First off, Spanish retail sales fell a calendar-adjusted 5.4 percent in January compared to a year earlier, clocking up in the process the the 14th straight month of of decline. The pace of the contraction did slack slightly from the previous month, but I don't think we can draw much in the way of conclusions from that, since we are at the height of what is left of the "stimulus programme".
Looked at from the long view, January's fall came on top of a 2.4 percent year on year decline in retail sales in January 2008, so January 2009 level of sales was about 8 percent lower than in the same month of 2007, which must surely give us some sort of indication of the force of the present contraction - especially since things have hardly even gotten started yet.
The Decline In Household Lending Continues In January
Now for the data point that goes to the heart of the problem. Look, if you want to understand what happens next in Spain now, you need to follow two variables, the contraction in the annual rate of bank lending (to both households and corporates), and the closing of the massive (10% 2008) current account deficit. These two processes go hand in hand, and make the Sanish economy more like a ball of negative energy at this moment, with the contraction feeding of itself as the one interacts with the other.
The other two key vaiables would be employment and prices. As people progressively lose there jobs this only drives consumption and investment further downward, and as prices start to fall (as they surely will with this blast driving into them, deflation) then nominal (as opposed to real) GDP will start to fall, with current price GDP dropping more than price corrected GDP, which will send us off into an Alice in Wonderland world where the only "for sure" thing is that the weight of debt hangs heavier and heavier on people's shoulders.
In fact household lending fell again in January, by 853 million euros, while year on year the rate of increase dropped to 3.9% year on year. The January drop follows a 4,3 billion fall in December. If it goes on like this we will hit negative lending grwoth year on year at some point.
Lending to corporates was up by 3.6 billion euros in January, but again the rate of increase is down, falling to 6.4% year on year.
Update: Construction and Industrial Output
In the construction sector, seasonally adjusted production1 rose by 1.3% in the euro area and by 1.8% in the EU27 in January 2009, when compared with December. In December 2008, production fell by 2.8% and 1.8% respectively. Compared with January 2008, output in January 2009 dropped by 9.1% in the euro area and by 7.3% in the EU27.
Before reading what follows I think it is worth bearing in mind that construction covers both housing and civil engineering, so we may well see month on month increases in some countries (like Spain) based on the substantial government stimulus programmes, but we should not draw any major conclusions about this. Weather is also, evidently, a factor in winter, since even while seasonal adjustments are made, the weather does fluctuate significantly in winter, with evident effects on construction activity. Some evidence for this can be seen in the case of Slovenia, where activity was up 22.4% on January over December, but down 20.7% year on year in January.
Monthly comparison
Among the Member States for which data are available for January 2009, construction output rose in five countries and fell in six. The most significant increases were registered in Slovenia (+22.4%), Spain (+7.8%) and Sweden (+2.2%). The largest decreases were recorded in Hungary (-13.9%), Germany (-7.8%) and Romania (-6.4%).
Building construction grew by 0.1% in the euro area and by 1.8% in the EU27, after drops of 2.6% and 2.8% respectively in December. Civil engineering rose by 5.1% in the euro area and by 2.3% in the EU27, after drop of 2.7% and 1.4% respectively in the previous month.
Annual comparison
Among the Member States for which data are available for January 2009, construction output rose in three countries and fell in eight. Increases were recorded in Poland (+9.1%), Romania (+7.0%) and Sweden (+1.2%). The largest decreases were registered in Germany (-25.6%), Slovenia (-20.7%) and Hungary (-16.0%).
Building construction fell by 12.0% in the euro area and by 9.0% in the EU27, after -14.7% and -12.0% respectively in December. Civil engineering declined by 1.6% in the euro area and by 2.1% in the EU27, after -9.9% and -5.4% respectively in the previous month.
So Spain's contraction continues even when the stimulus programme is added in, even if at a reduced rate in January.
But if we look at the output index, then the decline since early 2007 is obvious and constant, that is there is no evidence of any slowing down, nor should we expect to see that much, since even when the Spanish economy starts to "steady up" this industry will need significant downsizing.
And if we look at this chart below - which comes from a recent Deutsche Bank presentation, we can see just why the downsizing will be so large, since housing output in Spain and Ireland was just way way above all the rest.
As Deutsche Bank note:In Spain the supply of new housing units exceeded the number of new households by more than 300.000 units p.a. in the last few years. This has led to a vacancy of more than 1 m units.
In only a few years nearly 90.000 new residences were built in Ireland, a country with only 4 m inhabitants (three times more than in Berlin in the boom years).
Their conclusion that the United Kingdom, France and especially Germany should be affected less on the supply side seems eminently reasonable to me.
Industrial Output
In January 2009, seasonally adjusted industrial production1 fell by 3.5% in the Eurozone2 (EA16) and by 2.9% in the EU272. In December3 production decreased by 2.7% in both zones. In the year to January 2009 compared with January 2008, industrial production declined by 17.3% in the Eurozone and by 16.3% in the EU27.
In January 2009 compared to December 2008, production of non-durable consumer goods fell by 1.1% in the Eurozone and by 0.3% in the EU27. Energy decreased by 1.6% and 0.4% respectively. Durable consumer goods dropped by 2.6% in the Eurozone and by 1.8% in the EU27. Intermediate goods declined by 3.6% and 3.4% respectively. Capital goods fell by 6.0% in the Eurozone and 5.7% in the EU27.
Among the Member States for which data are available, industrial production fell in fourteen and rose only in Ireland (+6.7%) and Hungary (+2.5%). The most significant falls were registered in Latvia (-11.2%), Portugal (-9.8%) and Germany (-7.5%).
Annual comparison
In January 2009 compared with January 2008, production of energy fell by 2.9% in the Eurozone and by 4.4% in the EU27. Non-durable consumer goods decreased by 4.9% and 4.0% respectively. Durable consumer goods declined by 18.0% in the Eurozone and by 18.3% in the EU27. Capital goods fell by 21.4% and 21.1% respectively. Intermediate goods fell by 24.4% in the Eurozone and by 23.7% in the EU27.
Industrial production fell in all Member States for which data are available. The largest decreases were registered in Estonia (-26.8%), Latvia (-23.9%), Sweden (-21.1%) and Hungary (-21.0%), and the smallest in Ireland (-0.8%), Lithuania (-4.7%) and Denmark (-9.6%).
Spain's output was down 20.2% year on year according to Eurostat data.
Spain is suffering a classic "specie flow" adjustment as described by Hume: money is simply leaving the country.
ReplyDeleteBank deposits fell in January. So did lending. Banks tried to stop the bleeding by borrowing more from the ECB
http://www.bde.es/infoest/e0801.pdf
and by increasing their balance in the eurosistema.
Banks must keep curtailing their lending in order to keep a step ahead of their falling deposits.
This is a race they cant win...because the reduced lending will sink real estate values, and make the banks insolvent.
Hi Eddy,
ReplyDeleteNice to see you popping by.
"Banks must keep curtailing their lending in order to keep a step ahead of their falling deposits. This is a race they cant win...because the reduced lending will sink real estate values, and make the banks insolvent."
Well, I totally agree. That's why I said that this is a contraction that feeds on itself. So, in my view, without direct outside intervention from Brussels this will just keep on going round and round downwards in a complicated spiral.
There is a theoretical limit point out there somewhere when the CA balance closes, but the level of GDP will be much, much lower than where we are now, and this then, as you say means real estate values well below their recent levels, lots of defaults etc, and then on we go for another ride on the downward roundabout.
Of course, Spain is far from being the only case here, and if no one does something then the whole eurosystem will eventually explode under the strain.
Unfortunately, the limit point is not a current account equilibrium. It can, be or not. The limit point is when banks are comfortable with their level of external debt.
ReplyDeleteOr, in other terms, when an euro used to reduce external debt yields the same as an euro used to lend (risk adjusted) to the internal sector.
But as the solvency of the banks keeps deteriorating, the cost of revolving their existing foreign debt keeps increasing. So they will devote any single euro they could grab in new deposits to reduce their external debt (alternatively they could increase the price of the new credit, a thing they are doing in the consumer credit sector, but find politically difficult to do in the mortgage market).
In macro terms, they are trying to reduce Spain’s external debt, ie, they need a positive current account balance (of course public borrowing can counteract this, if foreign funds can be obtained to fund the public deficit)
As a result, behaving like rational profit seekers, they are sinking the economy (and of course, themselves too at the end
Lending on the scale that became normal over the last decade is for sure the one thing that we will not recover. We turn around in 2009 to find ourselves a much poorer nation than we thought we were a year ago, especially among that broad range of formerly middle-class wage-earners who lived so luxuriously until yesterday. The public can't process this reality and the president, for all his relaxed charm, is either not ready to articulate it, or can't process it himself.
ReplyDeleteEverything that we're doing right now is engineered to avoid reality, to sustain the unsustainable, to recover the unrecoverable, when the mandate of reality compels us to face our losses in order to move on to the next chapter of a collective life.
Nutshell: The biggest problem with the all of the official attempts at "solving" the economic collapse is the idea that perpetual growth is not only desirable, but that it is possible.
ReplyDelete