One of the features of the credit crunch era is that apparently contradictory themes and trends are able to coexist in a manner which would previously have been dismissed as unthinkable. Of course we also know that calling something “unthinkable” these days as European Commission President Barroso did about the break-up of the Euro actually means that it is a continuing danger. This also follows the famous line from the apocryphal UK civil servant Sir Humphrey Appleby.
Never believe anything until it is officially denied
However the economy in Spain is showing an increasing dichotomy between the financial side and the real economy. I have discussed it before but the drumbeat is getting ever louder.
Spain’s Financial Markets
There has been an ongoing rally in the price of Spanish government bonds ever since the head of the European Central Bank in effect gave them a put option via his plan for Outright Monetary Transactions or OMTs. This worked in spite of the fact that it has never actually been put into practice.However according to its prospectus it would operate here.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years
If we now look at that part of the Spanish yield curve we see that an extraordinary rally has happened with the two-year yield dropping from over 6.6% in late July 2012 to 2.13% as I type this. This has extended to maturities beyond OMTs spectrum as the benchmark ten-year yield dropped yesterday below 5% after being 7.5% in late summer. So quite a rally all round and you might think from all this that Spain’s economic prospects had improved especially once you see that she has been able to issue some new debt at the new cheaper levels. So far so good.
Here we see a very similar pattern as the IBEX 35 dipped below 6000 in late July 2012 but is now at 8645 giving a rally of around 44% in a relatively short period. Well done to anyone who got into this. However back to today’s point a Martian observing this -in between wondering what he/she will do with this platinum coin stamped US Treasury they have just received- might reasonably conclude that Spain is seeing an economic recovery or that one is at least in prospect.
The Euro exchange rate
This on the face of it looks if we return to Euro area political speak a picture of health. It has risen to nearly 1.33 US Dollars and has pushed the UK pound back into the 1.22s. Against the currently stricken Japanese Yen it has surged to above 118 where the prospect of what has become called Abenomics in Japan has seen the Euro rally by 10% in less than a month and a half.
But of course Spain is trying to export her way out of trouble and whilst she has improved her export performance there are plainly issues at the new higher exchange rate. Here is an issue around the fact that she does not have her own currency and that it must now be harder to export if we look at the real economy. Against this there will be an anti-inflationary influence from the rise against the US dollar as many commodities are still priced in it.
Also as Alice Ross of the Financial Times has pointed out today.
Bank of Tokyo: Every new wave of the euro-zone debt crisis began after sustained rallies for the euro.
The Real Economy
This is a much grimmer tale and there is a real dichotomy or divorce between it and the position outlined above. When I last discussed Spain on the 28th of December I pointed this out about her retail sales position.
Sales in retail trade at constant prices (that is, after eliminating the prices effect) showed an annual variation of –7.8% in November.
In addition the latest numbers from the Bank of Spain had indicated that her banks were responding to ever higher doubtful loans by reducing the supply of credit to both households and businesses. And just to add to the increasingly toxic mix economic growth in 2011 has just been revised down from 0.7% to 0.4%.
Industrial Production takes a dive
Todays numbers lead us towards describing the month they refer too as nasty November if we recall the retail sales figures above too.
The annual rate of the IPI, adjusted for the calendar effect, stands at –7.2% in November, as compared with –3.1% in October.
Okay what sectors was this concentrated in?
All the industrial sectors presented negative annual rates
If we look back over the past year we see that both capital and intermediate goods production in Spain have fallen every month and this is on both the actual numbers and the seasonally adjusted ones. the underlying index is now at 77.9 where 2009=100. Regular readers may have spotted that 2009 is the new 2005! Not quite the attempted manipulation thwarted in the UK yesterday but still something of what in baseball is called a curve ball.
Also if we look into the detail of the numbers we see something that looks likely to feed into Spain’s export numbers sooner or later. Of the categories listed as weakest over the past year we see the following. Manufacture of motor vehicles -13.9% and Manufacture of parts and accessories for motor vehicles -12.6%.
To put it another way Novemeber managed to be even worse than what has been a very poor year for industrial production in Spain.
The average for the Industrial Production Index registered a variation of –5.7% in the first eleven months of 2012, as compared with the same period the previous year.
Sometimes we learn things off the beaten track
If we take a look at passenger numbers on public transport in Spain we see this.
The variation rate for the number of passengers on public transport in November as compared with October 2012 was –8.4%. This monthly rate was the lowest in the last five
What might happen next?
After the retail sales and industrial production numbers it is right to advance on this survey with some trepidation and you would be right to do so.
The Harmonised Business Confidence Index (HBCI) registers a drop of 4.1 points, as compared with the fourth quarter of 2012, showing a new drop in the confidence by businesspersons.
If you see the number quoted somewhere and wonder how the index is now 100 it is because it has been restated inspite of only being a year old! On the release it has now started life in 2012 at both 100 and 105.4. Oh dear! But if we look beneath this tangled web we see this.
The difference between the percentages of favourable and unfavourable responses, known as the Balance of Expectations, stood at –50.1 points for Spain as a whole, as compared with –43.9 of previous quarter.
As we advance into 2013 we see that a feature of the economic landscape is a complete divergence between the financial economy and the real one in Spain. She is far from alone in this as if you look at UK financial markets such as the booming FTSE 100 and compare them to today’s dire industrial production numbers (-2.4% year on year in November in spite of improved oil production). However what stands out here is the scale of the apparent decline in Spain’s economic statistics which I do not feel have been fully reflected in her Gross Domestic Product numbers yet.
Back on January 3rd and the 27th last year I declared my fears that Spain was slipping into an economic depression. Since then whilst in many ways I would like to be wrong the data has backed up this view. But also we see a circularity in all this which emerges if I quote from my update of the 27th of January 2012.
In some ways it also illustrates a weakness in using government bond yields as an indicator. As I type this Spain’s ten-year benchmark yield has dropped back towards 5% this morning
Is this version of history doomed to repeat itself? Will 2013 repeat the pattern of 2012 in this respect with optimism at the opening of the year then pessimism and then optimism? One thing has changed though and that is that Spain’s economy is substantially weaker than it was back then.
The Financial Times
Last night it published an editorial with which I completely disagree and I have replied online to it. Below is my reply to Lies,damned lies and odd statistics.
This editorial does the Financial Times no credit at all. It completely ignores the fact that there is a statistical debate about the Consumer Price Index (CPI) as well as the Retail Price Index (RPI). You do not need to take my word for it let me quote from the Royal Statistical Society’s response to this issue.
“However it is clear to us from the work carried out so far that the accuracy of both the CPI and the RPI could be improved by implementing the results of the research programme and that changing the RPI now to bring in onto a par with the CPI would be premature.”
Or the view of the RPI CPI User Group of which I am a member.
“the credibility of the RPI (and CPI) depends on convincing users that the concepts and methods have been agreed in a full and fair process of consultation. CPAC appears to have given undue weight to positions that … lack empirical support”
So there has been another side to this debate which I have covered in the article linked to below.
However the other side is missing from this editorial which might mislead readers into thinking that there isn’t one. I hope that such was not the intention.