Spain's September PMI
Key points:
- The Rate of output contraction accelerated.
- First reduction of new orders in three months.
- Job shedding intensified.
September data pointed to another deterioration of operating conditions in the Spanish manufacturing sector. Both output and employment fell at faster rates, while new business decreased for the first time in three months. The seasonally adjusted Markit Purchasing Managers’ Index® (PMI®) – a composite indicator designed to measure the performance of the manufacturing economy – dropped to 45.8 in September, representing a marked deterioration of business conditions. Moreover, the pace of decline accelerated to the fastest since June. Output contracted solidly in September, and at a sharper rate than in the previous month as demand in the sector decreased. Production has now fallen in nineteen of the past twenty months.
Falling demand was also a key factor in the twenty-fifth consecutive fall in employment as firms adjusted their staffing levels accordingly. Moreover, the rate of job cuts accelerated to its fastest since June. The lack of demand within the sector led to a further shortening of supplier lead times as pressures on vendors continued to ease.
Commenting on the Spanish Manufacturing survey data, Andrew Harker, economist at Markit, said:
“The latest Spanish manufacturing PMI data make sorry reading as the sector took a turn for the worse. With firms unable to pass on rising raw material costs to clients due to a lack of demand, manufacturers’ profit margins are likely to come under increased pressure in the coming months. The labour market shows little sign of recovery as firms continue to cut jobs at a sharp pace.”
Demand Deficiency in Spain
Spain is now suffering from an acute deficiency in internal demand. The latest retail sales figures (July) continue to confirm the ongoing decline, with sales down 1.2% month on month over June, and 6.47% over July 2008. Sales are now down 10.11% over their November 2007 peak. Spanish construction fell again between May and June, despite the omnipresent plan E, falling 0.2% on the month. Year on year figures are now virtually meaningless for an industry which had been contracting for three years as of last July, but from the peak activity is now down by around 30 - that is it is the industry is now roughly 70% of what it used to be, and there is still a lot further to go. Industrial output continued to fall in July, and was down 17.4% year on year, which means it has now fallen nearly 35% % from the June 2007 peak.
With the collapse in internal demand Spain's government has been compelled to come in to support the economy. Such intervention is entirely justified, since without it Spanish living standards would be falling dramatically, but behind the spending there should be a plan, and this is really what is missing in the Spanish case. Spain's economy has become demand deficient because all the main groups of domestic economic agents are steadily trying to cut back on spending and debt, and the export oriented sector, after years of neglect and internal price inflation, is now just not competitive enough to make up for the gap. Worse, given this, investors are not exactly queueing up to put money into new export capacity, which would be about the only other source of growth the Spanish could look for at this point.
The Unemployment Just Climbs And Climbs
Spain's unemployment hit 18.9% in August - the highest in the whole EU - according to the latest Eurostat data. According to Eurostat there were 4.348 million unemployed in Spain in August. This means the country should pass the 20% on the wy up around November, and of course it will simply keep on heading up and up until someone finally does something. I guess we could pass 5 million around February perhaps, if there aren't any accidents on the way, that is.
Europe Must React
Decision making in modern Europe stands on two legs. On the one hand, as far as fiscal decisions go we have the European Commission whose powers are shortly due to be extended by the all important Lisbon Treaty. Even this rather modest step forward, however, remains bogged down in dispute. On the other hand when it comes to monetary policy the powers of the central bank (the ECB) are severely restrained (at least in theory) by the terms of the Maastricht Treaty which as well as creating the bank also established the EU itself as a legal entity. The present Spanish government is - like all EU governments - being given a wide margin of manoeuvre in how it handles the crisis by both the long suffering EU Commission and by the ECB - there is scarcely an option given the degree of sovereignty the member states still retain - but this degree of tolerance cannot last for ever, and the present increase in the Spanish debt will surely not be allowed to survive unchecked into 2010 and beyond. So push is steadily coming to shove. Yet meanwhile, from their ivory Towers in Brussels and Frankfurt those who are really responsible for Europe's decision taking are relegated to the frustrating position of being mere spectators, forced to come in after the horse has bolted and extinguish the fire but without real access to the direct policy levers which would have enabled them to put the blaze out before it got out of hand. Would somebody please like to do something here, before we pass the point of no return. Hello-o, anyone there?
I would quite agree with the theory that Spain may soon need to be bailed out in order to save it from bankrupting itself.
ReplyDeleteOn the other hand, one must ask if the Eurozone is presently strong enough to bear the burden of such bailout. In my humble opinion, the answer is negative.
At the end of the day, the other EU countries would have to pay the price of such bailout. But what other EU countries would be able to bear the burden of EUR 500bn?
If we duly eliminate countries that are either de facto bankrupt or too small to be relevant (Latvia, Lithuania, Estonia, Ireland, Slovakia, Bulgary, Romania, Portugal, Hungary, Czech Republic, Greece, Finland, Denmark, Austria), we will be left with the UK, France, Italy and Germany. As you will probably agree, Italy is out as well. I can not really imagine that the UK, presumably ruled by David Cameron, will be really keen on helping Spain, either.
So if skip the EU badge and look at what is really there, we are back to the French and the Germans.
Are they really able and willing to place an EUR 500bn bet on Spanish recovery? I can not really imagine Angela Merkel doing anything like that.
Of course, if Spain goes to the tank, it will hurt German banks and pensions. But it may make much more sense to Dr Merkel to use the unlimited German ability to borrow and subsidise German banks/pensions directly and only when the losses arise.
So maybe the guys in Frankfurt are not in denial. Maybe they only believe that saving Spain for the euro is not worth the expense.
"we are back to the French and the Germans."
ReplyDeleteI do not expect the French to be in a situation to support their European colleagues. Our deficits here are growing massively as well. And the savings rates of our middle are plunging.
Do you really believe that France could set up taxes - neither directy or via public debt - with a view to support Spain ? What about Italy, Greece or Ireland ? Next on the list. Those countries have not suffered war. No robust justification. Just private debt - and consumption by the way - over the top. The cause is not legitimate on any internal political ground.
The relatively higher savings rates offer some cushion. And certainly will make it possible not to stumble early. That's all you can say.
What you can expect is a looser monetary stance. No more. No less.
Print the money required to support banks ... but anyway local asset prices will have to come back to earth. In decent relation to revenues.
You are with the keynesians theories (lack of demand than must be compensated by the government). But internal demand must fall as a consequence of years of overconsuming fueled by debt. Government intervention (stimulus plans)only will make it worse, as it will add more debt to the gigantic private debt that must be repaid (or defaulted).
ReplyDeleteAs others say in this blog, Zapatero must rely in Spain (no rescue will come from Europe, perhaps from the FMI, but the price will be high). As you say, it is needed a plan to help our economy to be more competitive. And the leit motive must be internal devaluation.
Hello José Luis,
ReplyDelete"You are with the keynesians theories (lack of demand than must be compensated by the government)."
I'm not exactly sure who you are referring to here. Certyainl it shouldn't be to me. I think the Keynesian-neo libertal debate is taking place in Spain along the traditional pattern of politicising technical economic issues. I am not referring to you personally, but I think this is part of the whole problem in Spain. People love to debate ideology, but have no plan to address the most basic economic questions.
I am NOT participating in this ideological debate, since I consider it irrelevant.
"Government intervention (stimulus plans)only will make it worse"
I think we agree on this. I have been arguing this since August 2007 since the crisis broke out in earnest, but basically few have been listening.
But....
Government support (and now this will have to be from the EU since Spain has wasted its ammunition) is going to be vital to support Spain through what will be the most painful of painful transitions. Pain for pain's sake is not interesting - leave that one for the masochists. Spain is a baby going into the incubator, and will need life support. These days we do not care for premature babies by simply "exposing them" to see if they are strong enough to survive.
In this sense I am 100% an admirer of Keynes, who understood perfectly well you cannot simply sit back and watch tragedy happen, and millions and millions of people pile up pointlessly in dole queues. But each crisis is different in its own way, and needs its own remedies. We are not in the 1930s, and the situation is different.
Spain needs to be put back to work, and government both national and European will have a huge part to play in this.
And while we are going through this correction - which make no mistake, could easily need five years - pensions will need to be paid, hopspitals will need to be kept open, and schools and universities will need to continue to function.
And to facilitate this we will need help. Just look at the crazy things which are going on in Latvia.
"perhaps from the FMI, but the price will be high"
The price will be high, very high, whichever way we go now. This is the price of letting gangrene fester.You have to saw off the bottom part of the leg from the kneee. Ouch!
And Spain will effectively not be a sovereign country during the transition. This is the cost of getting so near to national bankruptcy before doing anything.
"And the leit motive must be internal devaluation."
Absolutely agree. On my calculations we need around 20% to jump start things. An operation in such a large scale has never been done before. We will be pioneers. And the rest of the developed world will watch nervously, since the stability of their financial systems will depend on us. If we collapse in chaos, then the rest of the eurosystem will not be far behind, and New York and Tokyo will get sucked in via Frankfurt. As somone once said "apres moi le deluge!".
So - No stimulus, but a real plan!
I agree with previous comments pointing out that Europe (Germany+France) is not able/willing to repair the Spanish disaster. They could provide significant financial assistance and guidance, but obvioulsy we the Spaniards should solve this mess, as we are responsible for it.
ReplyDeleteI feel that the view of most Spaniards on this crisis is quite optimistic; it will simply pass, maybe in 6 months, 1.5-2 years in the worst case.
Those who should explain the magnitude of our problems (and "profiting" from it), Partido Popular, have no credibility for more than half of our population (for different reasons, no matter if these are right or wrong), and they are not proposing a real plan (because it would/should include unpopular measures).
What do we have to do? Before
discussing what to do (no easy answer), how do we make people realize the situation we are in? Zapatero must go, but I fear that this will not happen until we reach complete disaster (over 30% unemployment, sovereing debt spread vs. that of Germany over 300bps). It seems the government is ready to keep pumping cash and subsidies, to back banks' and cajas' new debt, to directly finance them... and to keep raising taxes and issuing public debt as long as it takes. These measures will ease the inmediate pain but worsen the problem because:
1. easing the pain makes it more difficult for people to realize our true situation. A good example is the recent Plan E, which rather than "estimulo" should mean "engaño": to waste €10,000ml in completely useless small civil works (unrequired repairing of street pavements & fountains) has fed construction companies for 6 months, giving them and their workers false hope on the real demand of their services.
2. it makes the size of the problem to solve (debt) larger.
From the government point of view, these measures help to delay armageddon while waiting for the economy to recover by itself (or because of the recovery of global economy). Scary.
I am sorry to disagree with you Edward, but I think the emperor still has clothes on, and he will for some time. In any case, good job. I understand it is not always comfortable to spread bad news, but please keep up with your work.
Lagarto:
ReplyDeleteInteresting points but I think the Spanish economy is about to enter unchartered waters. It's true that the present government has been able to ease the pain on individuals so far through debt- financed 'engaños' as you well put it: Plan 'E' (for estupido), baby-cheque, inflation busting increases in pensions and salaries of 'funcionarios' and delighting the trade unions by absolutely refusing to even discuss any reforms in the labour market. And so on.
In fact F.Gonzales' govt had similar problems in the early nineties when Spain's goods and services were completely uncompetitive due to inefficiencies in productivity and a burdensome, uncontrolled public sector. Solution: Devalue the peseta 4 times, about 25% in total I think, and Bingo! Imports surged and tourists flocked in their millions to the Costas. End of crisis but of course the underlying problems were not solved at all and Zapatero doesn't have this card up his sleeve.
Now I think that you make a good point when you say that most Spaniards have felt that they could ride out this storm. The 2 years of unemployment benefit plus generous tax-free severance payments have made people feel surprisingly comfortable, especially if they've believed the Govt's hype about a big recovery coming next year. But honestly, I think people's views about a recovery around the corner are changing now and those who continue to believe it are going to get a very nasty shock when they see that their income/savings start running out, euribor starts to rise and those lucky ones in work pay more and more taxes.
So I think armageddon might be quite close and that the emperor could lose his clothes sooner than you think.
Of course we mustn't blame the messenger (Edward). In fact we should praise him and only lament that nobody in Zapatero's govt has been able to get the message across to him.
Saludos, Chris.
I wish this real situation of Spanish crisis will be on the TV news, perhaps news from foreign countries.It´s sad but in Spain will be no TV channel brave enough to tell people what´s going on and ask for help to come out of this crisis.Afterall, we are all involved in this new global economy, we already bought all the incoming technology, adapt our way of living to Europ standards and so on.Let´s think of a model or new financial instrument to solve this,now for Spain and in the future for who needs it.
ReplyDeleteGuys you talk sense and to me have mastered the art of economics, but you actually forget to analyze the true reason why spain got itself into such a mess. Edward Hugh, have you ever lived and worked in Spain? Then if you have, you will agree with me that it is only Spain to blame for the downfall of its economy. One of the very serious problems of Spain is corruption. There is a great deal of corruption in the police, the government, the banks, the welfare system, the lot! It is a normal thing in Spain for a bank or any other institution to abuse a position of trust or power to make huge profits without any care other than personal gain. My pockets are full so why should i care whether or not everything collapses?! sort of thing.
ReplyDeleteThe housing boom irresponsible speculation we have seen can be easily transposed to immigration where a large number of Spanish institutions have been making huge amounts of money giving working permits and passports to anyone, even with a 12 percent unemployment rate.
Nobody cares or is responsible enough to see the damage that´s being done to the country. Let´s party, let´s party!!! Now we'll see if either Britain, Germany or France are willing to collect all the mess that the two decade Spanish party has left behind.
I doubt it, that's why Britain has always been with one foot in and one foot out. If she puts both feet in, she is certainly in deep trouble too.
I think that as a responsible adult you have to see where your actions are leading you and act according to common sense. I don´t know how on earth the spanish wanted to have a sustainable economy and housing sector, in a country where the minimum wage is 620€ and the typical monthly salary is 800€.
How far can you go with mortgages for a 2 bedroom second-hand flat at an astonishing 300 and 400 thousand euros in main cities like Madrid, Bilbao or Barcelona?
The answer is simple: You go nowhere. Spain has never had or will have the economy to cope with such high prices. The disparity is huge and clear. This is a poor kid wanted to live like a millionaire. He will soon learn the lesson.
Thank you for the blog, it is very good and educational.