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Wednesday, April 09, 2008

The Spanish Government Response

The Spanish government is preparing a 22 billion euro ($34.38 billion) stimulus package as a response to the economic problems the country is facing. This was the substance of the statement by José Luis Rodríguez Zapatero, Spain’s acting prime minister, to the Spanish parliament yesterday. The package constitutes the new government's response to its electoral promise of emergency measures to reactivate Spain's faltering economy, which has been severely affected by the sudden collapse of construction activity after a 10-year property boom and the continuing turmoil in global financial system which has meant the international wholesale money markets effectively remain closed to mortgage backed securities issued by Spanish banks.

Outlining his government’s priorities for the next four years, Zapatero told the Spanish parliament he would speed up government infrastructure projects such as high-speed train links, promote more state-subsidised housing and extend government guarantees for some mortgage securitisations. Property developers with unsold stock are going to be able to place their empty homes with a state rental agency, and there will be retraining schemes for tens of thousands of unemployed construction workers. Spain's new government will also ramp up home-building programs and offer mortgage-repayment relief as part of a U.S.-style fiscal-stimulus package.

The roughly €22 billion ($35 billion) plan, representing about 0.5% of gross domestic product, aims to ease the bite of the credit crunch on debt-laden households that has brought the Spanish housing sector to a virtual standstill.

"Our government will immediately, as soon as it is constituted, take measures to counter the economic slowdown," Spanish Prime Minister-Elect José Luis Rodríguez Zapatero said in Parliament, which is set to approve his nomination this week.


Zapatero promised his government would build 1.5 million new price-protected homes for low income families in order to offset a sharp drop in home-building activity. He said he would also like to make it easier for homeowners with difficulties to meet their mortgage repayment obligations to extend the terms of their loans.

In his speech, Zapatero also pledged a 400-euro rebate for tax payers, speedier payment of VAT rebates for businesses and tax breaks to encourage Spain's struggling construction sector to renovate old town centres. He also announced a programme to help building workers find new jobs and a plan to meet unions and business leaders to find ways to boost productivity.

Zapatero announced an ambitious public works programme, including the idea of putting millions of euros into building 150,000 affordable homes a year in an effort to sustain a now very beleagured construction industry.

Despite criticism that this is just a "short-fix" solution to deeper economic ills, the government will also invest in major road- and rail-building programmes.

There was however evident disappointment among many analysts that Zapatero failed to announce any new measures - other than those already included in the Socialist party's manifesto - to deal with a rapid deterioration in the economy since a general election last month. Some economists estimate the country is growing at only half the rate it was this time last year, when the economy was expanding at a 3.8 per cent rate. If the market for Spanish mortgage-backed securities continues to remains closed, growth could fall to just 1 per cent this year, according to some forecasts. If this were to happen unemployment would evidently rise sharply.

Spanish banks are reining in credit - particularly to builders and property developers - because they can no longer fund themselves in the international capital markets, and this has accentuated the crisis in the construction sector, once the motor for growth.

Although Mr Zapatero has promised to speed up infrastructure projects, economists say government spending will not be able to replace private sector investment in housing, which totalled 9 per cent of gross domestic product at the height of the construction boom.


The government draws confidence from a budget surplus which totalled 2.2 percent of gross domestic product last year. But falling tax revenues have already slashed that to 0.8 percent of GDP in the first two months of the year and the Bank of Spain has said that - even without government stimulus programmes - the surplus would virtually disappear in 2009 simply as a result of the slowdown.

Sunday, April 06, 2008

If Construction Is Falling in Spain, What About The Motor Industry?

Spain's construction industry isn't the only part of the Spanish real economy which is currently in difficulties. Years of higher than desireable inflation and low productivity growth has produced a less than desireable situation in many areas which has to some extent been hidden behind the apparent affluence created by many years of property boom. The motor vehicles sector is just one example, but it is a good one since it is currently being squeezed by stalling sales at home (as domestic demand drops) and cheaper rivals abroad (especially in the rapidly growing Eastern Europe sector ). All of this is only going to add to the pressure which is currently falling on policymakers to speed reforms and to develop a workable plan to find long term alternatives to construction dependence and an unsustainable external trade deficit.

March was a pretty bad month for the Spanish motor industry, since according to Spanish car manufacturer association Anfac, new car sales in Spain fell by 28.2% to 124,698 vehicles compared with 173,716 cars in March 2007. In the first quarter of 2008 taken as a whole the position was marginally better, since 347,734 cars were sold, which is only a 15.3 percent drop over the first quarter of 2007, but it does also give us another indication that the rate of deceleration in the Spanish economy increased significantly in March.


"The economic situation has darkened since the start of the year, unemployment is worse than expected and people don't have much disposable income given their debt levels and the increasing cost of basic goods," said ANFAC, Spain's car makers association.

The newly re-elected Socialist government hopes reforms to improve productivity will help the sector and reduce Spain's dependence on the construction and services sectors. But many analysts say they are going to have their work cut out for them as not only Spain but all of western Europe battles cheaper labour markets to the east such as Poland and Romania, to say nothing of burgeoning auto production in India and China.

Spain has one of the lowest productivity growth rates in the euro zone and wages as high as any in western Europe, putting its future as an auto manufacturing centre in doubt. Top carmakers in Spain include General Motors, Ford, Renault, Daimler and Nissan, who all rushed into Spain in the 1970s and 1980s to benefit from what was then a cheap labour force as well as proximity to Europe's largest car markets in Germany, Britain and France.

But the now comparatively high wages have sparked plant closures and job cuts as factory after factory has headed east. Even absenteeism seems to have become a problem with the industry lobby estimating absenteeism cost the sector 26 billion euros ($41 billion) between 2000 and 2007.

Absenteeism of 7 percent last year was equivalent to 6.7 million labour hours and compared to just 3 percent in Romania, for example, Spanish car manufacturers' association Anfac said. It said the high rate was mainly caused by unjustified sick leave.

Jose Vicente de los Mozos, head of Nissan's Spanish operations has been making the point in the press that inflation is an even bigger problem, and he argues that if Spain's annual inflation rate stays around the current 4 percent, Nissan would have to improve productivity by a whopping 8 percent every year until 2010 to remain competitive.

Spanish inflation was 4.6 percent in March, far above a record 3.5 percent for the euro zone.

But according to the most recent data from Spain's INE, producer prices in Spain were increasing even more rapidly than consumer prices in February - at a year on year rate 6.6%, a very hefty clip, especially given the rate at which the economy is decelerating, and very bad news in the sense that it seems the increase into consumer prices is working its way back upstream into production.




Clearly with domestic demand in freefall exports from cars built in Spain is the key to growth in the sector, and Anfac hope to achieve a production rise of around 1-2 percent this year - to around 3 million vehicles -- a level it hopes to keep in the medium term. Yet Spain already exports 80 percent of its output and if nothing is done about the relative cost situation it is hard to see a significant increase in exports. And it simply gets worse and worse, since the car industry accounts for almost a quarter of Spain's exports, employing more than 9 percent of its workforce and accounting for about 5 percent of Spain's economy. So any strategy for turning round the Spanish economy into an export driven one will have to pass through cars, and address the endemic problems of the sector.

And of course the key to turning this round is productivity, but higher productivity in Spain now will mean ramping up growth without job creation, and a substantial period of wage restraint (after the end of the German property boom in 1995 German real wages barely budged in a decade). So while a rise in productivity is crucial to the industry's (and the Spanish economy's) survival, ironically in the short term this may only add to and not alleviate the pain. I suppose at this point it is a bit late to say this, but what we have here is a clear example of why it would have been better never to have gotten into this situation in the first place.

Thursday, April 03, 2008

Spain Retail Sales February 2008

Euro zone retail sales turned out much weaker than expected in February, contracting on the back of falls in Germany, Italy and Spain and reinforcing concerns about the outlook for economic growth across the eurozone. In the Spanish case retail sales contracted by 2.6% when compared with February 2006, according to data from Eurostat earlier today.



Sales were also down in February by 0.2% when compared with January.


Spain Consumer Confidence and EU Economic Sentiment Indicator March 2008

Consumer sentiment fell back again in March to 73.1 points from the 76.8 reading registered in February, according to the Instituto de Credito Official (ICO) earlier today.



The reading is still up (if only slightly) from the all time historic low of 70.9 registered in January, but still in the conext of everything else we are seeing it is yet another indication that the situation in Spain is becoming grim.

The index measuring the perception of the current economic situation slipped to 60.0 in March from 61.0 in February, and confidence in expectations for the next six months fell to 86.2 from 92.5.



The European Commission has also now reported its eurozone “economic sentiment” indicator for March, with the composite number bouncing back a little from the February reading which its lowest level since December 2005. The indicator, which gauges optimism across all economic sectors and is regarded as a good guide to likely future trends, was back up to 102 after falling to 100.1 in February from 101.7 in January. As we can see in some of the counries shown in the chart below, the picture is a mixed one, with Germany for the time being holding reasonably stable, climbing back to 104 from 103.7 in February (France is also holding up fairly well at 105.6, from 105.2 in February), Ireland hovering, Italy continuing its steady downward path, and Spain continuing to head steadily off the map. The March reading in Spain was 83.9 which was downm from 87.5 in February. I suppose here it is a case of how low can you go before you hit bottom. Yet awhile I suspect.



Spain Services PMI March 2008

Business conditions for Spain's services companies deteriorated at the fastest pace ever recorded in the nine years for which this survey has existed in March, according to the lates data from NTC Economics today. The Spanish headline Purchasing Managers Index turned in a reading of 40.9 - well below the 50 cutoff point between growth and contraction. This was also the lowest level ever for any of PMI dervices survey for a European economy.



This latest reading gives us an indication of just how rapidly the global credit crisis is now undermining Spain's long-running economic expansion, an expansion which had drawn most of its force from household borrowing against rapidly rising housing prices.

"In Spain it seems to be an all-round malaise," said Chris Williamson, NTC's chief economist. "It was a dreadful survey."


This result follows the manufacturing survey on Tuesday which showed Spain's manufacturing sector put on its worst performance in over six years in March as output shrank sharply and firms reduced staffing.

The Spanish services PMI, which fell nearly 6 points to 44.2 in January, had recovered a little in February to 46.1. Confidence among Spain's service sector providers, ranging from banks to cafes, fell to a survey low for the second month running in March.

"While still indicative of optimism, the Business Expectations Index eased to 57.1, from 59.2, and was well below the survey average of 72.1," said NTC. "Negative expectations were attributed to fears for the wider Spanish economy."



New orders fell in March at their sharpest rate in the history of the services survey and companies' costs continued to rise sharply, although the rate of input price inflation eased from February's 87-month high.

Spain on Monday reported a 4.6 percent inflation rate in March, fuelled by global food and fuel prices and raising the prospect of continuing strong inflation during a year of sharp economic slowdown. In other words, in the very best case the Spanish economy is now suffering from some form or other of stagflation. But if the deceleration continues at the present case worse may be to come, since stagflation in the context of a rapid fall in house prices and growing insolvency (both corporate and private) can rapidly - as we have seen in the Japanese case - convert itself into some form or other of endemic price deflation.

Wednesday, April 02, 2008

Spain Unemployment March 2008

The number of registered jobless in Spain fell back very slightly - by 0.6 percent -in March from February, but was sharply up - by 11.73% on a year by year basis, according government data released by the national labour agency (INEM) today. On the surface this could be taken as mildly positive news (as it has been in some of the press commentary, since it breaks a run of five consecutive months of unemployment increase as the Spanish economy has been slowing, but the truth here lies in the details. The number of unemployed fell by 14,356 people to just over 2.3 million in March. But, for seasonal reasons unemployment normally rises in March, and this years rise has been very small indeed. In fact this is the smallest March increase since 2001, a year when many parts of the European economy - but not Spain - were also headed for recession.




The Bank of Spain forecast earlier in the week that unemployment would rise to 9 percent this year and 9.8 percent in 2009, and this in spite of a 22 billion euro ($34.38 billion) fiscal stimulus package due to be released soon by the government.

The last government unemployment figures, as opposed to the number of registered jobless, were released in January and showed unemployment at 8.6 percent in the fourth quarter, up from 8 percent three months earlier. March's joblessness decrease was not that disimmilar from that registered in March 2007, when the number of unemployed fell by about 16,000. And the construction industry was already begining to feel signs of slowdown at this point, let it be noted. Since that time the number of jobless has risen by 240,000 over the past 12 months as the construction boom which fuelled economic growth for a decade went into reverse and the banking and financial sectors began to be hit by the impact of the credit crunch.

Perhaps the most revealing chart of all here is the one which shows the year on year change in unemployment, and where we can see how a quite positive (decline in) unemployment situation has little by little been being converted into its opposite.


Tuesday, April 01, 2008

Spain Manufacturing PMI March 2008

Well the unresolved problems in Spain's financial and construction sectors are now slowly but surely making their presence felt across the whole economy. Accroding to the latest reading on the NTC Purchasing Managers Index, Spain's manufacturing sector put in its worst performance in over six years last month as output shrank sharply and firms reduced staffing.

The NTC Purchasing Managers' Index (PMI) is a composite indicator measuring the health of manufacturing industry, and it once more fell below the 50.0 mark separating growth from contraction, reaching the quite low level of 46.4, its lowest since December 2001, down from 46.7 in February. So, to be clear, Spain's manufacturing sector is contracting, and has been contracting for some months now, and the news today is that the rate of contraction seems to be accelerating.



This was the fourth successive month of negative territory for the Spanish PMI, painting an ever bleaker picture for the euro zone's fourth biggest economy.
The output index fell to 43.7, its lowest in the survey's 10-year history, while new orders fell to 45.3, the lowest in just over six years. Firms complained of reduced domestic demand, with many blaming weakness in the construction sector.

"Spain is entering a particularly dire phase in terms of weak domestic demand ... and its performance is having an impact elsewhere (in Europe)," said Chris Williamson, chief economist at NTC Research.


NTC said unemployment in the manufacturing sector rose for a seventh successive month in March, reflected in the employment index slipping to 47.8 -- its lowest since April 2005 -- from 48.3 in February.

"Given the recent trend, the manifesto pledges of the (ruling Socialist party) to bring the unemployment rate down to around 7 percent and to create 2 million extra jobs during its next four-year term appear at the outset difficult to achieve," said Nathan Carroll, economist at NTC Economics.


At the same time inflation pressures continued to build up. While input prices rose, output prices fell, stretching companies' margins as they cut prices to attract new business. The rate of cost inflation accelerated for the fourth month running and was the sharpest since last July.