The crisis in the Euro had all sorts of consequences of which one was to cause an implosion in the housing and banking markets of Spain. It is easy to forget that Spain had begun an economic recovery from the credit crunch in 2010 with the Bank of Spain being praised for its supervision of Spanish banks.
However the Euro area crisis saw matters turn south again with negative economic growth beginning in the second quarter of 2011 and continuing for a total of nine quarters. If we were looking for generalisations then domestic demand was poor, but help was increasingly provided by Spain’s export industries and less optimistically by the impact of lower domestic demand on imports.
One impact of this was on output per person which fell from 23,900 Euros each in 2008 to 22,300 in 2013. Another way of looking at the boom and bust is by comparing to the European Union average of 100 where Spain was ahead in 2006 and 2007 at 104 but behind in 2012 at 95.
However if we move forward, we see that the economy of Spain is in a recovery phase which leads to the question - what type of recovery is this? We got an example at the end of April where in quick succession two major indicators gave different signals with one glass half-full and the other half-empty.
Gross Domestic Product
This was the glass half-full section where economic growth was seen to be hopefully building:
Gross Domestic Product registers a quarterly variation of 0.4% in the first quarter of 2014. The annual rate is 0.6% in the first quarter of 2014.
A long way to go but a start in the right direction as this was the first time since the second quarter of 2011 that annual economic growth had been positive.
However the day before the situation had been much more glass half-empty when we were told this:
Employment in the first quarter of 2014 registers a decrease of 184,600 persons, reaching a total of 16,950,600 employed persons. The decrease in employment is the lowest registered in the first quarter since 2008. The quarterly employment variation rate stands at –1.08% (–0.10% for de-seasonalised terms).
Whilst this was a better first quarter than had been seen in recent times it was still a fall in employment levels. This poses a question for the scale of the recovery and intriguingly has a doppelganger relationship with the UK and US, where the labour market has outperformed rather than underperformed economic growth if I may put it like that.
We also got an implication for the state of play in public-sector austerity from the numbers and the emphasis is mine:
Private employment registers a drop of 195,800 persons, whereas public employment records an increase of 11,100 persons.
The numbers for this series also rather disappointed at the same time:
The General Retail Trade Index registered in March a variation of –0.5% as compared with the same month of 2013, after adjusting the seasonal and calendar effects. This annual rate was one tenth lower than that registered in February.
There were hopes that this series would pick-up after the impact of the Value Added Tax (Sales Tax) rises in September 2012 washed out of the annual comparisons. But whilst the previously heavy drops have gone they have been replaced by what can be described as flat-lining rather than sustained growth.
The GDP implied deflator
This is the inflation measure in the national accounts and it was -0.4% in the first quarter of 2014 according to the Bank of Spain (h/t Edward Hugh). Or to put it another way the falling prices drove the economic growth of 0.4% as the amount of output was unchanged but the price it was measured in fell. Last August I wrote an article explaining how this series had been particularly unreliable in Spain in the Euro crisis era and pointed out this:
Indeed 2011 seems to be a troubled year for Spain’s accounts as implied deflator inflation was 0.96% and is now 0.02% which is much more like 1% than 0.1%.
As you can see the past saw a substantial revision which poses questions for the present especially when it was the deflator which “provided” the economic growth recorded.
We saw a familiar theme at play this morning when this was released:
The monthly variation of the Industrial Production Index (IPI) between March and February, eliminating seasonal and calendar effects, is -0.5%. This rate is 1.1 points lower than that observed in February.
The annual rate of the Industrial Production Index stood at 0.6% in the series corrected for seasonal and calendar effects.
As you can see the impact of the headline is that a small decline in March reduced the annual rate of growth to a very weak level which again poses a question about the underlying strength of the economy.
The Spanish economist @JavierGEc has contacted me to say that if you look at working day numbers and core production (excluding energy) then the quarterly growth rate is a more impressive 1.2% and does show an improving trend. So as so often we await more data and hope for extra clarity.
Unlike the rather patchy official data on the Spanish economy this week’s efforts have signalled something of a summer surge.
Business conditions in the Spanish manufacturing sector improved again during April, helped by the fastest rise in production in four years.
So there is hope of a “march of the makers” for Spain. The only cautionary note is that the reading of 52.7 may only mean marginal expansion as we increase our understanding of how these surveys work. The only troubling component which acts as a counterpoint to the labour market data above was this:
The reluctance among firms to raise employment at a greater pace highlights the fragility of the recovery.
Bottlenecks already? Let us hope that these are temporary.
The services report predicted something of a summer heatwave.
The recovery in the Spanish service sector gathered pace in April with activity and new business each growing at rates not seen since the economic crisis began in late-2007.
A reading of 56.5 forecasts out and out growth for the services sector of Spain and the forecast was upbeat:
Meanwhile, companies remained optimistic that activity will continue to rise over the coming year.
Bond yields have fallen
The last year or so has seen a very strong rally in the Spanish government bond market. Now it has a benchmark ten-year yield just below 3% (2.98% as I type this). So a clear gain for the public finances and Spanish government but we know from experience in the credit crunch era that such moves are much more marginal for the real economy.
We can be fairly clear that Spain has returned to economic growth and we can expect more for the rest of 2014 especially if the business surveys discussed above are even half accurate. Also the rule that Spain mimics the UK is economy is both working and offering hope for optimists right now as the UK mini-boom continues. But so far the official data has yet to show a strong improvement.
If we look for headwinds we find a familiar one in the strength of the Euro as it sits above 1.39 versus the US Dollar. Also there is the issue of demographics with Spain having a shrinking population now due to emigration which exacerbates future expected problems in terms of an ageing population. And as the economist Edward Hugh regularly points out, this issue also poses considerable questions for the affordability of the Spanish pension system. Also we have the issue of how a shrinking population matches up with the supply of empty homes? So medium and long term issues remain. However in terms of presentation there will be some relief in September from the ESA-10 cavalry [the coming new international methodology for calculating national accounts - ed.] which is expected to boost the recorded size of the economy by between 1% and 2%.
This article is cross-posted from the website of Mindful Money, for which Shaun Richards is independent economist.