As 2013 has opened there has been a large degree of apparent optimism in most financial markets about the future of the Euro which has contrasted markedly with actual economic measures and statistics. An example of this is the exchange rate of the Euro which has pushed above 1.33 versus the US dollar again today and into the 1.18s versus the UK pound. Against the currently chronically weak Yen it has surged to 119 again today.Another is the performance of equity markets where the Eurofirst 300 has risen from 705 in early 2009 and 964 in the late spring of 2012 to 1165 as I type this. Government bond markets in the troubled periphery have risen strongly too with perhaps Portugal taking first prize as her ten-year bond yield has dipped below 6% this week which is quite a decline from the over 15% of a year ago.
This may not be as good as it looks
I have pointed out lots of times that whilst the rally in the Euro may be good for political rhetoric it is bad for competitiveness. This is a particular irony and issue for the peripheral countries that are supposed to be on a competitiveness improvement programme! An example of two steps forwards and one step back perhaps.
On this subject Morgan Stanley have done some research on Euro fair values for each country against the US dollar (h/t Alice Ross of the Financial Times). These show 1.53 for Germany, 1.19 for Italy and 1.07 for Greece. It is nice of them to confirm my argument that Greece needs a depreciation/devaluation on the way to pointing out which nation in the Euro is most likely to be a fan of the current Euro rally.
Is Germany having the last laugh on Euro area monetary policy,letting others have their way and then tightening policy via the exchange rate?
The Real Economy
Unemployment in Spain
Today has seen the release of numbers which show that the unemployment rate in Spain has risen to 26.02% meaning that both it and Greece now have unemployment rates above 26%. Indeed the south and south-east of Spain has seen the unemployment rate push above 30% according to the map provided. At 5.965,400 the number of unemployed is dangerously close to another grim threshold and if the rate of increase of 187,330 in the latest quarter is maintained we wil sadly soon break it. These numbers have surged in the crisis period as back in early 2008 there were less than 2 million unemployed in Spain.
Perhaps worst of all youth unemployment (aged under 24) has risen to 55% and aged under 25 according to reuters has risen to 59.8% meaning that a bigger fear than a lost decade in Spain is a lost generation.
Also the latest quarter has seen unemployment rise disproportionately amongst women as they were 116,300 although I have seen no explanation as to why. It does represent a clear change on the trend up to then.
This is a measure which also gives us a signal for the future and during the credit crunch era it has proved to be a useful signal which I am surprised that so few bother with. If we look at Spanish employment we see that is has fallen by 857,100 over the past year and by 363,300 over the last quarter of 2012. So we see an accelerating rate of decline which does fit with the signals being given from other measures such as the purchasing managers indices.
Migration is reversing
We may glean another signal from this and as we look at the fall in the number of foreigners in Spain of 169,200 over 2012 of which 73,700 was in the last quarter it too signals accelerating economic weakness. In the current climate I wonder where they are going…
I often point out that economic statistics are a guide and not a gospel and on that theme here are the details of the Spanish unemployment survey.
Thus, the sample size is approximately 65,000 households, representing information of some 180,000 people. The data are collected by interview personal and telephone
The Bank of Spain
Spain’s central bank added to the sense of gloom about her economy in its latest Economic Bulletin.
During the first three quarters of 2012 the Spanish economy continued on the contractionary course begun in 2011 Q4. The indicators available suggest this pattern will have intensified in Q4, and a decline in the quarter-on-quarter growth rate of GDP of 0.6% is estimated, entailing a reduction of 1.7% in its year-on-year rate
Okay and what is the driver of this?
On the expenditure side, the rate of decline of national demand steepened to a quarter-on-quarter rate of 1.9% (-4.6% year-on-year). This was the result of a combination of transitory factors, such as the effects of the reversal of the bringing forward of purchases prior to the hike in VAT rates in Q3 and the elimination of the extra December payment for civil servants, along with more persistent factors such as the continuing tight financing conditions, despite the easing in recent months, and the weakness of the labour market.
So the domestic economy is very weak and is being supported by Spain’s good trade performance which of course reminds us that she is now having to try to do this at a higher exchange rate after the Euro’s rally. The Bank of Spain also agrees about one of my leading indicators.
Employment fell at a higher rate than the previous year,
Also a little care is needed as many as using the Bank of Spain’s estimate of GDP as the official number,we do not get that until the 30th of this month.
The fiscal deficit
The Spanish government regularly updates us on this subject to tell us that things are going well. Whereas the Bank of Spain’s numbers tell a different story and the emphasis is mine.
The information available for the overall general government sector, covering up to Q3, revealed net borrowing of €65 billion (6.2% of annual GDP), almost 0.5 pp of GDP higher than in the same period a year earlier.
Er austerity what austerity? If this was an old record of the acetate type it would now be getting a little scratchy would it not?
Yet financial markets are in their own zone
Spain had a ten-year maturity government bond issue this week and according to the Spanish Finance Minister this happened.
Never in the history of Spain’s treasury has there been such a volume of demand, whether in an auction or a syndicated sale.
Then his soaring rhetoric completely lost touch with reality.
This is a clear indication of the Spanish economy’s credibility
The play list on his I-Pad perhaps includes PM Dawn.
Reality used to be a friend of mine
Reality used to be a friend of mine……..
Chase the blues away
Take your mind off reality and leave her alone
This theme of financial markets ignoring the real economy has established itself firmly in 2013 so far and there appears to be no let-up in it. The Euro area has seen an extreme version of this as it has had a currency which has risen too. As I have pointed out above maybe Germany can survive this and today’s purchasing managers numbers hint at this for her. But if we look at the Euro area as a whole whilst there has been a small improvement a composite purchasing managers index of 48.2 shows a continuing contraction. Also worries about France will build after her reading of 42.7 for January which indicates not only a contraction but a sharp one.
If we return to Spain’s situation and the question in my title the obvious hope would be for her economy to improve and if financial markets are currently forward-looking then they provide some support. Except we know that many financial markets are manipulated as for example the rise in bond prices has been driven by the European Central banks application of what would be called a backstop in cricket, or Outright Monetary Transactions. So we are left with an economy that is weakening with not only no apparent sign of a turn but genuine fears that it is getting worse. On that basis I can only say that I fear for the consequences of Spain’s increasingly lost generation.