Spain shows more signs of economic decline as her mortgage interest rates rise

It looks increasingly that further economic decline in Spain is set to be a major economic theme in 2013. It was only last Wednesday that I discussed the rise in her unemployment rate to 26.02% meaning that 5,965,400 people were unemployed there at the end of 2012. I pointed out that it is in my opinion even more of a signal that her total level of employment had fallen by 363,300 in the last quarter of 2012 alone as employment levels have proved to be a prescient guide to future developments in the credit crunch era. Unfortunately since then there has been more bad news.

Retail Sales

The Spanish statistics office has told us this today about December.

The General Retail Trade Index at constant prices stands at –10.2%, as compared with –7.8% in November

As this comprises the crucial Christmas season we can see that there was no seasonal cheer or pick-up for Spanish retailers this time around. In fact if you look at the numbers for the year overall we in fact see that there was a further decline.

In 2012, sales in the Retail Trade Sector dropped 6.8%, as compared with 2011

We get an additional guide to this below.

The variation of the General Retail Trade Index between December and November was 22.1%. This rate showed the lowest increase in the last five years.

The statistics agency probably now regrets also using a calendar or working day adjusted series as this shows an even worse decline in December as it is 10.7% below the year before.

Another worrying sign is that even food sales have turned solisly downwards as the annual fall in those in December was 5.1%.

Some perspective on this

The graph shown in the release takes us back to the beginning of 2011 and every month shows a fall some of them heavy. In fact retail sales in Spain have fallen for 30 months in a row now. If we look at the underlying index we at first get a little relief as being at 89.8 where 2005=100 it looks weak but better than some. But this is to forget that December is the major month for retail sales.

If we look at past Decembers they have gone as follows

100 (2011): 106.9 (2010); 112 (2009); 113.3 (2008); 122.5 (2007): 125.1 (2006)

So we see that retail sales in Spain were this December some 28% lower than the peak for this series in 2006. One area at least in Spanish economic life is seeing plenty of austerity!

How is the Spanish mortgage market doing?

This is a central theme as the boom and bust of her housing market has affected Spain’s economy deeply. It is a major factor in her accepting Euro area aid for her banks for example as her banking sector has been deeply wounded by it. Let us look at the trends.

The value of the mortgages constituted on urban properties was 3,360 million euros, indicating an annual decrease of 34.5%. In dwellings, the capital loaned exceeded 2,011 million euros, 34.3% less.

As you can see this remains a market in distress and we need to recall that these falls are on the back of previous declines so that this has been something of a collapse.

Something you may not have expected

If you look at mortgage interest rates we see this.

Regarding dwellings, the average interest rate was 4.39%, 0.2% higher than November 2011.

This did surprise me a bit too. After all 2012 was a great claimed success for the European Central Bank with its one trillion plus LTRO (Long Term Repayment Operation) leading to easier liquidity for Euro area banks. Also within this one year timescale it had cut its main interest rate three times on November 9th and December 14th 2011 and July 12th 2012. Yet in spite of all that liquidity and a main interest-rate cut from 1.5% to 0.75% we see that mortgage rates in Spain are higher than a year ago.

To be specific mortgage rates did fall until September but they then bottomed at 4.12% and then went 4.33% and now 4.39%. I will be interested in readers thoughts on this as to what has happened here. But Spanish mortgage holders do not seem to have got any sustained bang at all from the ECB’s (trillion Euro) bucks.

If we look at the structure of Spanish mortgages we see that interest rate moves do matter.

92.4% of the mortgages constituted in November used a variable interest rate, as opposed to the 7.6% that used a fixed rate.

Ah but haven’t deposits at Spanish banks risen?

Yes in December 2012 they did by 0.5% over November 2012. The catch is that this was a slower rate than in 2011 and if we compare December 2011′s 1580.62 billion with December 2012′s 1464.27 we see that there has been a fall of over 7%.

Meanwhile the Euro exchange rate rises

Spain is being squeezed by the rise and rise of the Euro in recent times as it is one of the few strong currencies around in the West right now. On the flip side of this is the way it has helped to drive weakness in the UK pound which dropped into the 1.16s versus the Euro yesterday. However if we concentrate on the implications of this inside the Euro area we see that the rally began at the end of last summer. Since the the ECB’s effective or trade weighted index has risen from a low of 94.41 in late July to 101.96 yesterday or 8%. Much of the move has taken place since early November.

So the Spanish economy which was making progress in its efforts to improve its price competitiveness is increasingly finding that the Euro rally is moving the goalposts.

As ever there is plenty of rhetoric

Today we are seeing the rhetoric contradict itself. The head of Germany’s Christian Democrats Herr Fuchs has been reported on the ways as saying that Spain is doing a very good job with its economic overhaul. As we muse on what he might mean by a good job we note the European Commissioner Olli Rehn has said this.

If there has been a serious deterioration in the economy, we can propose an extension of a country’s adjustment path

So it looks as though “good job” needs to go into my financial lexicon and we may see yet another relaxation of Spain’s fiscal deficit targets. The problem is that rather than getting ahead of events these in fact follow them and only reflect what has already happened.


Tomorrow we will get the official number for how much Spain’s economy contracted in the last quarter of 2012. We know that the Bank of Spain has already made it guess.

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

The danger after today’s retail sales release is for the number to be weaker than that. As ever care is needed as the release of a spot number hides more than a fair bit of uncertainty in a preliminary or first release. For example back on December 28th I reported this.

As a result of this update, the real growth of GDP national in 2011 was revised down three tenths (from 0.7% to 0.4%).

As an aside this is another kick in the teeth for conventional economic theory which predicts upwards revisions in such periods. But I am reminded of my prediction then which the subsequent numbers are increasingly backing up.

So far the official numbers have not fully encapsulated this but perhaps todays downwards revision for 2011 will be followed by others for 2012

I ended my update on Spain last week by saying that I feared for her lost generation and today I fear even more.

Update 30th of January

As I feared the Spanish GDP numbers did turn out to be worse than expected. Below are the official numbers.

Gross Domestic Product registers a quarterly variation of 0.7% in the fourth quarter of 2012

The annual rate is -1.8% in the fourth quarter of 2012

This entry was posted in Euro zone Crisis, GDP, General Economics, House Prices, Interest rates, Quantitative Easing and Extraordinary Monetary Measures, Recession and tagged , , , . Bookmark the permalink.
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  • forbin

    hello shaun,

    something bad coming through ??

    media seems mired in the HS2 debarcle !


  • John

    Can the general society in Spain remain stable with this level of austerity? It beggars belief that a country’s politicians are willing to impose this level of hardship on their own population.

    As time passes, I assume the temporarily inoperative factories become harder to bring back into service. Simply re-hiring staff will not be enough, industrial capability will need to be rebuilt from the ground up – expensive and time consuming!

    Are there any figures for the losses from now inactive plant and estimates of how this will rise over the next few years?

    What will happen when these loses hit the banks’ balance sheets?
    Are UK banks exposed to any significant extent in Spain?

  • Pavlaki

    One day the retail decline will bottom out – only because it has to if people are to buy clothes and eat. Just watch the Eurocrats crow that when it does that this is a sign of improvement!!! No doubt the Euro will rise on the back of it. There seems to be a positive knee jerk reaction to any news out of the Euro zone that isn’t catastrophic. They have done a magnificent job of spinning the best news from a bad case and Britain should do more of it. We, on the other hand, always appear ready to snatch defeat from the jaws of victory when it comes to economic news.

  • forbin

    “beggars belief that a country’s politicians are willing to impose this level of hardship on their own population.”

    that is because the Banks are in charge – not politicians – haven’t you noticed?

    Here or in Spain


  • Pavlaki

    We are often told that Euro zone countries have had successful bond sales – but it pays to look carefully at who is buying the bonds. In Spain they have used over 90% of their state pension fund (65 bil Euros approx) to buy government bonds as this does not add to official debt levels. What happens when this is all used up?

  • John

    so much for democracy! But yes, I had noticed. The politicians are frontmen for them, but I would prefer to see them stand up against the banks. The banks seem to want to take every penny they can and control the rest. Politicians are there to ensure that this doesn’t happen and they are failing. At some point there will be an explosion and all will be damaged.

  • Anonymous

    Or even some of it. Clearly a state pension fund is supposed to be for state pensions. Pensioners could reasonably ask where their pensions will be coming from. Presumably the government thinks it can tax and borrow its way out of this problem – Ho!

  • Anonymous

    The problem with Spain (etc) is that the statistics bear no resemblance to reality. On the one hand, they say that their overall unemployment is 26% or so, with more than half of young people on the dole, but on the other the government mentions that the ‘informal’ economy is about a quarter of the total. I do find this confusing – but it might explain why there has been little protest so far.

  • Anonymous

    Spain’s output decline is caused by reduced apartment building not industrial decline. Spanish politicians have little choice because of reduced tax revenues.

    Please suggest an alternative to Spain’s austerity – and detail where the extra money might come from.

  • Anonymous

    Hi Forbin
    True but now they have our increased involvement in Mali to distract them too. Sending troops as “advisors” what could go wrong?

  • Anonymous

    Hi Pavlaki

    Whilst you are right that one day the decline in retail sales will bottom out the evidence from Greece is that so far that has not been found in spite of calamitous falls. Even after them we in fact saw an acceleration in the rate of fall in October to -18.1% there.

    As to the Euro it is just on the edge of US $1.35 as I type this so the beat of the rally goes on…

  • Postkey

    Do you think T. Congdon has the ‘solution’?

  • max

    Shaun, On the bright side, at some point when we get to the bottom of the spanish housing market we londoners will have to move to Spain. With all the QE in London and foreigners buying up everything, it is impossible to afford anything here!!

    Redevelop Battersea power station?? Why not sell it all to foreigners? Great idea.

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