What does 2014 hold for the economy of Spain?

The credit crunch era has been tough for the economy of Spain. Not only was there the initial impact of it but there was also the follow up shock in the peripheral Euro area nations. Meanwhile Spain was struggling to deal with housing and construction sectors which had collapsed and a considerbaly weakened banking sector. This meant that Spain suffered from nine quarters in a row of Gross Domestic Product contraction starting in the second quarter of 2011. If we revert to annual measures the Spanish economy shrank by 3.8% in 2009, then by 0.2% in 2010 before growing by 0.1% in 2011 but then shrinking by 1.6% in 2012 and by 1.2% in 2013.

Turning for the better

Whilst the Spanish economy did shrink in 2013 it was in football parlance a year of two halves as the declines reduced and then a return to growth albeit of only 0.1% was seen in the third quarter. This was then followed by this.

The Gross Domestic Product (GDP)  generated by the Spanish economy in the fourth quarter 2013 registered a variation of 0.3%, as compared to the previous quarter , according to the flash estimate of quarterly GDP. This rate was two tenths higher than that registered in the previous quarter (0.1%).

Should this be confirmed as more data is collated then this will be the best quarterly performance for over five years. Also the improvement was broad based across the economy.

This result was basically caused by a less negative contribution in the domestic demand, and a positive, though diminishing, contribution of the external demand.

Where next?

Production

December was a disappointing month for overall Euro area industrial production  at -0.7% but whilst Spain saw a fall of 0.2% it meant that the overall picture for 2013 was for an improvement.

The annual rate of the Industrial Production Index stands at 1.7% in the series adjusted for the seasonal and calendar effects.

This compares with an annual rate of fall of 2.5% in December 2011 and 8.2% in December 2012. So we see that the situation has stopped getting worse but we realise that with a seasonally and calendar adjusted index of 90.7 where 2010=100 there is a very long way to go the regain the past lost ground.

The business surveys are optimistic for the early past of 2014.

The Spanish manufacturing sector started 2014 on a positive footing as growth of both output and new orders accelerated. Rising workloads led firms to take on extra staff, marking the first instance of job creation since late-2010.

Whilst the spot reading is only 52.2 or marginal growth it is to be welcomed that there are signs of export growth and a badly needed increase in employment.

The reading for the services sector was at 54.9 showing hopes of a decent level of economic growth.

The Spanish service sector backed up the solid performance seen in December with accelerated growth of activity in January, while we even saw an end to job shedding in the sector for the first time since the economic crisis began.

Domestic demand

This is  less hopeful as the numbers below for December indicate.

The General Retail Trade Index annual rate at constant prices stands at –1.0% in the adjusted for calendar and seasonal effects series and at 0.0% in the original series.

The monthly change adjusted for calendar and seasonal effects stands at –3.5%.

In 2013, sales in the Retail Trade Sector dropped by 3.9%

Of course December has the Christmas season and so disappointing numbers are more significant than for production. As we review them we note that employment fell again in this sector.

The employment index in the Retail Trade sector in December registered an annual rate of –1.3%, as compared with the same month of 2012.

If we look at the seasonally and calendar adjusted index we see that at 81.8 compared to 2010=100 there has been a severe depression here. Overall the rate of fall has slowed but questions over the recovery have been raised by the numbers for December. In a way, the internal devaluation model applied to Spain should lead us to expect this as the fact that the currency cannot change vis a vis Euro area colleagues means that wages are the variable expected to take most of the adjustment. Hence domestic demand struggles and is weak.

The housing market

This definitely remains a troubled area for the Spanish economy. Whilst there is talk and speculation about international investors and hedge funds snapping up property bargains the market looks moribund.

In December, the number of property transfers was 114,457, that is, 0.5% less than in the same month of the previous year The merchanting of dwellings decreases 3.6%, as compared with December 2012.

According to the Spanish bank BBVA (H/T @ibexsalad ) the situation in the mortgage market remains parlous.

New mortgage lending is still in negative territory, although not to the same extent as indicated by the December figure (-57.8%), which is distorted by the push factor of the withdrawal of tax breaks in December 2012. Thus the average YoY variation in 2013 was -31.9% vs. 2012. Nonetheless, the weakness of household demand will continue to put downward pressure on this type of lending.

The data on house prices at Eurostat is only up to the third quarter of 2013 but at that point house prices were falling at an annual rate of 6.4%. So the decline is slowing as we note that they actually rose by 0.8% in the quarter itself.

If we move to the real estate organisation TINSA they tell us this.

The IMIE General index has started the year with a 7.2% decline, almost half the figure recorded for the first month of 2013, when prices fell by 13.8%. With few exceptions (June and December), the decline slowed month-on-month throughout last year to reach the current figures.

As to the inevitable question as to how this leaves the overall picture we are told this.

The index fell to 1371 points in early 2014, identical to the level in August 2003, more than a decade ago. The cumulative decline since house prices reached their peak in December 2007 is now 40%.

Interest-rates and bond yields

This is again something of a story of two halves. If we look at the official interest-rate of the European Central Bank it is now 0.25% and the cost to the Spanish government of issuing new debt has dropped substantially. The ten-year benchmark bond yield of 3.61% is much lower than the peaks seen in the Euro area crisis.

However if we move from official to unofficial interest-rates which is one of the earliest themes of this blog we see a different pattern. Take a look at mortgage interest-rates.

The average interest rate for mortgages constituted on dwellings was 4.40%, that was, 0.3% above that registered in November 2012.

Actually that release makes the situation look worse than it is as the average mortgage rate in November 2012 was 4.39% and not 4.1%. But my point is that all the apparent improvements do not seem to have reached the mortgage borrower. I suspect that they have reached the typical saver though!

Comment

2014 starts hopefully in several senses for Spain. Football fans there will have hopes of winning back to back world cups and they and others will have hopes of the economic recovery not only continuing but improving. Here however we see that issues remain as the recovery mantra of the latter part of 2013 has to face up to falls in both retail sales and industrial production in December.

Also whilst it had been true that Spain had made great strides in its export performance this faded away towards the end of 2013 and was replaced by domestic consumption. So whilst there is now a trade surplus there is a danger of repeating past mistakes. Accordingly whilst we await the next developments I note that the latest research paper on the subject from the ECB is also worried about what may happen next.

While current account deficits have declined, for example in the case of Spain, the unemployment rate has risen very sharply, so the normative conclusion that the adjustment process is over might be premature.

At this point I find myself returning to the strength of the Euro which is at 1.366 versus the US Dollar as I type this. The trade-weighted index which fell below 95 in the summer of 2012 is now at 102, is this rise now beginning to weigh on Spanish exporters? So growth seems likely but exactly how much remains in doubt.

via:http://www.mindfulmoney.co.uk/wp/shaun-richards/what-does-2014-hold-for-the-economy-of-spain/