Spain’s Unemployment Continues To Rise

Spain’s EU harmonised seasonally-adjusted unemployment rate (which is the interesting number) went up again in July, according to the latest data from Eurostat. It rose to 20.3% from 20.2% in June.

So despite a double digit fiscal deficit, Spain has not yet succeeded in putting a brake on the upward drift in the headline unemployment number.

And the number of those officially working continues to decline, according to the data on those paying insurance contributions from the Labour Ministry.

Clearly having broken the 20% barrier the number looks like heading up even further in the second half of the year, although quite how far up is hard to say, since my feeling is that some of the increase in unemployment is now being offset by the silent march of feet, heading for the door, and looking for employment abroad.

On The Shoulders Of Giants – How Spain Is Destined To Follow In Germany’s Footsteps

The current generation of policymakers seem to be like Captains of large ocean liners, out there on the high seas, bereft of either compass or adequate charts, trying hard to calm there worried passengers by telling them nothing is amiss. But the charts are there, if only they would look at them, and in the present Spanish case, unlike the old refrain, the future is ours to see, and it has a name: Germany.

For those willing and able to examine our present situation with a reasonably open mind, a comparison of the recent history of the Spanish and German economies can prove illuminating, especially since, as I will argue below, there are strong structural homologues to be observed in the evolution of the two.

This post will contain comparatively few words (what a blessing!) since I will try and let the charts themselves tell their own story, in the hope that concepts which seem to be difficult to convey verbally, may be easier to grasp visually. Continue reading

One Swallow Doesn’t Make A Summer, But….

Well, as we all well know one swallow doesn’t make a summer, and one data point doesn’t swing an argument one way or another, but the latest retail sales PMI reading for Germany is far from being either uninteresting, or (for my part) surprising. Basically after only two months (in the last twenty seven) of registering growth, the August PMI suggested that German retail sales once more fell back. And the anecdotal explanation for this: Spain’s victory in the world cup affected the shoppers appetite! Actually, from a long term aggregate point of view I think (and economic study would be a waste of time if it weren’t like this) that rather more factors come into play than football and the weather.

August data signalled a modest decline in month-on-month sales, reversing the solid upward trend registered in both June and July. At 48.4, down sharply from 57.2 in the previous month, the seasonally adjusted Retail PMI was below the 50.0 no-change value for the first time since May. The latest reading was the lowest for four months and slightly below the long-run series average (49.1). Anecdotal evidence suggested that less favourable weather conditions and reduced consumer footfall had negative impacts on like-for-like sales in August. Some retailers also noted that the end of the football World Cup had contributed to a decline in household spending.

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Not Content With France, Now It’s Poland Too!

Not only is the French economy the grateful recipient and beneficiary of sustained German export growth, so too is Poland (I’m sure they’ll be glad to hear that in Warsaw!). According to the FTs Jan Cienski:

German recovery boosts Polish GDP

Poland’s economy grew by an unexpectedly strong 3.5 per cent in the second quarter; the country’s statistical agency said on Monday, thanks in part to continuing strong exports to the rapidly rebounding German economy, as well as resilient domestic demand.

In fairness to Cienski he then does go on to inform us that according to the statistical agency “the main driver of growth was domestic demand, which grew 3.9 per cent”. But then he falls back on himself again, since he immediately adds “many German manufacturers buy parts from Polish factories, and when the German economy grows – it is expanding by the fastest rate in two decades at the moment – it pulls Poland along behind it”.

But then, hold on there, just wait a minute: “For the first time in many months, however, Poland’s trade balance was negative, as imports surged 18.2 per cent, a sign of a maturing economic recovery”(a)

Can we run that again. The German economy is boosting Polish GDP by selling them imports? Can’t the people over at the FT do basic math? And can’t they get it into their mindset that there are export driven and autonomous consumer demand driven economies? And following the causal chain, it is those economies who take on debt (Poland and France in the current situation) and run current account deficits who become the customers of the last resort, and drive those who need to export to live. How can they possibly believe it is the other way round?

Of course, at the dis-aggregated level the whole world is interconnected, and I’m sure a lot of firms in the US benefit from domestic demand in China, even though no-one, but no-one in the US would argue that strong export growth in China was powering the US economy. The idea would simply not occur to them. More than demonstrating a high level of economic illiteracy, what is involved here is a certain lack of respect for the capacities of the the two countries involved (France and Poland, even if I suspect Cienski is himself Polish). Such is the power of the German Chou Chou train metaphor. I think a whole zeitgeist has to fall here, before we can make much more progress in our economic understanding of the situation.

For a fuller analysis of the current dynamics influencing the Polish economy, see my recent “Biting The Fiscal Bullet In Poland“. (And here if you want is a version in Polish).

(a) Incidentally, I take it here Cienski is referring to the combined goods and services balance when he says “for the first time in months”, since the goods trade balance has long been in deficit.

Wolfgang Munchau Has It (More or Less) Right

Well, having just posted a lengthy study of the German economy on this blog, I started to lazily browse my way around today’s economic news headlines, and Lo & Behold, what did I find over at the FT, a contrarian voice. That of Wolfgang Munchau. In his comment column he berates the Euro Area for its lack of product market and labour market mobility – in the sense that there are large differentials in both price and wage levels, yet few seems motivated to either shop or work around in the search for a better deal. Few seem motivated to follow Germany’s earlier example of a real devaluation, with consequences which are, unfortuantely, only too predictable.

Taken together, this means the intra-eurozone imbalances will not only persist, but probably increase. This will make the economic adjustment for Spain, Portugal or Greece even more difficult than it already is. Those persistent imbalances, much more than the build-up of debt, are my deep cause of concern about the long-term health of the eurozone.

But from a German perspective, this strategy boosts growth in the short term. It is, of course, a beggar-thy-neighbour strategy. The improvement in Germany’s economic growth is driven not by productivity gains but by real devaluation.

So while I expect the German economy to perform better than the eurozone average, it is important to keep some perspective and not draw false inferences from the 9 per cent annualised growth rate during the second quarter. If you look at the period since the beginning of the financial crisis, Germany’s economic performance has been dismal. If you compare levels of gross domestic product between Germany and the US since the crisis, you find the US significantly outperformed Germany during that period. That situation may still be reversed if the US were to go into a double-dip recession. But the best judgment we can make now is that of Christine Lagarde, the French finance minister, in her recent interview in the Financial Times: Germany is recovering faster this year because it contracted faster last year, when GDP fell by 5 per cent. So far, this looks like classic dead-cat bounce.

Given its export-dependence, the performance of the German economy will ultimately depend on the global economy. As the US is heading for another downturn, it is hard to see how Germany can maintain its recent rates of growth. To do so would require a sudden increase in domestic demand. But I cannot see where that would come from.

The Baron Münchhausen Effect

Karl Friedrich Hieronymus, Freiherr von Münchhausen was a German baron born in Bodenwerder in the eighteenth century. Made famous by the Hollywood director Terrence Gilliam, the baron first came to public attention for his ability to recount outrageously tall tales about his adventures while fighting abroad in the Russian army. Among the astounding feats which legend attributes to him are riding cannonballs and travelling to the Moon. But perhaps his best known marvel is the story of how he managed to escape from a swamp by pulling himself out by his own hair (or by his bootstraps, depending on who tells the story). Which puts me directly in mind of the way some people are now expecting an export-dependent German economy to drag the rest of Europe – and with it the whole global train – up and out of the ditch in which it is currently sunk, simply by exporting to everbody else. Sounds just like one of those tall tales, doesn’t it. A very tall one. Continue reading

Another Irish lesson fail

Not seen on the newswires from the Federal Reserve retreat in Jackson Hole, Wyoming —

The world of economics was rocked to its foundations yesterday when European Central Bank President Jean Claude Trichet urged countries to run huge structural budget deficits and massively pro-cyclical fiscal policy while creating huge contingent liabilities in their financial sectors.”

Because that’s not what M. Trichet actually said, or what the media took him to say.  But did he know that was the apparent implication of what he said?  Yes, it’s Ireland again, seemingly everyone’s favourite misunderstood episode of boom and bust.   It’s what Paul Krugman might call the Magical Foreigner syndrome.

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Estonia’s Long Awaited Recovery May Still Be Delayed Yet Awhile

In a recent FT Op-ed, entitled “Estonia’s recovery defies economists and academics“, columnist John Dizard argued that “the “internal devaluation” policy, which means cuts in nominal costs such as wages and rents, was very hard on the population, but appears to have worked ahead of even the Estonian government’s schedule”.

But as I said to John in a very enjoyable phone conversation I had with him before he wrote the piece (where he was kind enough to descibe me as a “freelance economist”, one who doesn’t have to answer to a boss before expressing an opinion), perhaps we should just hold on a minute before jumping to too many conclusions, since things are still far from clear. So let’s take a look. Continue reading

New Series Of Spain Podcasts

The first in a new cycle of Spain economy related podcasts I am doing with Matthew Bennett is now up.

Here’s a sort of summary from Matthew of what goes on.

The short version: market reaction so far this year has, as always, been irrational, underlying indicators are not in a good place and Spain has no plan to replace the construction industry as the engine of its economic recovery.

* Spain, Greece and the EU bailout package;
* The madness of the markets and rational analysis of underlying factors;
* Is there any basis for the current apparent economic and financial calm?
* Important changes in the role of the ECB and its relationship with sovereign states;
* The impact of cuts announced by Zapatero in June;
* Spanish banks reliance on ECB funding and moral hazard;
* The civil service wage cut announced in June is not really a wage cut;
* Car sales in July were down 30% on June, after the Spanish version of cash-for-clunkers was withdrawn and VAT rose 2%. Is that indicative of what the rest of the economy might look like if we took away government stimulus?
* The effect of the VAT rise on consumer behaviour and the real-estate market;
* Inflation, deflation or stagflation?
* There’s no plan to replace the weight of the construction industry in the make-up of Spanish GDP. Could tourism replace the construction industry in Spain’s GDP?
* Europe and the IMF are not being harsh enough on Spain;
* The Spanish government’s hope of reaching 2.7% GDP growth and 3% deficit targets by 2013 is totally unrealistic;
* The north-south economic divide in the eurozone;
* What happens to Spain when the ECB starts raising interest rates and monthly mortgage payments start rising again?

Chart Of The Day: How Spain’s Stimulus Money Helps Germany Achieve Record Growth

Well, here’s a nice way of putting things. Spain did less badly than expected in Q2 2010 as compared with a year ago, since in Q2 2009 it actually did worse than it initially appeard (following a downward revision in the data). Well, that’s one way to improve, push the past backwards.

On a more serious note, the detailed data on the second quarter are now available for Spain, and interesting reading they make. Basically, what little improvement Spain did manage to achieve (0.2 q-o-q, -0.1% y-o-y) came from domestic demand and not exports, while the external trade balance deteriorated. Exactly the opposite to what you want to happen.

As the statistics office (INE) say: “On analysing the two large components of Spanish GDP from the perspective of expenditure, a similar pattern of performance could be observed as in the previous quarter. Thus, on the one hand, the negative contribution of domestic demand to GDP decreased two points and three tenths in this quarter, from –2.8 to –0.5 points. Whereas, in contrast, foreign demand decreased its positive contribution to the aggregate growth one point and one tenth, from 1.5 to 0.4 points”.

In other words, all that deficit spending money is simply getting wasted, and there is no competitiveness correction taking place. In the midst of a huge potential export boom, Spain’s economy is growing thanks to domestic demand, as the trade deficit once more deteriorates.

So one very simple way of putting this, so everyone can understand, is that the Spanish government is running a double digit deficit, and one part of the money spent is going straight out in additional imports which (among other places) come from Germany. That is, Spain is getting itself even more into debt to lend a kindly helping hand to the German economy. In theory, the exact opposite was to happen, and the German expansion was supposed to help Spain’s net exports. But Spanish industry isn’t, well you know..

And just to remind us, here are the respective industrial output charts I published in this post.

So when are people at the EU Commission and the IMF going to finally wake up to reality? This isn’t going to work like this, and Spain needs to adopt concrete measures to restore competitiveness, and not find ever more ingenious ways to kick the can even further down the road. Either that, or we will all live to regret our own inaction one of these fine days.