subprime."
I absolutely agree. I find this evident in conversations I have on an almost daily basis.
I am currently on holiday in the Costa Brava. I travelled up here by bus, and on the way I had a long conversation with the Peruvian woman sitting next to me. At first she denied she had any kind of mortgage.As the converasation developed she admitted that her "friend" did have a mortagage on the flat they were living in - they are 3 in the flat, she is working as a domestic. "I told him not to buy" she told me, "but he wouldn't listen". "We were locos for property, we Latinos" she added.
And of course they all bought at very elevated prices towards the end of the boom. Her "friend" had already been to the bank offering to give them the keys, but she said they told him the flat was only worth 33 million (old pesetas, people still use these for property) but the mortgage was 45 million, so even if he left the flat he would still have to keep paying. Most such people don't know what to do, but my guess is that at some point they will throw the towel in and go home, leaving more flats on the market and less people in need of them.
Urban rents at some point are going to plummet IMHO.
Another little anecdote concerns the Pakistani community here in Barcelona's raval district. These have often bought heavily. A friend of mine accompanied one of them to a bank to try to negotiate some sort of deal on what was supposed to be one property (which he had reneted to another Pakistani who was now unemployed) and which he couldn't pay. She was astounded to see him take out no lesss than 5 mortgage documents during the interview, as he thought to better be able to convince the bank manager of how much he was having difficulty paying them all (cultural communication issues).
The manager simply said "dios mio" how did you get all those, and sunk his head in his hands. Of course documentation processes have been extremely lax everywhere here, and now prices are already falling at a 12% annual rate in the Raval according to Barcelona property consultants Aguirre Newman.
"Do you have a view on the criteria for identification of those in most jeopardy.. in this scenario ?"
No. I don't have acess to the necessary documentation. No one does. So all I can do is try and read the tea leaves from the bits and pieces which do appear in the press. The WSJ had a feature on Spanish banks yesterday, eg. If you read between the lines on the snippets I post, you can more or less work out what I am thinking.
But I think we can't see how this can really unwind at this point. We can simply follow it day by day and watch and wait.
"Flanders0508 noted that a consequence of the current rollout would be a reversion of Euro Dollar exchange rate to popular trade wighted estimates of 1.10 /1.20. What is your view on that prognosis."
Very hard to say here. Claus Vistesen has an excellent piece on Global Economy Matters blog today - Is the Buck Back?
I basically agree with what he says there. It is difficult to see what can happen to the dollar in the shorter term, since this time there are reasons for thinking it may well not be simply the old style "safe haven", but the wild card here are the new emerging markets rather than the euro, in my view.
In the mid term, the Euro is at real risk from 3 things:
1/ The Spanish banks
2/ Italian government debt
3/ an emerging markets type crisis in Eastern Europe, and possibly the effect that this may have on the German economy which is tremendously inter-locked via export dependency
The worst case scenario - the triphasic tripple wammy - were they all went wrong at once would obviously put the whole future of the eurozone in question, but again I think it is better to take all this a day at a time, and see what happens as it happens.
At this point in time making currency bets on the above is a bit like trying to back the winner for the 2010 football world cup, indeed, if you are a gambling person maybe you have more to go on in trying to get that one right than in trying to guess euro/USD in the 2010 - 2012 range.
It's worth noting that over here in the USA the person on the street has no idea of the gravity of the Eurozone situation as Edward has described it. We here in the USA are caught up in our own economic problems; and strangely there are currents of thought that European buyers will come to the rescue of the US real estate market:)
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