"The latest PMI data are very, very bad with falls in output, new orders and employment at an extent which would have been unthinkable just one year ago," said economist at Markit Economics Andrew Harker.
The services data mirrors the equally dismal figures from Spain's manufacturing sector which I reported on on Monday, which also hit record lows in November.
With consumer confidence sliding, unemployment soaring and business conditions worsening by the day, expectations continued to be pessimistic with some surveyed going so far as to suggest they thought the economic downturn would last into 2010.
The rather later deterioration of Spain's services sector (when compared with the more longstanding contraction in the industrial sector - see yesterday's post) is also reflected in the quarterly services index published by the INE with the national accounts. Spain's services obviously hung out rather longer than the manufacturing sector, but now this too - in its turn is folding, which means on the provider side we now have all major sectors - industry, services and construction in sharp slowdown. It no longer makes any sense at all to talk about this as a "housing slowdown" - really it never was, since it has always been a financial crisis (or at least since the summer of 2007 it has), with construction just being the first sector to get hit really hard, since without mortgages you can't sell houses, and now we are discovering that without loans you can't sell cars etc, etc.
Accelerating Slowdown After The Summer
Thus while the PMI headline index has now shown business activity among service providers shrinking continuously since last January, the pace of decline has accelerated significantly over the last three months. Both new business and employment contracted at the steepest rate in the series history in November. Companies have now been cutting jobs every month since March.
Also, for those who are following the deflation argument, it is worth noting that service providers cut their charges during the month at the fastest pace recorded by the survey, as the attempted to compete for what is now increasingly scarce new business, while energy costs and other input prices continued to rise, squeezing profits. Meanhwile Joaquim Almunia said today that deflation is not a real risk in the euro zone. Of course, in one sense this can be quite intentional splitting hairs, since while the deflation threat in the whole zone may not be that great (although we do need to wait and see on what happens in Germany here), in countries like Spain and Italy it is becoming an increasingly pressing issue.
Also interesting was the reason why he felt deflation was unlikely:
"We have different conditions than in other countries. We have a labour market that is organised in such a way that makes it extremely, extremely difficult to go towards deflation."
This seems to be saying that we won't be talking about labour market reform as one of the tools in confronting the crisis, and hence, as demand for their products contracts, we will simply sit back with folded arms and let them close, one by one, rather than adopt any kind of aggressive policy to bring back competitiveness. If this is what he has in mind, then this kind of "quietism" is surely a serious error, and anyway (do correct me if I am wrong) but isn't he being paid at this point to promote the Lisbon strategy (labour market reforms and all) as one pillar of our response to the crisis?
Another Shoe To Drop?
My feeling is basically that there is another shoe to drop here. Some of the PMI respondents seemed to accept that Spain's contraction would now almost certainly last on well into 2010, but others continued to express hope that the crisis would prove to be a short-lived one, and expectations for business in 12 month' time bounced back a bit from October's survey low (although we should note that the response remained pessimistic overall). This also seems to mirror a response from Spanish consumers (as covered in my last post) that things would start to get better in the middle of 2009 (my guess is that the really serious part will only be hitting us by then, and maybe not even until later, depending on when builders and property companies go bust big time), but the view is getting support from the insistence by the Spanish government that the Spanish economy should begin to register growth from mid-2009. Joaquim Almunia also reflects this view:
"I hope we will adopt decisions using the fiscal stimulus, using monetary policy ... to avoid a protracted recession and to prepare the economy for a recovery that I hope will come in the next quarters, hopefully in the second part of 2009,"
This view is hopelessly optimistic and superficial, and I do therefore worry about what will in fact happen to business and consumer confidence when it becomes plain that this much hoped for recovery simply isn't going to come. We built the station, but someone unfortunately laid the rail tracks to pass through another town.