Some Views
Morgan Stanley forecasts that the "sizeable" infrastructure spending announced by the government will become noticeable only at the end of 2009 with a "muted recovery" likely the following year.
Capital Economics is a bit more pessimistic. It predicts that it might not be until 2011 before the Spanish economy stages any meaningful recovery.
And Edward Hugh (that's me) predicts that there is no recovery in sight, only a very painful correction in the current account deficit and downsizing on the construction sector as prices fall some 20% or so relative to the eurozone average, so that exports can take over as the growth driver (deleveraging and recovery in household balance sheets to be the tonic regulating internal demand from now to 2015). 2011 will be the hardest year as it becomes increasingly difficult for the government to borrow money externally and the deficit has to be capped, while a second credit crunch will take hold internally, as the walking dead builders and property developers finally find it impossible to keep rolling over their non-performing loans.
And if you think I am being to strong, just remember, apart from pumping in money to keep the property sector alive till 2011, no one (neither the PP nor the PSOE) is planning to embark on anything in the way of deep structural reform to transform the economy if the responses to Bank of Spain Governor Miguel Fernandez Ordoñez's proposals (earlier this week) are anything to go by. Not even worth talking about, just no, no and no! So I guess we all now know what to expect.
13 comments:
I could not agree more. Unfortunately for most of Spain they don't have the leadership to break out of this any tine soon. To do business in Spain is a nightmare, illogical working hours, poor quality of service, poor product knowledge coulped with, 22 holidays a year, 15 fiestas, 45 days pay per year finiquito, sick pay from ist vday sick, possibility of only 9 months temorary work contract, full contract thereafter. The multinationals like Iberia, Gesa,Telefonica, Vodafone are a complete shambles, have you ever tried to change or cancel a contract? Have you ever been on an Iberia flight that is on tme. The only saving grace is the weather which is some what better than Kazikstan.
Edward, your input is excellent and I wanted to share the last two paragraphs with some people so I have translated them into Spanish:
Edward Hugh predice que no hay recuperación a la vista, sólo una muy dolorosa corrección en el déficit por cuenta corriente y un encogimiento del sector de la construcción a medida que los precios caen un 20% en relación con la media de la eurozona, para que las exportaciones puedan imponerse como motor del crecimiento (el desapalancamiento y la recuperación en los balances de situación de los hogares van a ser la tónica que regule la demanda interna hasta el 2015). El 2011 será el año más duro ya que para el gobierno resultará cada vez más difícil tomar prestado dinero del exterior y el déficit tiene que ser limitado, mientras que una segunda contracción del crédito se impondrá internamente, a medida que las constructoras y promotoras muertas vivientes encuentren al fin imposible renovar su deuda incobrable.
Y si ustedes piensan que estoy exagerando, simplemente recuerden que, aparte de bombear dinero al sector inmobiliario para mantenerlo vivo hasta el 2011, nadie (ni el PP ni el PSOE) está planeando embarcarse en nada relativo a una reforma estructural profunda para transformar la economía si las respuestas a las propuestas del Gobernador del Banco de España, Miguel Fernández Ordóñez, (a principios de esta semana) son algo que marque el camino. [Estas propuestas del Gobernador no son n]i siquera algo que merezca la pena discutir, simplemente ¡no, no y no! Así que supongo que ahora todos sabemos qué cabe esperar.
Mavrik,
That is not the hurdle. The basic tenet of the spanish labour force is the low productivity.
The odd problem is nothing to do with the workers but the business model currently running in Spain: low investment in R+D, huge amount of manual work instead of brain-work-technological processes, focused on two main activities: real state and tourism.
It has neither sense nor solution to aim at shrinking the standard of living of the working class - furthermore one of the lowest among the developed countries. If the case, will worsen and jeopardize the overall scenario of the spanish economy in order to find a way out of this depression.
In my opinion the lack of skills of the spanish politicians to deal successfully with the increasingly cumbersome trend of the economy, teetering on the brink of the biggest depression ever, is the smoking gun pointing to those who are to blame. It is a crime against the people that these politicians agreed for grant to bail out- without any warranty- , beef up the bankers with the 30% of spanish GDP, and likewise the Comunidades Autonomas. With such a budget you would have far enough room to relaunch a new kind of economy based heavily on qualified human resources, investments in technology and so on. Instead, we have a herd of politicians trying to relaunch a twilight and dying economy, not matter the poverty they will bring to the population as a result.
Greetings.
Hello Pepe,
"It has neither sense nor solution to aim at shrinking the standard of living of the working class"
Look, the kind of solution you are talking about simply won't work, due to the time scale involved. You economy is going to implode during the next two years, basically until the current account is balanced.
This can either happen by a sharp fall in imports which will (as you fear) produce a huge drop in living standards - since people will simply be consuming less (all the things, like petrol, they are not importing). There will also, of course, be a meltdown in the banking sector.
Or.....
You can drop wages and prices 20% quickly (no direct drop in living standards implied here, although you probably will need a small one to kickstart the thing), and you can get exporting as the global economy recovers, and thus start to pay down the nations debts.
Clearly there will be loan defaults, and financial stress, but Spain is in the fortunate position that a lot of this money was borrowed externally, and thus debts will need to be restructured and the external banks take their "haircut". Obviously this will make them wary about lending to Spain for a time, but surely you wouldn't want to get into all this debt again.
The easiest way here would just be to devalue the pesseta, but their is no pessata :)
Basically the productivity and R&D thing will be useful, but over a much longer time horizon, say 10 to 15 years, and still you will need massive industrial restructuring, especially out of construction and into new (yet to be built) factories and agriculture.
Construction and financial servises just died as a viable model.
Basically you don't put a forest fire out by saving up to buy a new fire engine.
"It is a crime against the people that these politicians agreed for grant to bail out- without any warranty- , beef up the bankers with the 30% of spanish GDP, and likewise the Comunidades Autonomas."
This process hasn't even started yet, hasn't even started. You have no idea of the numbers which we are going to see one or two years from now, or how many unemployed there will be in 2010 and 2011.
Neither do I, but they are going to be large, very large, in both cases.
Hi, Edward
You got some interesting points here.
What I wanted to point out is just what you ve just posted: though there will be a stringent titration-like cut in wages and prices -no peseta, no meseta- the main problem still lies in the massive losses of the manpower that the country has to face in the next future, due to the fact that millions of jobs -fueled and boosted during the bullish stage of the housing bubble- cannot be reallocated.
That is the issue, how to hinder a permanent downward shift in the economy that winds up with a chronic decreasing activity rate, let´s say, half of the current one - you can get a glimpse of this horrible future by scrutinizing the evolution of the "población activa" in late-filed reports of INE -.
That turns us back to the beginning, what we need -whilst have the euro- is to underpin a new economic foundation that will give us some hope to relaunch the economy by means of more reliable grounds and within a middle-term time-window. This is the main issue: to devise a new business spanish path (as depicted in my last post)with the willingness of Europe (herein has sense the european bonds) to fund and schedule the agenda.
Instead, out there what we have it is a cattle of politicians remain glued to an old greedy oligarchy whose assets are mainly real state,and thereby with a big inertia, resistance to be swayed that such an economy is over.
Finally, if our leader and policy-makers were not able to implement such middle-term measurements, it would be for grant that we will have either to quit or been kicked off the Euro, since a permanent unemployment, near 30% and falling house-hold incomes scenarios, would menace the stability of the political system self.
Greetings.
Hi,
This site is extremely useful. I just hope there are equivalent resources in Spanish.
Of course Spain is displaying some of the worse aspects of the Western world decline.
You have to be fair. The chances that Spain can nurture an equivalent to the Silicon Valley in order pay for its current import-based standard of living are next to nil. I hope the government does not set up challenges that will never be met.
Spain has to revert to more of "live on your resources" way of life. That does not mean retreating on what is essential :
- health and medical support,
- food and quality of life.
The next step is not about setting up lab, building motor-roads or TGV lines... But makin smart short-term choices in terms of welfare support for the masses and helping people help themselves. Whilst reducing budgets in a smart way.
I am sure that this can be done. Older generations can help younger ones to weather this storm. Some know how to live on scare resources in a smart way. They did in the past. It can be done!
Let us government will not get in the way. They certainly can.
@Anonymous:
You said: "The chances that Spain can nurture an equivalent to the Silicon Valley in order pay for its current import-based standard of living are next to nil."
I disagree. Your "next to nil" is only right if you try to make some kind of California in Spain with Spaniards only.
But the chances are much better if you try to make it with people from all over Europe.
Every f...... region along the whole Mediterranean Coast from Marbella to Mykonos has tried to become the "Florida of Europe" - a place of leisure for the wealthy Europeans looking for sol y playa and money laundry. A place where foreigners spend money.
No region tried to become the "California of Europe" - a place that attracts people that are looking for sol y playa and business opportunities.
Take one of the golf courses of the costa brava/blanca/tropical/del sol and call them "campus". Take all the empty first-line-golf apartments around the course, call them "academic housing" and invite students from all over to Europa to spend some kind of sabbatical semester there, and the odds are quite good that you can create an academic hotspot on the coast.
Those students won't buy one of your 1,5 million spare flats, but at least you could import (rather cheaply) the human capital you didn't create on your own during the ladrillo boom.
Edward, I went to look for the proposals del Gobernador del Banco de España, Miguel Fernández Ordóñez
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(http://www.bde.es/prensa/intervenpub/gobernador/mfo100209.pdf)
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Now I understand your opinion about his proposals.
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His proposals are of the same kind that we use to ear in Portugal (from the government and from the empresario's associations).
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Spain and Portugal don't need incremental improvements in productivity, they need quantum jumps of productivity.
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Quantum jumps of productivity are not the result of shrinking companies or reducing salaries, they are the natural outcome of improving the value of what is produced.
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Mr Miguel Fernández Ordóñez has not yet learned something that took me 8 years to learn, when a country joins the eurozone there is only one healthy way of leaving in it: become economically similar to Germany. Work, think and invest as Germans, that is the only way of improving productivity and the level of living when your currency is strong.
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Mr. Miguel Fernández Ordóñez says "Esta relación entre formación y salarios se explica porque los trabajadores más formados son más eficientes y, por tanto, obtienen unos salarios más elevados y porque los empresarios siempre prefieren despedir a los trabajadores menos productivos." These are the words of a beaurocrat, these are the words of someone that does'nt know the reality of a plant...
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Portuguese and Spanish workers with very little academic instruction are very productive when they work in a German plant, because what matters is what people produce, the value that they create, plant work is repetitive.
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I would like to send to Mr Miguel Fernández Ordóñez this message:
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"It is widely believed that restructuring has boosted productivity by displacing low-skilled workers and creating jobs for the high skilled." But look how this is deep:"In essence, creative destruction means that low productivity plants are displaced by high productivity plants." Please turn back and read it again.
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This last text was taken from:
http://www.etla.fi/files/1088_FES_04_1_creative_destruction.pdf
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I invite Mr Mguel Fernández Ordóñez to read the article from September-October 1992 from Harvard Business Review "Managing Price, Gaining Profit" from Robert Rosiello et al. To see how different is to increase value instead of reducing fix cost.
Hello CCz
"Edward, I went to look for the proposals del Gobernador del Banco de España, Miguel Fernández Ordóñez"
Well, I would like to make it clear, very clear, that I am neither endorsing or advocating the specific proposals of the Bank of Spain governor. I am simply saying that he is the only leading public figure with the guts to put something on the table at the moment.
He was also the first to draw attention to the size of this years likely government deficit, and the bank of Spain was the first pùblic entity to come out and recognise that Spain was in rcession, and draw attention to the need to have realistic estimates for growth in the budget.
Thus I respect him for this, whether he is right or wrong on other issues. I am not a labour market specialist, so I wouldn't advance specific reforms, though they are obviously needed. But...
"Quantum jumps of productivity are not the result of shrinking companies or reducing salaries, they are the natural outcome of improving the value of what is produced."
Well the point is, this is true in normal circumstances, but we are not in normal circumstances. We have a huge contraction on our hands, for macro economic and not productivity reasons.
Basically Half the construction and real estate sectors have to close permanently, and they will do (probably as we approach 2011).
But at the moment companies are shutting on a daily basis, so good and some bad. Some of the good ones could be saved, but you need a way of doing this - downsizeing. But if downsizing is too expensive then you have no alternative to bankruptcy. This, I guess is what MFO is saying. Either you find a cheap way to get rid of half the people, or they all go. Keeping everyone employed just isn't an option at this point. So Spain has to decide whether it wants to keep much of its existing industry, or start again from scratch.
My proposal is a very different one: index wages to prices on a downwards basis and kick start with a five percent wage cut. Of course, all I get for this proposla are howls of abuse, but to level out the economy we need a 20% drop in wages AND prices over 3 years (the U shaped recovery), and if we don't do that we will simply get an L shaped recovery - ie no recovery at all.
"It is widely believed that restructuring has boosted productivity by displacing low-skilled workers and creating jobs for the high skilled."
well the problem is that Spain has to work with what it has. There are 5 million low skilled immigrants and large numbers of people over 50 with comparatively low educational levels being now thrown out of work, all these people can only work in relatively low value areas, and so this is better than nothing.
Productivity can be measured in two ways, at firm or at national level, having 20% plus of your workforce out of work on an ongoing basis is very bad for national productivity, and getting them back to work (even in factories making sandles and T shirts for exports (ie head on head with China if need be) is now a national priority. The thing is to get wages and prices back into line so you can attract the investment.
In the meantime Spain has just become like the typical emerging market economy suffering a financial crisis driven by a current account deficit, and being in the eurozone no longer offers protection against this, this is the big news.
I doubt whether many firms from other E.U countries would want to set up in Spain because of the restrictive practices already mentioned and also because many individuals would be wary of moving to Spain in the light of all the property corruption and lack of consumer rights.
Ricardo
"But at the moment companies are shutting on a daily basis, so good and some bad. Some of the good ones could be saved, but you need a way of doing this - downsizeing. But if downsizing is too expensive then you have no alternative to bankruptcy. This, I guess is what MFO is saying."
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That's a very good point.
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I did not understand that way. OK, that could be needed for the short-term but will not help Spain after the crisis.
"and getting them back to work (even in factories making sandles and T shirts for exports (ie head on head with China if need be) is now a national priority."
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Portuguese shoe industry export 95% of its production at an average price of 19 € the pair. Asian shoe industry exports shoes to Europe at an average price of 3€ the pair.
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Unless europeans use the proteccionist shield they cannot compete head on head with the Chinese. One has to compete where a sustainable competitive advantage exists... look to Inditex, they dont produce in China to supply Europe, they developed a business model that is still working. Same to the German hidden-champions of Hermann Simon.
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Take care
Hi again CCz,
"Asian shoe industry exports shoes to Europe at an average price of 3€ the pair. Unless europeans use the proteccionist shield they cannot compete head on head with the Chinese."
Yep. I have to admit I knew this, since I have to admit I know someone who used to be purchasing manager for a big shoe importer into Spain, and he even told me the Taiwan companies who do the manufacturing in China had been moving out to Vietnam since wages in China are now to expensive for their business model.
Only problem, workers in Vietnam are not as "submissive" as they are in China.
So I wasn't really being serious, but what I do want Spanish people to do is stop looking down on certain categories of work. We are in an emergency situation, and we need to react. And we need to create millions of jobs (or at least 2 million new ones) since that is what is being lost, and more to come.
You take care too,
Edward
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