Spain has a real economy that is sinking whilst her financial markets boom

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

Government Bonds

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.

Equity Markets

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?

Business Confidence

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.

This entry was posted in Currency, Equities, Euro zone Crisis, GDP, General Economics, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , , , . Bookmark the permalink.
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  • JW

    Hi Shaun
    Is it not correct to view stock markets as surrogate casinos? Their relationship with the real world has surely completely ended? All that electronic money seeping out from commercial banks due to endless QE has to go somewhere. Al I have read recently is the latest push to infer that ‘everyone’ should get out bands and back into equities. I surmise that as soon as the gullible retail investors do this we will see an enormous sell-off later.

    So the gambling continues for the benefit of few, whilst the real world ( mainly western/Japan) is mired in the public consequences of any and all loses, whether that be through unemployment, lower real wages, increased taxation, less services or slow leakages through inflation ( real price increases, not manipulated statistics).

  • pavlaki

    Shaun, I am glad you are around to inject a dose of reality as I was beginning to think I was missing something in all this Europhoria! I find it odd that the forex markets consider data that is not quite as bad as they expected as a sign to boost the Euro in such a dramatic fashion. I am no forex trader but I see no reason to be so bullish about the Euro with all it’s underlying problems (of which you have highlighted some significant ones above). The real life situation on the ground in Greece is dire indeed and I would not be surprised to see political upheaval soon. It seams to me the fact that things are getting worse at a slower rate is now the new ‘optimistic outlook’!

  • Anonymous

    Spain’s export performance enhancement is from a very low base. But then there are other countries rather near to here that have the same problem and share the issue that most of their high value exports are done by companies that remit their profits (and thus taxes) elsewhere. The car and commercial vehicles industries come to mind.

    Barroso is just another PR merchant with his eye on the very long term. Anyone believing him is likely to be in a very small minority.

  • James

    Very interesting as ever, Shaun.
    There seems to be a complete breakdown in so many areas at the moment:
    1. between the power of politicians and the electorates. I now see that the Garmans think it “blackmail” and “dangerous” to offer a referendum on the EU;
    2. Between the markets and reality, as you say. Whether equities are being pushed higher by QE or other technical factors, I do not know. It is, however, obvious, that they are not following reality. You could say that this is because markets look forward, not backwards, but there is precious little sign of a recovery as far as I can see, except in politicians’ soundbites
    3. Between the rhetoric and the situation on the ground. You have to pinch yourself to realise that the Greeks and Spanish are fighting for the top unemployment figures, both being OVER 25% and over 56% in Greece for youth unemployment.
    4. Between what is happening to government debt and spending (increasing) and reporting of either (decreasing, under control, just two more years of austerity etc).
    It is almost as though the news is so bad that we have become inured to it and just want to hear good news. Would anyone have dared to think of government borrowing at these levels or QE even five years ago?
    ps If you’d like a great analysis of the UK debt/deficit position, this week’s private eye has a very entertaining summary…

  • Drf

    Hi Shaun,

    “However the economy in Spain is showing an increasing dichotomy between the financial side and the real economy.” Is this not the principal problem which all Western economies have now? It is just that some are more advanced on the oblique slide to oblivion than others!

  • Rods

    Hi Shaun,

    Another excellent article.

    We know bond markets are being extensively manipulated by governments. I have read recently many economic commentators suggesting that savers should be buying shares as a hedge against inflation and 2-3% returns from dividends. With stock market volatility and declining profitability in Europe, I’m sure many people are going to get their fingers burnt here. Are share prices likely to continue rising in the long term as a hedge against inflation, if the Euro countries continue to be mired in an economic recession / depression with declining company profits? Are dividends going to continue at the current rate? Where many countries over the next 10 years are going to have to face a sovereign debt crisis, is the stock market going to be mired in a lost 10 years in Europe and a lost second decade in the UK?

    I think the problem for many people and business that have savings, is where do you invest them to get a return above inflation? In these uncertain economic times there is no easy answer to this question! I guess the best you can manage is a range of different investments, knowing you are going to get burnt on some of them.

    The next major crisis is going to be pensions in the UK, Gordon Brown’s £5bn a year pensions tax grab has been a disaster, so we have now gone from the best funded in Europe to the worst. Many pension funds I’m sure are currently contracting where the fund fees exceed and returns. So funds and historically low annuities will mean the expected pension is no longer there.

    All we need is some sovereign debt crisis QE induced hyperinflation and many people savings and pension funds will be wiped out!

    Where I think the US is now at the beginning of the end of their economic problems with cheap shale gas boosting investment and rescuing their economy. I don’t think that after 5 years of recession / depression that Europe is at the end of the beginning yet, with the beginning of the end no where in sight. With the desperate situation in Greece and Spain, is this going to lead to a third major European political crisis in 100 years?

  • JW

    Hi Rods

    Agree completely about the bond/equity ‘spin’. Its just about return of your capital.

    I think the US situation is not nearly as good as portrayed. The only increases in ‘employed’ since 2008 are in the over-55 are group, and they are predominantly part-time. Wages are still slipping. Shale gas is a help no doubt, but whether its enough to offset the rest is debatable.

    However the demographics in the US are so much better than the EZ in general.

  • MW

    Shaun, interesting article. Hate to nit-pick, but the ‘don’t believe anything until it’s officially denied’ was from Jim Hacker, not Sir Humphrey……

  • Midge

    Almost gone unoticed that the greek situation has led Cyprus needing a bailout.Belated congratulations on your RPI campaign victory.

  • John

    Aren’t we going to see contradictory situations like this until the german elections are over? German demands will be muted for fear of inflaming home politics. They will allow situations to develop further away from the line they have been taking over the past several years. Once the elections are over, I expect to see the true german position in the EZ to be reasserted gradually. However, events, like the US budget deficit, could always create waves.

  • Rods
  • Anonymous

    An important aspect of economic activity surrounds the ownership of existing assets and speculation upon their future values. In Ricardo’s time it was agricultural land. Today it is financial assets and the process of financialisation. and the fees that can be charged for peddling these things.

    As opposed to investment to 1) meet needs 2) generate productive capacity, jobs and incomes.

    But the relationship between these two things is the most fascinating aspect of economics.

  • Anonymous

    Hi JW

    I assume that you meant bonds and not bands! As to the investment advice I agree that many government bonds do look expensive the catch then is where else do you go? If you have had shares in Spain or elsewhere recently and have done well good luck and well done but that is very different to buying at these new higher levels.

    I found the Spanish bond market intriguing as we have returned to where we were last January but what you have made me think of checking is the IBEX 35 too and guess what?

  • Anonymous

    Hi pavalaki
    With apologies to any pygmies reading this in the “currency wars” we are seeing a height contest amongst pygmies especially now that a currency you used to be able to fall against -the Japanese Yen- is now falling too.

  • Anonymous

    Hi James
    If I take your point 2 and agree that markets are supposed to look forwards I wonder what it is they think they are looking forwards too? I have some thoughts but would be interested in what readers think about this….

  • Anonymous

    Hi Drf
    I can only agree with that.

  • Anonymous

    Hi MW and welcome to my part of the blogosphere

    You are entriely correct so apologies. However in checking I reminded myself of some very funny other ones so thank you! Here is one for you.

    “Two kinds of government chair correspond with the two kinds of minister: one sort folds up instantly and the other sort goes round and round in circles.”

  • Anonymous

    Hi Midge.

    Thank you. As to Cyprus it looks as though her banks have been wiped out, I guess as ever nobody will be to blame!

  • JW

    Ah yes, identical.
    I wonder how much of share movements is now due to high speed algos?

  • HarryA


    Do those deficit percentages include debt interest? 10yr USTs at sub-2% is not sustainable…

  • HarryA

    Fluctuations in bond yields cannot mask the impact a 25% unemployment rate has on an economy. Short-term investors can make a fast-buck riding the partisan views of Banks and Politicians. However long-term investors – the people, pensioners or capital suppliers of last resort will lose out.

    Japan’s stagnation existed despite a current account surplus. The economy stalled but never suffered as much as Spain or Greece will. But how have equity investors been rewarded there? Even bond investors have made negligible returns, boosted by the currency effect.

  • Anonymous

    Spain, a country of carefully cultivated paradoxes. The elite can see their long-established privileges melting away as the country’s egregious scams are revealed. Political corruption has reached the point where even the socialist opposition leader has called for a halt, demonstrating impressive hypocrisy. In truth, Spain is riven by endemic corruption that affects all parties. The working man, once protected by the strongest restrictions on redundancies and automatic pay rises with inflation coupled to a very decent state pension scheme, sees those protections beginning to loosen. In a country that claims 25% unemployment, the workforce is nervous and angry. Half the kids are out of work, or at least say they are, and the best ones are fleeing to Germany. Nobody is doing anything about the massive problem of at least 1m unsellable new houses and the catastrophic amount of bad debt that has been the direct result in the local savings banks. The bad debt still has not been admitted publicly, but in private, figures of around €1tn are discussed. That really is a lot of money, around €21,000 per Spanish resident. Construction continues apace, financed by who knows what.

    Spain is on the autopilot and approaches the famous cliff. No doubt, like the US, it will find a way to smooth things over for a while longer, but the maths of the situation will ultimately catch up with Rajoy. Shouting about how wonderfully exports are doing is not the answer, they are better than they were but they are nowhere near enough to create the growth needed to sort out the economy. Making a start on demolition of the half-completed housing projects would be a good idea, but for the triggering of nasty consequences for the banks and their hidden bad debts.

    Oh, well, the sun will be back in a couple of months, at least in the south. You can rely on that if nothing else.