Back on the 27th of January I wrote an article which said that I was afraid that the Iberian peninsular (Portugal and Spain) would bypass recession and go straight to a depression. It created a fair bit of interest as it swam against the media and official tide. Since then economic numbers have shown the two countries are on a downward spiral in spite of the fact that they trade together less than their geographical proximity might make you assume. Today,however, has produced some data to really ram the point home.
Spanish retail sales
If we go back to January 27th I reported that retail sales had fallen in real terms by 6.2% in December 2011 and by 5.8% in 2011 overall. This meant that.
As the general retail trade index adjusted for inflation is at 100.3 we can say that Spain’s retail sales have returned to the levels of 2005.
So she had gone back to 2005 and was in my view in danger of repeating the Greek experience. Now I wish to bring us fully up to date and here is this morning’s data from the Spanish Institute of Statistics.
The General Retail Trade Index at constant prices registers an interannual variation of -11.3% in April, more than seven points lower than that registered in March.
So we have an immediate shock effect of a double digit fall and a severe acceleration as the number is 7.3% worse than an already weak March. If we apply the usual rule and remember that retail sales are an erratic series and look for a trend we only get further confirmation of problems as every month since January 2011 has shown a decline with the shallowest decline being -2.1% in April 2011. We also see that as last April was relatively good (if a decline can be good) that seasonality is unlikely to be a factor in today’s reported collapse in retail sales.
What is the underlying index?
At this point you may be fearing the worst for this and you would be right to do so. The real level of retail sales has fallen to 75.7 where 2005 is 100. That is a depression type number and exactly what I feared back in January. Even if you put the inflation back in you only get the underlying index back to 91! So even nominal retail sales have fallen below 2005 levels.
I have taken a look at the back data to see where we stand and there are a few months in late 2000 and early 2001 where underlying retail sales we around 75. So more than a “lost decade” is in evidence here.
Just for comparison purposes where is Greece on this measure?
The latest volume retail sales numbers for Greece gave her an underlying index of 79.0. So on the latest numbers Spain is in a worse position than Greece! However care is needed as the Greek numbers are only up to February and she too has a rapidly declining trend so she may yet pip Spain to the post in a race nobody wants to win.
One thing that both countries share is a rapid decline in the latest numbers as the volume figures for Greece had fallen by 13% in February.
Such data poses all sorts of questions none of them good and the comparison with Greece is genuinely grim. I have argued many times that the same tactic of Euro austerity in a period of economic weakness is likely to keep producing the same result which is an economic depression. Indeed it produces a self-reinforcing depression where austerity begats economic weakness which requires more austerity to hit fiscal and debt targets and repeat.
I understand that Albert Einstein put it like this.
We cannot solve our problems with the same thinking we used when we created them.
Not the one you were expecting was it?
If we consider one of the implications of sharp falls in retail sales we see that the take from indirect taxes is likely to be weak too. This is awkward for countries which are raising Value Added Tax ( for overseas readers it is a consumption/sales tax) to gain more revenue.
How is Spain doing with regards to her fiscal deficit?
Back on January 27th things were not going too well.
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%.
Since then we have had more revisions and Spain’s deficit for 2011 found itself revised higher to 8.5% and more recently 8.9% of GDP. Even worse the latest revision came as a result of a perennial problem for Spain which is that in a decentralised power structure her regions tend to overspend.
Now if we see a shrinking economy and a fiscal deficit target of 5.3% of GDP for 2012 I see two things happening. Firstly Spain will not hit the 5.3% target and in fact may get nowhere near it but that she is right in the eye of the austerity storm which inflicted so much damage on Greece and her economy.
Unemployment has got worse too
Back on the 27th Of January I reported that the unemployment rate had risen to 22.85% in the last quarter of 2011 and we now know that it rose to 24.44% in the first quarter. I do not think that we require the famous brain of Albert Einstein to figure out that it must have been rising since then.
What is the most up to date news?
This remains the purchasing managers indices for Spain which back up the grim retail sales news. For April we were told this.
The downturns in Italy and Spain accelerated,
And for up to mid-May
increasingly steep downturn in the periphery
Spain’s Banking Sector
After my update on Friday on Bankia we have seen that just like Anglo-Irish Bank in Ireland the estimate of the cost of a bailout keeps rising and rising. The latest is 23.5 billion Euros which as I pointed out on Friday is too much for Spain’s bad bank the FROB and if you listen to her leaders request for help maybe too much for Spain herself.
Yesterday on the comments section there was a discussion around the plan to issue Spanish government debt directly to Bankia so it could repo it at the European Central Bank. Again rather like Anglo-Irish Bank (although strictly speaking that involved Promissory Notes and the Central Bank of Ireland acting as a proxy for the ECB). This is a sign of desperation which I expect the ECB to resist strongly and we will see how that plays out.
However we see today that Spain has learnt absolutely nothing from the Bankia failure as she is floating on the newswires a plan to merege 3 cajas or savings banks ( Liberbank, Ibercaja Banco and Banco Cajatres). For those unaware Bankia was the product of a merger of 7 cajas. I understand repeating successes but utter failures?
Those who follow the “never believe anything until it is officially denied” saying of Sir Humphrey Appleby will see something in this from Reuters who quote the Spanish Prime Minister.
There will not be any (European) rescue for the Spanish banking system
So we see that Spain has now slipped into the economic morass that created such destruction in Greece. We also see familiar echoes of past problems in other countries as Spain repeats the Irish tactic of sticking its head in the sand like an Ostrich as its banking sector weakens. Meanwhile with a steady drip drip her economy weakens and the opportunity to do something about it slips away.
Borrowing costs are a problem for Spain too as her ten-year government bond yield has risen to 6.5% this morning which poses a further problem for financing bank bailouts. Even her two-year bonds which benefitted so much from the ECB’s provision of a trillion Euros of three year liquidity now yield over 4.5% rather than half that. So for tactics in several ways it is now over to you ECB…
As to strategy this is now an economic depression and Spain needs to call for help. If we look at the track record of recent such help she is likely to be better off just going to the International Monetary Fund but the “rub” here is that the IMF may struggle to get the funds required.