Spain Real Time Data Charts

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?

Saturday, October 31, 2009

A New Spectre Is Haunting Europe, A Spanish One

A spectre is haunting Europe, but this time it is not the spectre of revolt by the popular masses, or even one of yet another wave of bank bailouts. No, the spectre which is currently stalking the corridors of Europe's most prestigous institutions is one of a Spanish economy which stays on a flatline while Europe's other economies, one by one, start to struggle back to life. And the main reason that this particular ghostly image is giving everyone so many sleepless nights is because Europe's current institutional structures, and especially the monetary policy tools available at the ECB are scarcely prepared for such a nighmare eventuality.

France Is Recovering, And The Rebound Is Robust

First it was just a rumour, then it was a possibility, and now it has become a reality - some of Europe’s economies are springing back into life. But only some. It all began quietly, with a barely noticeable 0.3% quarterly growth in French and German GDP in the second three months of this year. France and Germany will have maintained their modest growth into the third quarter , while Italy has now joined them, leaving only Spain among the Eurozone big four, registering yet another quarter contraction, and, more importantly, showing no evident sign that an early return to normal activity is anywhere near to the horizon.

In fact Spanish gross domestic product fell 0.4 percent quarter on quarter in the third quarter following a 1.1 percent drop between April and June , according to the Bank of Spain monthly bulletin. Spain's GDP also contracted 4.1 percent year on year in the quarter, after a contraction of 4.2 percent in the second three months.

'This is the least pronounced contraction since the beginning of the recession ... and this improvement is linked to state-backed measures with a temporary effect,' the bank said.

To this government stimulus effect, I would also add the net trade effect which is being felt as a result of the strong fall in imports, and the consequent closing of the current account deficit. With imports falling faster than exports (on an annual basis) the net impact is positive growth in the headline GDP number, and the Spanish CA deficit was closing very rapidly indeed in the third quarter (see chart below).

The impact of the stimulus package can also be seen in the seasonally adjusted unemployment numbers supplied to Eurostat by the Spanish Statistics Office (INE). Unemployment (which hit 19.3% in September - see chart below) has been rising continuously since mid 2007, but the sharpest increases were registered during the fourth quarter of 2008 and the first quarter of 2009.

It is very hard to see any real difference in the trend rate of increase between the second and third quarters of 2009, and we should expect this trend job attrition rate to continue until it once more accelerates under the impact of either the government being unable to continue funding the stimulus, or the banking sector having a financial crisis (possibly induced by someone being forced into trying to sell some of the housing units they are accumulating only to discover that there are no buyers, since the market is effectively dead).

Life, Unfortunately For Spain, Is Elsewhere

But for all our preoccupations growth in 2009 is now no longer the issue. All eyes are gradually moving towards the outlook for 2010, and it is here that those little red lights have suddenly started flashing over at the European Central Bank.

And the problem is a real and growing one, since according to a series of reports which have been published during the last week, while activity in the export dependent German economy remained very fragile, the French one has really starting to hum. The first sign of this came on Tuesday, with the initial reading for the October Purchasing Manager Index which showed that while the Eurozone economy in general entered the fourth quarter on a strong note, with growth accelerating in both manufacturing and services sectors, the private sector in France started to earn alpha grades by clocking up a third successive month of accelerating growth, leaving us with the impression that France is now seeing its steepest output expansion in nearly three years.

Then on Wednesday the ECB presented its monthly bank lending data, which showed that lending to the euro area private sector shrank by an annualised 0.3 percent in September, the first such contraction since the series began in 1992. But looking a little more closely at a lending activity on a country by country basis, we find that while lending continues to contract in Spain, in France the credit cycle has turned, and indeed lending to households is now once more rising steadily (see chart below), indeed it never fell below an annual 4% rate of increase and the annualised quarterly growth rate in lending has been rising since the end of the first quarter.

That is to say, credit is once more starting to flow freely round the French economy, while here in Spain banks continue to accumulate reserves, lending generously to the government, while money for struggling small companies and for young people looking to buy homes is hard to find. What is more, if we look at the chart below (which was prepared by Dominique Barbet and Martine Borde for PNB Paribas) we will see that the stock of unsold new homes – which was in any event never very high in France, maybe 100,000 in the spring – is down by 20% as sales steadily pick up again, while here in Spain we continue to play a guessing game to decide just how many (more than a million surely) such properties there are here, and the number is growing, not declining, since real new sales to private individuals (as opposed to newly completed properties contracted two years or so ago, or exchanges between developers and banks) are almost non existent at this point. Everyone knows prices will fall further, and are waiting for them to go down.

Then on Friday we had the key piece of information, which confirmed what many of us already suspected, since Markit PMI data for October retail sales made plain the presence of very divergent trends across the Eurozone, with ever more robust growth in France contrasting with falling sales in Germany and Italy. As Jack Kennedy, economist at survey organisers Markit Economics said “While the sense of growing optimism should be treated with some caution – it appears the increase in sales was also supported by widespread discounting and the continuation of the government’s car scrappage scheme – the outperformance of France relative to Germany and Italy offers further evidence that it is France that is leading the Eurozone recovery.”

And here, with this very outperformance comes the problem, since the ECB policy rate will be set to target average eurozone inflation, which will certainly be lower than inflation in France, and possibly significantly lower. Which means the ECB policy rate will be below the one which the French economy will, in reality, need.
Between 2000 and 2008 the structural dynamics of the Eurosystem were different from now. Spain was the "exceptional student", with above-average growth, and inflation which was consistently over the Eurozone average, and for long periods above the ECB policy rate. This had the consequence, of course, that French inflation was nearly always below the average. Now things have changed. We are coming out of recession with a eurozone divided into three groups. French growth is becoming robust, while Germany and Italy are dependent on exports and just keeping their head above water. Spain, on the other hand, fails to recover and continues to contract. This is what makes the current situation critical, since starting in 2010 France will have an inflation rate over the EU average, and in all probability over the ECB interest rate. Which means that if something isn't done, and soon, to force the situation in Spain, and produce a recovery, France will have negative interest real rates during a sharp economic rebound, with all the risks that that implies.

Only last Wednesday Norway became the first western European country to raise interest rates since the start of the financial crisis after its central bank reported finding “signs of renewed growth” in the global economy. Central bankers from across the global, from Washington, to Sydney, to Delhi and to Oslo are all now busily telling us they are going to take increasing account of future accelerations in asset prices in an attempt to avoid repeating policy mistakes that are presumed to have inflated two speculative bubbles in a decade – and left the entire Spanish economy in a lamentable state. If France had its own monetary policy I have no doubt La Banque de France would be itching to follow the Norges Bank and raise rates, but there is one small problem, La Banque de France has no capacity to decide on monetary policy in this way, and herein lies the heart of what is now Europe and the ECB’s greatest dilemma.


Anonymous said...

Another good reason to wipe the slate, stop propping up the markets, and realise that the construction boom will not be recreated, or even prolonged. If we cannot have different rates (including exchange rates) then we will have to allow Spanish prices of all sorts to become cheaper. This means lowering wages, this means writing off debt - we cannot pretend that a country whose economy has reached a certain height (albeit EU average) through some kind of asymetric temporary expansion should now be preserved in that state through government spending and false accounting, especially if such impedes the necessary readjustments the market really requires for a new economic direction to take hold. We assume the value of the euro is tied to the economy it represents, both should be rated lower.So the problem is not to set different rates for different countries, but to allow for proper respective economic revaluations after the bubble so that all countries find themselves broadly in line with interest rates, and interest rate policy. Easier said than done, but we are not even trying, in fact quite the opposite. The result will be that the Spanish economy falls through, just as people who will not reduce wages end up needing to be fired, just as they will then default on their debts, just as banks will have to write off large sums. There is only a limited window to reajust being bought by 'stimulus', and so far it is only bank reserves, the stock market, and public spending that have expanded. They are not 'the economy'.


Hynek Filip said...

Edward, you mentioned the most recent Eurostat unemployment report of October 30. Reading through this publication, one will find more than one piece of "writing-on-the-wall".

The scariest of all, in my opinion, are the youth unemployment figures for Spain and some other countries. It appears that youth unemployment in Spain now stands at about 42% and continues to increase at such a pace that by end of 2010 we might easily see it up close to 60%.

I would suggest that if this does not stop anytime soon, all these people with little cash, no future, plenty of energy and a lot of time to spare may do the obvious, namely take to the streets.

Edward Hugh said...

"I would suggest that if this does not stop anytime soon, all these people with little cash, no future, plenty of energy and a lot of time to spare may do the obvious, namely take to the streets."

Or Hynek, take to the airplane (or train) and leave. This is what happened the last time the rest of the world recovered and Spain was stuck in a mess (1950s).

Anonymous said...

"take to the airplane (or train) and leave. "

hmm, whereto? I know several young people who just graduated last year from university. They are looking for a job all over Europe. Nothing! In order to find a job anywhere the economy in Europe has to start creating jobs again. At the moment jobs are destroyed everywhere. It doesn't really matter here if your unemployment is 19% or 9%. What matters for the young is that there are no new jobs! So leaving Spain is not really an option as of today. That might change with a recovery in EU-core countries in 2010. But of course, the local unemployment has to be soaked up first. So leaving Spain for work in Germany/France might not be possible for another year or so.

B.t.w.: there is one thing about Spanish unemployment that puzzles me: how is it possible that unemployment is at 19% and rising whereas GDP is falling only 4%?
what kind or work did all these people do? Did they really create no value at all? Are all these people really without work or is there a huge "black" sector in the Spanish economy?

Hynek Filip said...

Edward, even if the rest of the world manages to recover so quickly, it will always be easier to go break a few windows than to find a job in faraway lands.

On top of that, I would put the chances of a real recovery (e.g. recovery that produces jobs, as opposed to a mere statistical recovery) occuring before Christmas 2010 at less than 10%.

Even in France the unemployment rate has just topped 10%, Germany is where it is, and I can not really see any other EU country large enough to accomodate the eventual Spanish migrants. Considering that these migrants would have it very hard to compete with all those Ukrainians, Latvians, Lithuanians and Greeks, who will soon be looking for work as desperately as the Spaniards, it seems that all those unemployed youths will have to stay where they are.

Or will they be ready to work for a monthly paycheck of EUR 600, assembling Jaguar engines in a Mexican-owned plant a hundred miles south of Dresden? Because that is about the only kind of job there is these days.

Przemek said...

B.t.w.: there is one thing about Spanish unemployment that puzzles me: how is it possible that unemployment is at 19% and rising whereas GDP is falling only 4%?


Could it be that GDP accounting is not very reliable? GDP is rather abstract and there are many estimates and assumptions going into it unlike for rather staright forward employment/unemployment numbers.

As for wage deflation in Spain: is it realistical to expect one? Even in Baltics with all those sever austerity measures wages are droping very slowly.

Chistopher said...

Anon, Edward,Hynek,

This is all gloomy stuff but I haven't completely given up hope. "Necessity is the mother of invention" and it's just, just possible that events will eventually lead to the massive social/economic shake-up that Spain needs. My hope rests on the fact that within a few months it will be necessary to either drastically reduce public spending and/or introduce an absolutely brutal taxation program.

The govt has a plan to raise €14 bil. This is an absolute joke as by the time the VAT increase is implemented next summer, the sum required will be at least 10 times that. The effect on demand would be catastrophic. Even this lot wouldn't want to be so suicidal. No, I think it's just a question of time until we see a huge reduction in public spending, stimulation plans etc. Then we could start the reforms.

I don't believe these people have the cojones to implement this so I go along with Edward's forecast of a few weeks ago that sooner or later (and perhaps sooner than we think), Spain will become an international problem under supervision from Frankfurt and Brussels. I've no idea who'll be governing in Spain but perhaps that will be the least important thing.

The likely recovery of other big economies is not going to pull Spain through as there is now no easy mechanism for Spain to devalue its products and services. It'll all blow up in 2010 IMHO and won't that be a good thing in the long run?

Anonymous said...

"B.t.w.: there is one thing about Spanish unemployment that puzzles me: how is it possible that unemployment is at 19% and rising whereas GDP is falling only 4%?
what kind or work did all these people do? Did they really create no value at all? Are all these people really without work or is there a huge "black" sector in the Spanish economy?"

Yes, indeed, Spain ha a huge underground economy, but this is only one of the two reasons why a country with a 19% uemployment is not rioting in the streets. The other one is the traditional nuclear family, the true welfare state of the country. Unemployed people, specially young ones, are getting fed and subsidized by parents.

I agree with Edward that a generation of young spaniards will heve to take the plane. Only recently we were surprised to see thousands of young argentinians, well educated, working as waiters. One day, one of them told me: "those of us not fleeding Argentina would have to eventually pay the debt".


Anonymous said...

Dear Edward, no actualizas el blog desde hace un mes. Si esto sigue así lo voy a terminar quitando de Favoritos, jajaja, un saludo


Edward Hugh said...

Hello Fernando,

Don't worry. Something coming very soon. In the meantime try following me in facebook.