Spain’s underlying retail sales are now worse than those of Greece meaning she has entered a depression now

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.


This entry was posted in Banking Reform, Banks, Euro zone Crisis, General Economics, Greek Financial Crisis, Quantitative Easing and Extraordinary Monetary Measures, Recession, Yield. Bookmark the permalink.
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  • Ian_jones

    There is no way out of this without one group of people taking a lot of pain, the discussion is simply over who suffers and by how much.. Note that those taking the decisions will make sure they are not hurt…..

  • Walt Kowalski

    The problem with Spain formally requesting a bailout is that there isn’t enough money to get the job done, nevermind the basic tenant that you can’t solve a problem of debt with more of it. Rajoy should drape himself in the Icelandic flag, let his banks go, exit the Euro and re-introduce the peseta. 

  • JW

    Hi Shaun
    Yesterday I read an interesting piece that drew an analogy between say Spain in the EZ and California in the States without the Federal institutions that exist in the US and forecast what would happen. Unfortunately it resulted in Washington sending in the troops to stop a UDI. Not a happy outcome. As this is rather unlikely with Spain ( I hope!), its just UDI then.

  • Justin

    Hi Shaun

    Regarding the proposed bankia ‘bail out’, my understanding is they plan to inject equity in the form of the Spanish government debt as you mentioned above. Isn’t this just throwing more good money after bad? Rather than solve the actual problem, this just provides a little more liquidity that kicks the can a little bit further. An ongoing theme it seems…
    Wouldn’t a better solution just to declare the bank insolvent and wipe out the equity and subordinated bondholders, while safeguarding deposits? This would also have the added bonus of demonstrating that there isn’t a need to withdraw cash. I know it might be slightly more difficult given the rights issue last year, but still seems more sensible than wasting another €23.5bn euros. I’m not sure why this sort of thing hasn’t been considered, or is there a contagion risk I’m missing? I think it was something you mentioned beforehand as a solution, but I can’t remember which post.

  • Robert S


    I was reading Jeremy Warner’s piece in the Telegraph where he says that £43 trillion worth of corporate debt needs to be re-financed over the next 4 years.  Being such a huge number, can this be right, and if so, where does that leave the likes of Bankia?


  • Anonymous

    Hi Shaun
    It would be helpful if you could define “depression” for the lexicon, here. Not sure that retail sales should be at the centre. Ben Broadbent has given a speech which contains some insight to a productivity seizure linked to credit-famines, even for companies who do not need to raise debt from banks. He admits low interest rates have become marginalised by the force of “risk off”. And yet, he carries on with the QE liquidity answer. My view is that the credit famine is worming up from every angle, including Spanish troubles. It needs to be put to the fore.

  • Anonymous

    El famoso Sir Humphrey, versión espaniola! The present goings-on in Madrid are simply astonishing. Denial abounds, so it must be true! Today’s editorial in El Mundo sets out in some detail who, and which parties and trade unions were involved in the patronage that was part and parcel of Caja Madrid, a large predecessor bank of Bankia. Rajoy is trying his best to avoid a parliamentary investigation as is Rubalacaba, presumably because both main parties were involved in the imbroglio over many years. Soft loans to unions (and thus parties) are only part of the problem. The absurd and possibly corrupt over-lending to real estate companies is also key.There is much to come out about the activities of the Spanish savings banks and as El Mundo says, you can only keep the lid on such things for a while, not for ever. Certainly putting the taxpayer on the hook for several tens of €bn is not something you can do without some pretty serious questions being asked and a proper investigation being held. Obviously the Spanish electorate know that. So does Rajoy.

    I suppose that the one positive thing to happen is that a light will eventually be shone into some pretty dark corners around Spain. None of this would matter if the numbers were small, but small they certainly are not, even in an international context. Enormous is perhaps a better word.

    Sorry, Shaun, I know you ‘don’t do politics’, but they are inextricably mixed with finance in this very serious but fascinating situation.

  • Zak.

    “…exit the Euro and re-introduce the peseta.”

    Perhaps we can get Shaun to post this line at the top of his blog every day for the next couple of years. Then we can all just cut and paste with interchangeable countries/currencies?

    One kind of gets the feeling that this whole euro-collapse story still has a long way to run.

  • Zak.

    Agreed, but you can only hurt other people so much until eventually they will bring all that hurt right back to you.

  • JW

     One you will like Shaun, SNB issuing debt at minus 0.62% which just about balances their cost of € purchases. Article in Zurich paper tonight about how SNB planning for € breakup.

  • Rods

    Hi Shaun,

    Another excellent blog.

    I’ve a friend who lives in Spain, he explained to me the problem Spain has got is that adopting the Euro has been associated with much increased wealth. Farm workers who were doing horse drawn ploughing 30 years ago now use the latest farm machinery. The average person therefore wants to keep the Euro. They view the current problem as something for the politicians to sort out and it not really anything to do with them. They are also very nationalistic and hate any criticism of their country by people from abroad.

    With the Greek and Spanish people both wanting to keep the Euro, I think this has somewhat further to run before the fractures happen. Unfortunately,  then I think it will be a series of disorderly exits with much damage to all European economies and another global slowdown or recession.

    The holes the Eurozone are currently digging at the moment are getting very, very deep.

    I can’t remember who said this quote when Italy joined Germany in WWII: “It will take ten battalions to prop them up and three battalions to mop them up”. It makes me wonder what sort of ratio applies to the cost of bank bailouts compared to letting them go?

  • Anonymous

    Hi Mr K

    As you know your latter suggestion is my preferred alternative! But if your favourite choice isn’t on the menu you can still choose what you prefer from what is on it, some are nicer than others…

  • Anonymous

    Hi Zak

    I hope not and believe that there are ways out of this mess. However if things carry on as they are it might be quite some time I agree with things getting worse. Wasn’t it Ace who sang “How Long Has This Been Going On” ?

  • Anonymous

    Hi JW

    If I may reply to both in one go we can turn the microscope in the other direction can we not? There were find wealthy provinces such as Catalonia and the Basque country that want independence from Spain  so we are more likely to see Spanish troops in Catalonia than EU ones in Spain I think…

    Ah Switzerland and her negative interest rates. You would have thought the think tank Compass would have come to back to me wouldnt you after I predicted such a thing at their September 2011 meeting? Last time I checked the Swiss 2 year it was yielding -0.12% and from the SNB’s point of view it must feel like it is planning to stand in front of a dam bursting!

  • Anonymous

    Hi Justin

    Your second paragraph always was my preferred solution even back in the Northern Rock days. Over the period of the credit crunch this sort of view has become called Too Big To Save as a counterpoint to the current Too Big To Fail..

    As to the rights issue I would be issuing court proceedings against those responsible. In the UK the RBS rights issue showed the FSA to be both incompetent and spineless as it looked prima facie misrepresentation to ask for £12 billion and then collapse a few months later! Directors will have signed the document and should be responsible for it…

    Going back to the first paragraph it looks as though Spain has reined back from the plan you mention which I suspect menas that the phone lines have been burning from ECB towers! I discussed this in yesterdays comments section as suspected that the ECB would be fuming….

    As to an ongoing situation well thats how Anglo-Irish Bank went downhill drip drip drip and so far Bankia has modelled itself  on it.

  • Anonymous

    Hi Robert

    I think that you win the prize for the largest number used so far on this blog! That concept has put many other types of inflation to shame….

    I note that it is a number from Standard and Poors who helped get us into this mess! However if we run with it I would like to see the other side of the ledger too. What are the assets and the cash held? Many larger corporates have plenty of cash. So lets see the full picture would be my suggestion.

  • Anonymous

    Hi Shire

    I agree that retail sales are only one of many factors in a depression and was today suggesting that these numbers on top of the others we have seen are pointing at depression if I did not say that clearly then apologies. If you asked me for a centre stage for Spain it would be unemployment.

    Okay so what measure? These days GDP numbers can be unreliable but year on year falls are a part . But employment and unemployment take centre stage for me with their levels,rate of change and also for unemployment the length of time of it. Then we get industrial production the various PMI surveys and retail sales.

    To put it another way you can only get a real handle on a depression looking back in time. But right now that is of little use so like my suggestions for monetary policy one needs to project forwards too. It has it dangers but when you are on the edge of a cliff as so many economies are it is no good looking backwards!

  • Anonymous

    No problem. I didnt restrict others merely that I would leave the stage….

  • Anonymous

    Hi Rods

    I have been reading the book Soldier by Richard Holmes and this bit is from the Peninsular war so accurate geographically with todays update but 200 or so years ago.

    The British army had plenty of foreign regiments and the book gives us details of 1 in the picture section.

    “The King’s German Legion: its combat record was consistently first-rate

    Would we say the same about their current policies In Europe? I suspect not…

    I also found it intriguing that the British Army has a German unit long before there was a Germany as at that time it was a collection of nations and nation states.We fought alongside the Prussians and imported our Royal Family from Hanover.

  • Eurozone crisis live: Spanish crisis sends euro sliding

    [...] Richards warns here that this also has a nasty knock-on effect on Spain’s budget plans, as lower retail spending = less tax collected through VAT. In conclusion: 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. [...]

  • Robert W

    Shaun, some time I would be interested in your take on the derivation of GDP. Another blog I read makes the claim that as GDP is basically measured as ‘amount of money spent in the economy’ then as long as net borrowing is increasing, GDP will always be flattered and debt-to-GDP ratio reduced almost arbitrarily – inducing investors to lend even more. I notice that you give credence to debt-to-GDP ratio in your piece today. Can you assure me that it is not meaningless?

    (Love the blog. I read it every day.)

  • JW

     Yes indeed the ECB appears to have told Spain that it wont play ball, that it needs to inject some good old-fashioned equity. It hasn’t got any of course. There is a view that everyone is praying Ben will do some QE3 quite soon and this will wash through the European banks, cavalry to the rescue etc.

  • Anonymous

    It’s perhaps also relevant to mention that agriculture, often marginal in the south (grapes grown for raisins, avocados grown despite vast water consumption), was replaced with great enthusiasm by the sale of land plots and the construction of houses for foreigners. Instant money. Fine, but is massive house construction a sustainable activity? The more houses you build the less the area is attractive to incomers. Wall to wall ‘chalets adosados’ don’t appeal to many. Many kids decided to skip their formal education as their families suddenly became quite rich. Now Andalucia is running ‘catch up with your education’ courses for these people, as without a decent education there is no hope of getting a job. How you stop this sort of thing in a country where ‘get rich quick’ is at least as appealing as elsewhere I simply don’t know. Spain has come a long way in the last 30 years, in some respects too far.

  • Justin

    Hi Shaun

    We can only hope that such a situation arises where those engaged in blatent fraud are prosecuted. Its probably not likely we’re going to see Fred the Shred behind bars anytime soon though?

    I’ll have a look back through the comments of Monday’s article, thanks.

    On a lighter note, do you think the ECB might be more up for supporting the bankia bailout if they put up Christinao Ronaldo as collateral?


  • Eurozone crisis live: Fears grow over Spain as banking crisis deepens | ccnew

    [...] Richards warns here that this also has a nasty knock-on effect on Spain’s budget plans, as lower retail spending = less tax collected through VAT. In conclusion: 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. [...]