Spain’s Economy Re-enters Contraction Mode In The Third Quarter

Well, that didn’t last long, now did it. Two consecutive quarters of minimal GDP growth seem to have exhausted the forces of a more than fragile Spanish economy. All the post-June data we are seeing suggests the economy has now turned the corner (in the bad sense), and we should expect a negative quarterly GDP reading in the July to September period.

Perhaps the clearest indicator we have so far of the shape of things to come is offered by the August services PMI reading, which shows the sector went back into contraction in August, a performance that for a country which depends to some significant extent on tourism is really pretty striking.

As Andrew Harker, economist at Markit and author of the monthly report commented:

“Months of broadly stagnant demand have now resulted in a decline in activity in the Spanish service sector, albeit a marginal one. It looks increasingly likely that the anaemic GDP growth seen during the second quarter of the year marks the high point of the recovery for the time being. The recent rise in VAT has further added to problems for service providers as weak demand has largely forced firms to absorbcost increases.”

The manufacturing sector continues to turn in a very slight positive reading, but both new orders and employment are falling.

Car sales were down 25% in August over August 2009, due in part to the withdrawal of the “cash for clunckers” programme, and in part to the rise in VAT, and finally industrial production data showed that output even fell very slightly in June.

Unsurprisingly, retail sales fell back sharply in July (by 3% month on month) following pre VAT rise purchases in June.

And unemployment, which is now heading up over and beyond the 20% mark (20.3% in July) was up again in August (even by 12,000 on a seasonally adjusted basis.

We don’t have the July construction data yet, but the position with retail sales is likely to be repeated, following a strong 7% (month on month) pre VAT surge in June.

Exports did recover to some extent during the “good times”, but to nothing like the extent they did in the more strongly competitive exporting countries.

And in fact, as we saw in a previous post, the net effect of the stimulus was to temporarily widen the trade deficit (strange, Monsieur Trichet on being asked by a journalist at the last ECB press conference when he planned to withdraw his stimulus, was most adamant that the ECB non-standard measures did not constitute “stimulus” – I guess it’s lucky for US citizens that Ben Bernanke doesn’t see things that way). Now, whether from the ECB or the Spanish government, the outlook is for gradual withdrawal of stimulus, which means the only realistic outlook for a badly structurally distorted Spanish economy is towards a slow but steady decline.

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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".

4 thoughts on “Spain’s Economy Re-enters Contraction Mode In The Third Quarter

  1. Let’s look what happens with banks in Ireland. That will have very profound butterfly effect.

  2. Pingback: Belgium « The Gold Standard

  3. Edward Hugh is proven wrong again!

    Spanish economy did not reenter contraction on 3Q.

    As a matter of fact in yearly growth it reentered positive growth while it remained neutral in quarterly figures.

    Edward, you are going to have to look at other data for your predictions, you do not get one right!

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