28th August 2012
Today I wish to discuss the latest economic figures from the Kingdom of Spain. We have received an update to the advance estimate on economic growth in the second quarter of 2012. From the Spanish statistics institute:
'The Spanish economy registered a decrease of 0.4% qoq in the second quarter of 2012, a tenth rate more negative than the previous period…..The annual growth rate stood at -1.3%'
The quarterly estimate is unchanged on the advance estimate but the year on year rate has been revised down from 1% to 1.3%. You may wonder how these two events can be combined and it is because the numbers for 2011 have been revised downwards. In fact the report illustrates part of my critique of the way we treat Gross Domestic Product numbers as a latter day type of economic gospel:
'…the growth of Gross Domestic Product (GDP) in real terms for the year 2011 was revised with a drop of three tenths (from 0.7% to 0.4%), and for the year 2010, it was corrected with a reduction of two tenths (from -0.1% to -0.3%).'
Also if you look at the numbers for 2009 they still say provisional next to them which should mean that any updates on GDP figures should be taken with a pinch of salt.
If you take a look at the numbers below you get an idea of Spain's recovery (or not) from the initial shock of the credit crunch:
'In turn, the annual growth of GDP corresponding to the years 2008 and 2009 remained unaltered at -3.7% and 0.9%, respectively.'
If we put the whole credit crunch into a pot together so to speak we see a sharp contraction but what we do not see is the usual bounce back that would be the normal pattern after such a decline. Indeed in a ever more familiar trend we have seen a very thin recovery followed by a further decline.
How are Spain's figures better than those of the UK?
A quarterly number of -0.4% for Spain compares favourably with that of the UK which Spain is still recording as -0.7% but was revised on Friday to -0.5%. So a narrower gap but nonetheless a gap which will come as a surprise if you look at Spain's retail sales, industrial production and services updates.
We get some insight into an explanation from the detail of Spain's economic output:
'Analyzing the Spanish GDP growth in the second quarter of 2012 from the perspective of expenditure, there is a negative contribution of domestic demand, which reaches -3.9 % versus -3.2 % in the previous quarter and also a stabilization of the positive contribution of external demand, 2.6 %.'
Okay so now we see that domestic demand in Spain's economy is falling at a substantial rate which is consistent with the other economic statistics she produces. This has been largely offset by a positive external demand or net trade situation. We have seen this situation before and the real question is how much of this is an increase in exports (good) and how much is a fall in imports (bad) due to the weakness of domestic demand.
If we do this we see that Spain is continuing to see what is good growth -particularly in the circumstances- in her exports: 'Exports of goods and services increased five tenths growth, going from 2.8% to 3.3%'
But this is a smaller factor than the fall in imports caused by decreasing domestic demand:
'Meanwhile, imports of goods recorded a slightly more intense decline in this quarter, from -5.6% to -5.9%.'
We have arrived at an explanation for Spain's economic growth figures looking out of line with her underlying economic performance. If we look at the positive she is putting up a good export performance. But unfortunately her net trade improvement that has boosted her GDP also has a strong influence from falling import levels. It is one of the flaws of GDP statistics that they can show an improvement or in this case a less worse situation due to an economy being weaker! We saw an extreme case of this in Greece in the first quarter of 2011 when she actually recorded positive economic growth which was inconsistent with both preceding and subsequent updates.
If we look forwards we see that we would expect this effect to begin to wear off in Spain as we progress through to the end of 2012 and into 2013 so we may see quite weak numbers to some which no doubt will be presented as a "surprise".
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