Spain is already in recession and the danger for 2012 may be an economic depression

The New Year in the Euro zone has opened in rather an odd manner. Firstly its politician’s gave  a very downbeat message for 2012 with Chancellor Merkel of Germany saying this.

next year will no doubt be more difficult than 2011

This was odd in itself as of course they have told us so many times that they have solved Europe’s problems! The mainstream media missed that point. Perhaps it was some form of Freudian slip by Chancellor Merkel. However markets completely ignored them and if we look at the German Dax equity index rose by 3% yesterday and have risen by 1% so far today. One could speculate that financial markets have got so used to political dissembling that they have assumed things are more optimistic! Or simply that they no longer take any notice.

Spain is in trouble

For some time I have been writing that the trajectory of the Spanish economy is poor and the outlook weak and over the New Year period and even today we have received new information on this front.

The Budget or Fiscal Deficit

The previous Spanish government told us that it was on target to hit a fiscal deficit of 6% of Gross Domestic Product in 2011. However a spokeswoman for the new Spanish government Soraya Saenz de Santamaria told us late last week that the deficit would now be 8%. This has become a rather familiar trend after elections in the Euro zone  and according to El Pais this has continued this morning as Spanish Interior Minister Jorge Fernandez Diaz has said it will be 8.2%.

This has become such a repeating trend I am thinking of defining austerity as being defined in Europe as an increase in fiscal deficits rather than a reduction for my new lexicon of terms in economics.

The usual response: more planned cuts and higher taxes

The government now plans a 14.9 billion Euro austerity package which combines some 8.9 billion Euros of spending cuts with 6 billion of tax rises ( income tax, capital-gains tax, and property tax). The tax increases will be “temporary” in what is another entry for my lexicon ( for newer readers official uses of the word temporary usually explain something which turns out to be anything but).

If we assume that the plan above is actually enacted we see moves which will reduce Spain’s fiscal deficit by 1% of GDP. This leaves her with a problem as she is supposed to hit a fiscal deficit level of 4.4% of GDP this year and 3% in 2013. So if we start at 8.2% and subtract 1% we get a long way short of 4.4% which means that Spain will have to turn the austerity screw a lot harder if she is to get anywhere near these targets.


The problem here is something I have reported on many times. Spanish regional governments have a higher share of total public spending than is usual elsewhere and they have failed to cut spending as promised. This is often missed by statistics headlines which only report central government numbers.

However if we move onto the Spanish economy we will see as I demonstrate below that there are real dangers of a substantial slowdown which will only exacerbate the fiscal deficit problem. Indeed we are in danger,in my view, of the vicious circle of missed targets,spending cuts and tax rises, and then a  shrinking economy leading to more misssed targets and repeat. In other words what has happened to Greece and looks like is happening in Portugal.

Spain’s economy


This is a central problem with the latest labour market survey showing a rise of 0.6% to 21.52% or 4,978,300. Even worse employment fell too by 148,000 to compound a picture of high and rising unemployment.

Housing Market

Here is another central problem with Spain’s housing boom having turned to dust with its implications for her banking sector. INE her statistics agency has reported this.

The value of the mortgages constituted on urban properties stood at 4,213 million euros in October, indicating an interannual decrease of 40.2%. In dwellings, the capital loaned exceeded 2,355 million euros, 46.5% less.

Apologies for their English (although far better than my Spanish) but the meaning is clear. If we look back to a year ago the market was already in distress so numbers some 40%+ lower tell a grim story. Indeed mortgage rates had risen to an average of 4.33% which was around 0.6% higher than the year before. Interestingly this happened before the European Central bank raised interest rates in 2011 and we will have to wait and see what happens now after it reversed course and cut them at the end of the year.

The number of mortgages had fallen by 36.9% on a year earlier.

What is happening now in Spain’s economy?

We can see from the report above that the two central problems in the Spanish economy were worsening in 2011 but the data is lagged and behind the times.

Industrial Production

This is also behind the times but also looks weak.

The interannual variation of the Industrial Production Index for the month of October is –4.2%, almost three points below that registered in September……..By economic destination of the goods, all sectors present negative interannual rates.

So worrying too and that is before we consider a seasonally adjusted index of 83.9 against a base level of 100 for 2005.

Retail Sales

These numbers are more up to date.

Sales in retail trade at constant prices (that is, after eliminating the prices effect) registered an interannual variation of –7.2% in November 2011, indicating a one tenth decrease, as compared with the rate from October.

All of the distribution classes presented a decrease in sales in November, as compared with the same month last year.

So we now see numbers for November which also illustrate a very weak trend and they reinforce a problem for Spain which is that in 2011 internal demand fell but external demand rose and to some extent compensated. For example her national accounts for the third quarter of 2011 showed internal demand falling by 1.2% but external demand (exports less imports) rising by 2%. However if you look at Spain’s trading partners we see that she will do exceptionally well to increase exports in 2012 and her internal demand looks like it is still falling. She could easily see falling external demand and find this added to by falling internal demand.

The latest data: Purchasing Managers Index for Manufacturing

These were released yesterday and reinforced the trends discussed above.

The seasonally adjusted Markit Purchasing Managers’ Index® (PMI®) – a composite indicator designed to measure the performance of the manufacturing economy – posted 43.7 in December, little-changed from the reading of 43.8 in the previous month and continuing to point to a strong deterioration in operating conditions in the sector.

These numbers are on a scale where a number below 50 indicates a contraction, and of the European countries surveyed Spain was the only one to show a fall, or if you look at her numbers I should perhaps say a further fall. And I am afraid that the detail of the report if anything reinforced the severity of the problem.

New business fell for the eighth consecutive month in December, and at a considerable pace that was slightly faster than that seen in November. Respondents reported falling demand from both domestic and foreign markets.

And particularly worrying considering her already high levels of unemployment.

Employment decreased again in December as firms adapted their workforces to lower demand.


There are real dangers that the Spanish economy could not only go into recession in 2012 but that the decline could be severe. Care is needed as the latter part of the year could improve and the future is always uncertain but she is suffering badly right now. Unfortunately the countries which have applied the Euro zone austerity mantra have all so far the got worse which is hardly auspicious is it?

The official definition for recession of two quarters of negative GDP growth is always slow to tell us a country has gone into recession but unofficially there can be little doubt that Spain is in one right now and the danger if recent history is any guide is of it worsening towards a depression.

Why arent Spain’s government bond yields any higher?

I have described recently the operations undertaken by the European Central Bank which have benefitted Spain’s government bond market in particular. A link to that is below.

However there are other factors to consider right now. Firstly government bond markets often do rise into an economic slowdown as a fixed income stream looks more attractive at such times and if you take the ten-year yield of 5.1% some may quite reasonably see that as attractive. Also if you compare that with the UK gilt equivalent of 2% yield you get 3% more from Spain when not so long ago they were similar. So “spread traders” may be involved too.

Personally I feel that such conventional analysis is likely to  have to face up to a much weaker Spanish economy in 2012 and if we see the sadly by now familiar “vicious circle” of austerity that a yield of 5.1% suddenly does not seem that much when real solvency issues emerge.

This entry was posted in Euro zone Crisis, Eurozone, General Economics, Recession, Yield. Bookmark the permalink.
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  • Anonymous

    Hi Shaun, your comments on Spain are, I think, a shade too kind. The biggest problem that I see is the lack of any plausible way out of the unemployment situation that largely stems from the huge rigidity of the labour market. That will drag the country down for many years as reasons for growth are not exactly easy to spot and reasons not to grow are only too many. But close behind labour market structure is the ongoing failure to recognise the huge damage done by the failure of construction. This operates at several levels, but the boom in the last decade in virtually unregulated construction has limited itself and in doing so, thrown millions on the dole. Not only  is there an enormous stock of unsold houses (some still being constructed, by the way) but the traditional buyers in the south, the northern Europeans, have their own economic problems and perhaps are less attracted to a half-finished bargain concrete jungle than they were to the Spain of the 1990′s. The finance side of the construction balance sheets remains well hidden from view and most probably conceals (in the savings banks) a very large doubtful debt indeed.  That issue needs to be addressed promptly, and not swept under the banking world’s carpets.

    The irresponsible politicians who encouraged Spain to go crazy in construction in the last 10 years of the Euro are now out of office and will neither take the blame nor assist in a solution. They have made their fortunes. But solution there must be or the half of Andalucian youth that is unemployed will get restless, even though they are probably in low paid casual work.

    Besides austerity, Rajoy needs to find a way to re-invent the Spanish labour market against the implacable opposition of the unions. It’s no use hoping things will revert to normal. This is the new normal.

  • ExpatInBG

    Correct – there are many half finished apartment buildings that will never be finished when the Spanish have such a glut of finished empty apartments.

    A significant proportion of the Spanish economy has dissolved – construction, real estate agents and property services will also suffer. Replacing this with other industries is very difficult.

    Austerity may work in Italy given enough political leadership because Italy’s economy has not been ripped to shreds by a construction bust. Austerity is very unlikely to help in Spain because their economy has been significantly reduced by the construction bust.

    Given the banking solvency problems you rightly point out, I feel that
    Rajoy has a mission impossible – and I suspect that Spain will need to

  • Andy Zarse

    I know someone who remortgaged his Spanish holiday appartment. Rather than hand the keys back on a flat he could no longer afford or justify, the bank offered him a fixed rate deal at… 0%pa! So no arrears for him and therefore no solvency issues for the bank. Genius!

    I have always thought that if the Euro collapses then the catalyst will lie in Spain, and particularly their banking sector.

  • ExpatInBG

    zero % mortgage – that is really extend and pretend !

    I wish I could refinance on those terms :-)

  • Walt Kowalski

    It’s not only Spanish banks and regions. More than that, their unions are stubbornly clinging to a economic model which no longer exists. Before Spain’s industries begin to compete globally, they’re going to have to lower their wages to Latin American levels. Globalization stinks for those who are used to nice wages and benefits. I’m afraid that default will come long before labor reform in Spain.

  • Okobasalam

    spain went too far too quick ,beyond the country formation and resources

  • Zak.

    Not to disagree with your basic premise Walt, but what incentive is there for the Unions to accept “Latin American” level wages when their living costs are still well above those of North America.

    You want to reduce my wages by 50% then you’d better tell the bank to do the same to my mortgage, the electric company to do likewise, etc etc etc.

    Cant happen. Isn’t going to happen. And I dont have any other answer either.

  • Anonymous

    Another thought for Spanish property owners – it is easy for a government in fiscal difficulties to slap down a punitive property tax as Greek apartment owners have found out.

  • Anonymous

    Hi Andy
    I was going to say that Expats “extend and pretend” may be at its limit here but then the concept of “debt forgiveness” flashed into my mind….
    I only raise it because they will look likely to try everything they can before this is over.

  • Anonymous

    Hi Mr.K

    If we look back to the past the Spanish economy achieved this by having a currency (the Peseta) which depreciated. By taking a harder quasi-Deutschemark as their currency they took that option away for the last ten years and look what has happened…..

  • Anonymous

    Hi Okobasalam and welcome to my part of the blogosphere.

  • Anonymous

    Spain is an undiluted and clear example of the what this global crisis has been about from start to……I was going to say finish, but I fear this is still the beginning of a new world order. Housing. And the result of ordinary men and women thinking they can ‘make money’ from buying a necessary commodity. The housing bubbles back home in England, (erm UK, sorry), in the USA and elsewhere has enabled this by profligate loaning of (what is now) taxpayers’ hard fought cash. And what a fabulous opportunity for the banking and political classes to destroy democracy and peasant the populations.

    Seriously shaun, having followed you from notayesman’s first days I feel you would be far more useful in charge. You have that objectivity and sense of balance.

    Happy new year to all of you folk around the world.

  • Pavlo

    I was going to elaborate but others have said what I intended to add! You have all quite correctly identified that Spain is in deep doodoo and there doesn’t appear to be a way out. Contacts I have are saying that the Spanish financial figures issued by the government should be treated in the same manner as Greek ones. Property loans need to be written down by something in the order of 45% to bring them to a correct market value – which isn’t happening. I have long thought that Spain is a bigger threat to the Euro than Italy and it looks like it is coming true.

  • Time Harty

    Forget the politicians. The politicians are put there to give you the
    idea that you have freedom of choice. You don’t. You have no choice. You have owners. They own you. They own everything. They own all
    the important land. They own and control the corporations. They’ve long since
    bought and paid for the Senate, the Congress, the state houses, the city halls.
    They got the judges in their back pockets and they own all the big media
    companies, so they control just about all of the news and information you get
    to hear. They got you by the balls. They spend billions of dollars every year
    lobbying. Lobbying to get what they want. Well, we know what they want. They
    want more for themselves and less for everybody else, but I’ll tell you what
    they don’t want. They don’t
    want a population of citizens capable of critical thinking. They don’t want well-informed,
    well-educated people capable of critical thinking. They’re not interested in
    that. That doesn’t help them. That’s against their interests. That’s right.
    They don’t want people who are smart enough to sit around a kitchen table and
    think about how badly they’re getting fucked by a system that threw them
    overboard 30 fuckin’ years ago. They don’t want that. You know what they want?
    They want obedient workers. Obedient workers, people who are just smart enough
    to run the machines and do the paperwork. And just dumb enough to passively
    accept all these increasingly shittier jobs with the lower pay, the longer
    hours, the reduced benefits, the end of overtime and vanishing pension that
    disappears the minute you go to collect it. And now they’re coming for your
    Social Security money. They want your fuckin’ retirement money. They want it
    back so they can give it to their criminal friends on Wall Street. And you know
    something? They’ll get it. They’ll get it all from you sooner or later ’cause
    they own this fuckin’ place.