What is happening in Spain’s economy and what is the outlook for 2013?

2012 has seen the development of the financial crisis in Spain as her economy has weakened. Back at the opening of the year on January 3rd I warned of the dangers of an economic depression there. Not only was she then in an apparent recession but her fiscal deficit had just been announced as 8.2% of her Gross Domestic Product or GDP as opposed to the 6% promised by the outgoing administration. The standard Euro area “cure” of austerity was about to be turned one notch tighter in response.

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.

As you can see this was yet another brake being applied to the Spanish economy and trimming it off the previous years deficit still left it a long way from where her government planned to be.

Austerity became a theme

As 2012 developed we saw that more and more of this was applied to Spain. For example another 40 billion Euros worth for 2013 was applied on September 27th. This of course was yet another an example of a country in denial as by then it was even more apparent that the Spanish economy was in trouble.

Banking and Housing problems merge

The amount of loans declared sour by Spain’s banks has risen steadily in 2012 and become something of a metaphor for her underlying problems. This is because they show signs of the crisis in both her property and banking sectors. At the end of 2011 doubtful loans totalled 139.76 billion Euros according to the Bank of Spain and by October which are the latest numbers we have they had reached 189.62 billion giving  an increase of just under 36% in the year up to then. Worryingly the figures for October did show an acceleration in the rise as an extra 7.4 billion Euros worth of loans went sour.

Banks cut credit too

The Bank of Spain numbers tell us that Spain’s banks had advanced some 1782.55 billion Euros of loans at the end of 2011. If we compare that to the 1688.72 billion Euros of October we see that this number had contracted by some 5%. So yet another brake was being applied to the Spanish economy in 2012.

One particular area where we have seen a credit supply squeeze has been in trade credit advanced by Spain’s banks. At the end of 2011 this totalled 49.94 billion Euros but by October it had fallen to 37.81 billion Euros. Not only are Spanish businesses not finding support here quite a downwards squeeze has been applied which is the sort of thing that turns a recession into a depression.


Perhaps the symbol of all of this has been Bankia and there was more bad news on this front released on Boxing Day – reviving the “good day to bury bad news” theme- as this was released by Spain’s bad bank or FROB.

- The economic valuation of the BFA Group is -€10.44 billion.

- The economic valuation of the listed bank Bankia is -€4.15 billion.

This should not really have had the shock effect that it did but Bankia’s share price fell another 20% to 55 Euro cents,and it has fallen further to 42 Euro cents as I type this. According to Bloomberg the one-year return is now -88%.

To my mind the problems are not over as the FROB plans to do this.

The capital increase at BFA amounting to €13.46 billion.

All well and good you might think but if you look at the negative valuation before it you see that the new Bankia will have quite a thin capital base compared to the loans it has advanced.  Accordingly,I do not think that this is the last capital injection that she will receive. Just like Anglo-Irish Bank in Ireland we seem to be on a drip-feed of bad news like a rope being pulled out notch by notch.

What is the latest news on the Spanish economy?

Retail Sales

Spain’s statistics institute has told us this today.

Sales in retail trade at constant prices (that is, after eliminating the prices effect) showed an annual variation of –7.8% in November

If we look into the detail we see that food sales are holding up to some extent as they only fell by 2.2% but of course that means that non-food sales were down more substantially. Also monthly retail sales numbers can be erratic but I am afraid that these fit the pattern for the year so far.

The average rate of the General Retail Trade Index during the first eleven months of the year presented a variation of –6.4% as compared with the same period last year.

If we look at the chart presented we see that retail sales in Spain have fallen in every month since January 2011. This has led the underlying index to now be 73.6 where 2005=100. Plainly this part of Spain’s economy is in a depression and we are also in lost decade territory.

Unfortunately there is a consequence of this for another of Spain’s problems as shown below.

The employment index in the Retail Trade sector in November presented an annual rate of –1.6%, four tenths below that registered in October.

Spain’s housing and mortgage market

We get an insight into this too from the latest figures for October. We see that the average mortgage value for house purchase continues to fall.

In the case of mortgages constituted for dwellings, the average amount was 100,665 euros, 4.9% less than October 2011 and 1.7% lower than September 2012.

We also see yet more evidence of a continuing credit squeeeze.

The value of the mortgages constituted on urban properties was 3,088 million euros, indicating an annual decrease of 27.5%. In dwellings, the capital loaned exceeded 1,923 million euros, 18.6% less.

These declines come on the back of substantial previous falls since 2008.

Those interested in the structure of the Spanish mortgage market will find some food for thought in this.

mortgages at a variable interest increased from 95.0% to 96.7%.

2011 wasn’t all it was made out to be either

Today has seen the release of updated regional accounts for Spain which tell us this via Google Translate.

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%).

So the past is no longer what it was thought to be.


It is plain that the beat goes on in Spain and that the drums are beating a depressionary rhythm. So far the official numbers have not fully encapsulated this but perhaps todays downwards revision for 2011 will be followed by others for 2012. The downwards spiral was caused by a boom and then bust in both her housing and banking markets which if the latest data is any guide are still developing. It appears that credit to other parts of the economy are being reduced too which is not a good sign either.

One bright spot is her balance of payments performance which has improved through this crisis and in July was positive for the first time in the Euro era. The trouble is that whilst there has been an export improvement this also represents a fall in imports due to  economic weakness.

Also we see that in terms of bond yields they have retreated from the highs of the middle of this year and her benchmark ten-year is now far from where it began 2012 at 5.28%. The problem is that as problems and debts continue to build this is still much too high.

So we see that the problems of 2012 for Spain’s economy look set to carry on into 2013 with no respite in sight. In a country with an unemployment rate already at 25.02% as of the official numbers for the third quarter that is a prospect beyond chilling which sends a shiver down the spine. Unemployment of 5,778,100 is already far too high.

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  • Anonymous

    Hi Shaun,

    So BFA & Bankia are bust. It would be nice to see real capitalism in action.

    1 ) Shareholders told to stump up the rescue funds or shut up and accept a total loss on their shares. : No state largesse for shareholders.

    2 ) Bank directors required to tell the whole truth. Drip feed of bad news requires fraudulent misrepresentation at the time of first rescue. Failure to be honest should result in jail and finance industry disqualification.

    3 ) No state aid for banks – this is illegal under European rules. Bust banks should be wound up. : The surviving banks would be more circumspect when they understand they are not too big to fail ….

  • JW

    Hi ExpatinBG

    Usually would agree with you. But in Bankia’s case the ones who are going to get hit hardest are the ‘little guy’.


  • Anonymous

    Quite a lot of recent Spanish government comment has stressed the ‘brilliant’ performance of exports, much of the total being vehicles, especially commercial vehicles, sold by Spanish companies owned by German, Japanese and US entities. The problem with this PR spinning is that Spain’s exports are about one fifth of those of Germany and are well below Belgium and Holland’s figures. The last two are considerably smaller countries. So it’s improvement from a very, very low base. Of course this is where Spain has to concentrate and it will be good to see at least a doubling from the current level, but ideally that would be done by indigenous companies, not those shifting their profits to lower tax regimes outside Spain. One thing the Spanish can’t afford to do is re-start the catastrophically oversized construction industry. They have well over a million new houses ‘in stock’ to which must be added a huge unsold balance of used ones. But they are still building away, presumably finding finance from somewhere. House prices in Spain look like falling another 30% in 2013. Sorry, banks, you will have to admit the problem quite soon now!

  • James

    I have a question for you. At what point does unemployment become not an economic and personal tragedy but also a political disaster, as in revolution?
    I only ask because I just don’t see how the staggering unemployment in Spain doesn’t lead to people demanding a new system and, if the government won’t give it, perhaps they will just take it.
    I know that you don’t do politics but the economic figures are so ghastly that I am amazed that there isn’t much more anti-Euro feeling

  • JW

    Hi Shaun

    Just came across this which may go further to answer the question you posed on 24th.


    Back to topic, Spain’s ‘old wealth’ is probably merely inconvenienced by this situation. Peasants just returning to their previous state , only 30 years ago. Not really an issue for those always accustomed to ‘going to school’ with the elite from Germany, Italy etc. Is there a popular movement outside the control of these people strong enough to stop this? Doesn’t look like it. To a lot of people the EU and Euro are the only defense against national tyranny, sad isn’t it?

  • http://www.thebusinessage.com/2012/12/28/eurozone-crisis-live-french-growth-revised-down/ Eurozone crisis live: French growth revised down | Business News,age, Markets, Entertainment, America, Asia, India, Pakistan, UK

    [...] we wait for Mariano Rajoy’s press conference…. economist Shaun Richards flags up that Spain’s GDP data for 2011 has been revised down [...]

  • Anonymous

    I agree it’s harsh, but why should the taxpayers cover this ?

  • http://www.income-tax-guide.com/income-tax/what-is-happening-in-spains-economy-and-what-is-the-outlook-for.html What is happening in Spain's economy and what is the outlook for … | Income Tax Guide

    [...] the article here: What is happening in Spain's economy and what is the outlook for … ← US Will Reach Federal Debt Limit on New Year's Eve – Herald [...]

  • Rods

    Hi James,

    I think that will partly depend on how many of the unemployed work in the black economy? I’ve heard this is currently one of the few areas of growth in Spain! If you are registered as self employed in Spain you have to pay a flat €250 social security payment each month, then there are other taxes on top of this. If you have suffered a large income drop and are struggling to keep a roof over your head and feed a family, I would imagine the pressures to de-register and become part of the black economy must be considerable!

  • Anonymous

    Hi Expat and JW
    This is a truly bad story but I would distinguish between ordinary shareholders and those who were missold the preference shares and bonds. Whilst it is grim the ordinary shareholders are frontline equity and this will have to be cut.
    But there was an enormous amount of misselling of preference shares and the like which went on and I hope that the private investors sue. However this just poses another problem for Spain.
    As Oliver Hardy put it “That’s another fine mess you put me into”
    Meanwhile other here Hector Sants who headed the FSA through the LIBOR and many other scandals has just got a knighthood. #rewardsforfailure

  • Anonymous

    Hi Barncactus

    The Spansih export performance has been good and when combined with the fall in imports due to her economic contraction (not so good) has turned around her balance of payments. Back in the boom years this was accelerating away in the opposite direction. So there has been quite a turnaround which may see her move into surplus in 2013.
    Unfortunately the housing and banking collapse is an even bigger problem and as you point out there is no point expanding housing again when so many units are empty. So 2013 looks grim.
    However if Spain had gone to the IMF for example and taken the old “balance of payments” targets things would be looking much better now. But she would also need her own currency rather than one which recently has been appreciating….

  • Anonymous

    Hi James
    On the officla numbers she must be very close I would have thought. The main relief comes as Rods has pointed out below from the black economy which in this repect we end up hoping is large than thought! Although the second order effect is that it will be harder to raise tax revenue to help with the fiscal deficit.

  • Anonymous

    Hi JW

    Thanks for the link. It also reminds me that unless a fiscal cliff solution is found those on extended unemployment benefit are about to lose it.
    As to Spain I am trying to find the link to an article I read which pointed out that the wealthy in Madrid seem to be spending more on expensive consumer goods and that this category was up circa 30%. Back to the 1%/99% argument or as you say for Spain going back to the Franco era in economic terms at least.

  • Taurus

    Hello Shaun,
    I know you are a keen football follower so I thought I would draw a (questionable) analogybetween the success and failure of the Spanish economy, and the rise and fall of Spanish football team Villarea (this is after stumbling across the name of a one-time shirt sponsor of the team) For those who don’t know, Villareal is a smallish town of 50000 souls just north of Valencia. It is an important centre for Spanish ceramic tile manufacturing.
    In the recent past the football club enjoyed unprecedented success on the field, the highlight being the reaching of the Champions League semi-final knocking out some illustrious clubs on route (Man. United, Rangers and Inter Milan.) During this purple period one of the club’s shirt sponsors was ‘Castellon Airport’ while the club’s main backers were the wealthy ‘Patrons’ of Spanish tile industry. Also during this period the Spanish economy seemed to be having a successful time.

    However as the Spanish economy went into decline with the collapse of its banking and constrution industries and a fall in exports, so Villareal began downward spiral into the Spanish second division. Firstly ‘Castellon Airport’ ceased its shirt sponsorship deal ( Odd that a airport, built at the cost of 200m euro, and which has never had a commercial plane land or seen a passenger pass through its terminals should have money to sponsor a Spanish football league club) and secondly the Spanish ceramic tile industry lost international market share to producers in other countries, principally the Chinese. And thus the ceramic tile magnates had to reduce their funding of the club.

    I draw the conclusion that the both the Spanish economy and Villareal football club were essentially castles in the sky being built without soild foundations and never likely to succeed.

    On the upside, should ‘Castellon Airport’ suddenly become operative and succeed in attracting commercial airlines to its runways, and thus see hundreds of thousand of visitors pass through its terminals. And should the Spanish Tile producers regain market market share from the Chinese and others, then the benefits for the Spanish economy and for Villareal football club will become apparent, and both will climb upwards in tandem.

    Anyway, in the meantime, I will go back to drinking Gluhwein and reminiscing of xmas past when a troika was sleigh pulled by three horses and Sub Prime was the reserve who brought the oranges on at half time.

    Wishing you and your family, and all your loyal followers a happy New Year.

  • JW

    Hi Taurus
    Sorry for the ‘football diversion’.
    Isn’t it true that really Villareal are a club within the greater Castellon area the town has a population of about 200,000, sufficient to support a club in La Liga. Saying its in the district of Villareal is like saying Man United are supported by the population of Trafford a district of Greater Manchester. Incidentally Villareal have never beaten Man United. In the year in question they drew twice with Villareal going through the group with Benfica. A link between the clubs is Guiseppi Rossi, whose injuries over the last 2 years may have had as much to do with their decline as economics, that and losing a great manager.

  • pavlaki

    I try to export from Greece, Spain and Portugal to the UK ( I say try because I often fail due to the high cost of goods in Euros) and visit these countries often enough to have witnessed their decline and to have heard first hand of the problems the people suffer. Whilst there are many clever schemes to move money around within the Eurozone to plug the leaking dykes of national economies, and even better PR to announce them, I am always brought down to earth by my visits to these countries. I look around at the economic chaos and realise that despite everything I see and hear,the currency of Greece ( or wherever; i.e the Euro) is actually appreciating against Sterling! And there is the fundamental problem that will not go away. In any sane world the currency would have fallen like a stone and competitiveness be restored. So the ECB et al can fiddle around forever with their financial alchemy but until I hear a solution to this basic issue, I will believe that the Euro is a failed concept.

  • Anonymous

    Hi Shaun

    The other day you suggested “We’re turning Japanese”. Quite appropriate when our regulators are toothless yes men and our politicians, namely Tony Blair gets rewarded by “ascent to heaven”. It is hard to understand how Tony Blair legitimately adds millions of value at JPMorgan when his economic nous included presiding over an uncontrolled house boom and championing UK Euro membership. Maybe his value lies in reducing risk of regulatory action ?

  • Taurus

    Hello JW

    Without wishing to ‘overdo’ the football theme, your are correct that Man. United were not knocked out by Villareal in a Champions League head-to-head but finished below them in the mini-league. Also, while the catchment area for the team is much more than the population of 50000 they have share it with local rivals Castellon so it would be much diluted.

    No, my main interest was in their shirt sponsors ‘Castello Airport’ who to my knowledge have never turned over a euro in revenue. Apparently it cost close to 200m euro to build and was paid for by the European tax payers so that makes us all team supporters!

  • Patrick

    It’s an interesting notion, that a revolution can come about that destabilises a government by crippling tax receipts, rather than through a more structured, collective action on the part of the 99%. Government’s the world over have made it very difficult for the average person to avoid paying taxes left, right and centre. If a black economy grows to the point that it prevents the rioting that continued growing employment would inevitably bring, how hard is the decision to try and restrict it.

    Actually, after the demonisation of the unemployed, collective bargaining, worker’s rights movements, and rejecting calls for living wage, it kind of inevitable that individuals would look to re-rig the game in their favour, but due to the level of unemployment in Spain, this begins to have the appearance of a concerted movement designed to affect change.

    It’s not the explosive action movie that Forbin has been stockpiling popcorn for – but an interesting show nonetheless. more

  • http://twitter.com/ejhchess Justin Horton

    ‘reviving the “good day to bury bad news” theme’

    Not as such, as Boxing Day is not a public holiday here.

  • holidaygal

    i just wanna know how expensive spain is cuz i’m going o holiday and i wanna
    know how much spending money 2 take thnx p.s a simple and strait answer would be nice thnx :)

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