P2P In The Spanish Economy

Well, we are getting a lot of waffle out there (noise), and talk about greens shoots and muted recovery, but all too often what is lacking is anything very substantial in the way of hard data to back up the various arguments. In particular, when it comes to Spain I would like to know just where people are finding the justification for all the optimism, since as we will see below, there is little in the way of hard data to suggest anything other than continuing deterioration. In this post we will look at the most recent data for three key indicators – construction, industry and retail sales, as well as the most recent services and manufacturing Purchasing Managers Indexes (August).

As you will see, I have also introduced a new measure – P2P – which stands here for “Peak to Present”, since after 12 months of decline the year on year measure is no longer interesting, and more than often misleading.

Here then are a series of P2P charts – showing the percentage drop from peak to present, which will enable us to follow the evolution of the crisis on a monthly basis.

You will also find with them the relevant index charts, and these also give a feeling for the extent of the drop.

Retail Sales

The latest retail sales figures (July) continue to confirm the same picture. According to Eurostat data, retail sales were down 1.2% month on month over June, and down 6.47% over July 2008. Sales are now down 10.11% over their November 2007 peak. So as we can see, sales are steadily sliding down, and the drift is relentless.


Latest data show that Spanish construction fell again between May and June, despite plan E, it was down 0.2%. Year on year figures are meaningless for an industry which will have been contracting for three years in July, but from the peak (July 2006) activity is now down by 30.5% – that is it is the industry has now shrunk to 70% of what it used to be.

Industrial Output

Industrial output continued to fall in June, and was down 16.2% year on year, which means it has now fallen 33.45% from the June 2007 peak. That is output has now been falling for over two years, and the decline seems to have continued in August (see manufacturing PMI report sumarised below)

August Purchasing Manager Surveys

And I have added the two Purchasing Managers Index charts – for services and manufacturing – for July, which is the first month of the third quarter, and so give us some idea of where we are going next. As can be seen, the contraction continues, more moderately, but it continues.

The Market Purchasing Managers’ Index on Tuesday nudged lower to 47.2 from 47.3 in July, while manufacturing output again declined below the 50 mark — the dividing line between expansion and contraction — after peeking above that level last month for the first time since January, 2008. “The Spanish manufacturing sector appears to be stagnating, rather than entering full recovery mode during the third quarter,” economist at Markit, Andrew Harker said of the survey.

Employment continued to decline, although at a slower pace for the second month running. The employment index has showed job cuts every month for the past two years.

Services PMI

Spanish service sector business conditions continued to deteriorate in August, but data pointed to a much slower drop in activity than in July. Input prices rose for the first time since December 2008, while optimism strengthened. The headline seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – rose to 45.3 in August, from 40.8 in July. Although the data indicated a marked contraction in business activity, it was the slowest since February 2008. Activity has now decreased in each of the past twenty months.

Yet Consumer Confidence Continues To Rise And Rise

And then, the strangest thing of all, consumer confidence goes on rising, month after month. Confidence in the current economic climate rose 3.9 points in July, continuing a six-month trend of increased optimism. The survey also indicated Spanish consumers have higher hopes than ever for the future of the economy, and the indicator for future economic expectations now stands at 106.7, up from a low of 59.8 in July 2008, partly according to the ICO (who organise the survey) due to an expectation that the job market is going to improve before the end of 2009. My guess is that a combination of falling prices and interest rates coupled with some salary increases for those on long term contracts has a lot to do with this bout of exhuberant optimism. As the job market continues to deteriorate in the autumn I predict we will start to see a reversal in the trend.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

11 thoughts on “P2P In The Spanish Economy

  1. “In particular, when it comes to Spain I would like to know just where people are finding the justification for all the optimism”

    Well, it’s just simple logic, isn’t it? If Spain is doing badly, then the Euro did not solve all Spain’s problems. But the Euro did solve all Spain’s problems, so Spain cannot be doing badly.

    Gosh, this isn’t rocket science, now is it?

  2. A couple of points, or four,off the op of my head:

    1). Since Spain had been booming during the last 20 years, thanks in part to a). the transition to ‘democracy’ and b). joining the EU and qualifying for regional infrastructural development funds, few people are surprised that the years of “vacas gordas” (fat cows – good times) had to come to an end. Towards the end, surely few people were not aware that the construction and associated speculative bubbles were vastly over-inflated.

    2). People still hope that the current period of “vacas flacas” – lean times need not last too long. They may well be mistaken in that. But, for most ordinary people, what they have now is still far better than what was available under the Franco dictatorship. Perhaps the ‘consumer confidence’ polls reflect people’s impression that, so far, the situation is not as bad as they had at first feared.

    3). There are reasonable social security mechanisms in place and functioning, and family and community solidarity.

    4). Do not underestimate the resilience of the “black economy”.

  3. Hello Andrés,

    I think you make some very valid points.

    “Perhaps the ‘consumer confidence’ polls reflect people’s impression that, so far, the situation is not as bad as they had at first feared.”

    Good point. I’m not sure that this will now hold up as we go into the winter. A lot of the economics coverage in the news slots looks more to me like publicity “spots” – eg last week they gave some importance to the fact that the OECD revised their forecast for 2009 to slightly “less bad” than expected, but largely omitted to mention that they singled out Spain as a country which was unlikely to recover quickly. That is there is quite a large gap at the moment between the debate and level of awareness inside Spain and outside.

    I also noticed that Elena Salgado came out at the G20 – where she was pushing for the stimulus programmes to be maintained and extended – and said that this was important since countries like Spain counldn’t really expect improvement until sometime in 2010. This is rather different from what she had been saying on Spanish TV the day earlier, where she was informing Spanish viewers she could already see “tentative signs of improvement in Spain” – as you can see above, all indicators except consumer confidence are still deteriorating, some of them deteriorating less rapidly than before, but that is all.

    This has all been going on now since August 2007, and I suppose you are right, I suppose I should not underestimate the patience of the Spanish people in allowing themselves to be systematically mislead.

    “There are reasonable social security mechanisms in place and functioning, and family and community solidarity.”

    Well, the decision to introduce a 420 euro minimum payment for everyone was certainly a good and historic one. It filled a gap in the social security system that I had long felt was a major omission, and I am sure the IMF, when they finally come to our rescue, will firmly keep this one in place to protect the poorest sections of our community as they are doing in Latvia and Hungary. But much of the rest of the social support system – schools, hospitals, contribution based pensions – is soon going to notice the shortage of funds, and I expect systematic cuts in all of these (as well as the number of government employees) as we now move forward. Talk of raising taxes – which will of course only make the economic contraction worse – is simply a breif glimpse at the way things are now going to go. The present ballooning of the deficit is quite evidently not sustainable.

    “Do not underestimate the resilience of the “black economy”.”

    I don’t. And I imagine this is the way things are going to move, with more and more of the economy “running for cover”, and avoiding any kind of taxes. The result will be that headline GDP will contract even faster, and of course the government will have less and less money, which is why I think come late 2010 or early 2011 we will have a “fiscal crisis of the state”, and the IMF economists will be being flown in from Washington to write the laws for the Spanish parliament – you know, the ones they won’t write for themselves unaided.

  4. Small remark: there is no general scheme for the protection of “poorest sections” in Latvia. So the IMF could not support something which does not exist.

    The “poorest sections” are moving to grey economy or looking for work in neighbouring countries, correctly speaking, in the grey sector of neighbouring economies.

  5. My opinion about the increase in Consumer Confidence: It will not last. Why? Our economy is based on three things: Tourism, Construction and Banking (which derives from the other two).

    We are undergoing the worst real estate crisis in Spanish history. Prices of houses have gone down, but very little. Prices as they were are not sustainable. 6 out of 10 workers earn less than 1100 euros, which is more or less what you paid for a mortgage some months ago. Our workforce is badly paid, we have a huge education problem (look at the lists of where is Spain in the PISA report). In addition, our political system is centrifuge, chaotic, and will be more chaotic in a near future (remember, as a painful example the fights between our Supreme Court and the Constitutional Court). We have an historic identity crisis, we dont know how to deal as a nation with our Global word, we dont know who we are. At least Argentinians know who they are. We do not.

    Going back to the real estate crisis. We don’t have any experience about such a huge real estate crisis. In Japan they have. In USA, they have. In the UK they have. People believe that real estate prices always go up, never go down. Everybody buys.

    You should read the opinion of Jose Garicano, now at the London Economic School: it will be a financial tsunami for our nation. We are in the middle of a tunnel, and this will last a decade at least. No way out until the government changes, the prices (real estate and other) implode, and a new consensus is reached in order to stabilize the whole political system, maybe with Cataluña out of Spain.

    Wait and see….

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  7. Edward,

    If you really think the IMF is going to have to come to the rescue of Spain in a year or so wouldn’t you think Credit Default Swaps for Spain’s sovereign debt would reflect that?

    The CDS market isn’t pricing in any such problems for Spain. In fact, the cost of insuring Spanish debt has fallen substantially in the last 6 months.

    If Spain’s government finances are under so much strain I would imagine that the market would be pricing in some chance of a credit event like they are doing in the case of Ireland.

    Roughly Spain’s CDS are priced at 70bps vs Ireland’s 200+bps.

    Also Spain’s bond yields aren’t that wide compared to other Euro governments.

    I wonder what your thoughts are about this?

    Do you think Ireland will need help from the IMF at some point and when?



  8. Hello Patrick,

    Well, what’s happening in the market is, as you point out, rather strange at the moment. Basically, I can’t see why they imagine the problem is such a serious one in Ireland and yet not so serious in Spain, while Ireland is trying (for good or for bad) to tackle the problem, and Spain’s banks and government are simply keeping their fingers crossed and hoping it will go away.

    I have no idea at all why people who trade CDS are taking the view that the former is a more risky policy. Spain is simply Ireland ten times bigger.

    On whether Ireland will need to go to the IMF, really I have no crystal ball. Basically I think it is a political question. The IMF only really helps when the politicians need a “bad cop” to enforce cuts – look at Hungary and Latvia, the EU pay the bulk of the money, but get the IMF to do the real serious negotiating.

    If the Irish political class are unable to get the Irish voters to back the inevitable fall in living standards and cutback in services, then the IMF will come on the scene.

    The EU Commission and the ECB can always fund, but they can’t fund situations which only deteriorate indefinitely, this is my point about Spain.

    The worst of all this is that there is now no easy answer. We are still playing around with a fire two years after it broke out, and the solution will not come cheap.

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  10. Thanks for your comments Edward. They were very helpful.

    As you said, it´s impossible to know why the market perceives so much risk for Ireland yet virtually none for Spain. I would argue that Spain´s story and heavy problems are just beginning to surface in the international press. Ireland´s system is just more transparent apparently.

    They (Spanish banks & the Government) have done a good job at masking their loan and mortgage fiasco.

    Did you see that GMAC sold a Spanish RMBS at 14.5 euros cents recently?

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