Back on the 31st of July I pointed out that the Spanish economy was divided into two clear areas. The first is the external sector which is the good part and the second is domestic demand which has been the bad part for some time. Of course they interrelate too as weak domestic demand reduces imports which boosts the external balance. In the second quarter of 2013 the mixture had improved as the Spanish statistics institute had recorded an economic contraction of only 0.1% which was the best performance since the third quarter of 2011. Although this still meant that the year on year picture was weak.
The GDP annual variation in the second quarter 2013 was –1.7%
One of the issues with Gross Domestic Product numbers is that they are revised over time sometimes significantly. This does not fit well with the short attention span of modern media and so leads to an obvious temptation to publish relatively optimistic figures and then revise them later once the hue and cry of the pack has died down. This does appear to be happening more than you might expect in the credit crunch era as over time recessions used to be revised upwards and by that I mean to a level less severe than was thought at the time. However yesterday the Spain statistics institute released this.
The Spanish economy registers real growth of –1.6% in the year 2012
This may not seem out of line so let me add this.
As a result of the update, the growth of Gross Domestic Product (GDP) for the year 2012 was revised with a drop of two tenths and for the year 2011, it was corrected with a reduction of three tenths.
So the output of the Spanish economy is suddenly being measured in GDP terms at around 0.5% smaller than it was ! So since the end of 2008 the Spanish economy has shrunk by 5.5% rather than the previous 5% and 2011 has edged close to no longer being a year of recovery as growth has shrunk to a wafer-thin 0.1%.
What caused this?
The picture looks simple at first.
as a result of the lesser contribution of domestic demand (from –3.9 to –4.1 points) considering that the contribution of the foreign demand remained the same (2.5 points)
But this is slightly misleading if we think that the economic impact of foreign demand was exactly the same.
Thus, real growth of exports in 2012 was revised with a drop of one point (from 3.1% to 2.1%), whereas the drop in imports increased by seven tenths (from –5.0% to –5.7%)
As you can see not only was domestic demand weaker but so was export growth. For the purposes of these numbers the fall in imports offsets the fall in exports but this is one of the flaws of GDP statistics as Spain is in fact worse off.
This also poses a troubling question going forwards as recorded improvements in Spain’s economic circumstances in 2013 have relied on an improvement in net trade. If 2013 has been recorded in the same way as 2012 then there is the possibility of a later downwards revision.
Deeper and Deeper
As I looked further into the numbers I spotted this.
In nominal terms, the variation rate of the GDP for 2012 was downwardly revised by four tenths (from –1.3% to –1.7%)
Is 0.4% the new 0.2%?
The Implied Deflator: No inflation in Spain in the last four years?
This is the inflation measure in the national accounts and regular readers will be aware that I have been writing critiques of its use in the UK particularly recently in the area of government where there have been some extraordinary numbers. In 2012 in Spain it fills the gap above by being revised down to zero. But we get a new view on Spain by observing that it has been effectively zero since the end of 2008. I am slightly exaggerating as in fact it adds up to 0.17% but I hope that you get the point.
The revisions here have been large as the number was previously 1.58%! Now consider GDP numbers which are sometimes poured over for 0.1% and we see one more time that such behaviour is bizarre as they are by no means that accurate. Indeed 2011 seems to be a troubled year for Spain’s accounts as implied deflator inflation was 0.96% and is now 0.02% which is much more like 1% than 0.1%.
For comparison purposes the Spanish measure of consumer inflation rose by 9.3% over the same period.
So we find ourselves comparing stocks with flows. The flow universe is much more preferable for Spain as it shows a reduced fall whereas the revisions of the stock world mean that they are being recorded as poorer overall. Or one step forwards to go two backwards.
Also we are seeing revisions of considerable size which is a reminder of how inaccurate such numbers are. This is further reinforced by the new view on the behaviour of the implied deflator in Spain in 2011.
Tucked away in the numbers were downgrades to the level of employment in Spain too which in a country with an unemployment rate of 26.3% is extremely unwelcome.
One number which is regularly poured over is the size of the doubtful loans being carried by the Spanish banking sector. In June these rose from 170.2 billion Euros to 176.6 for an increase of 3.7%. On the other side of the balance sheet data out today from the Bank of Spain shows deposits at Spanish banks falling to 1,491.7 billion Euros. Whilst a fall at this time of year is not a surprise the fact that the number is some 1% lower than last year is much more of a concern.
A wider data release covering the whole Euro area from the European Central Bank showed that it still has issues to deal with.
the annual growth rate of total credit granted to euro area residents was more negative at -0.5% in July 2013, from -0.3% in the previous month.
And in particular the amount of credit was falling faster in an important area.
The annual growth rate of loans to non-financial corporations was more negative at -3.7% in July, from -3.2% in the previous month.
So whilst the monetary policy of the ECB remains “accomodative” with narrow money (M1) growing at an annual rate of 7.1% and broad money (M3) growing at an annual rate of 2.2%, it is struggling to influence the supply of credit. It is also true that the rate of monetary growth is slowing making us wonder if the improvement in the Euro area economy will ebb too as 2013 moves into 2014.
Mortgages in Spain
This is an area where there are still considerable declines.
In the case of the number of mortgages constituted on dwellings, it stood at 14,053, 42.2% lower than that registered in June 2012. The average value of the mortgages was 97,495 euros, 9.0% less.
This is the worst performance in June so far in the post bubble era for Spain’s housing market. As we can see from the numbers below it represents a deterioration on the numbers for 2013 so far too.
The number of mortgages constituted on dwellings decreases 23.5% in the first six months, as compared with the same period of 2012.
Also the ECB might do well to note the point below.
The average interest rate for mortgages constituted on dwellings was 4.43%, 2.0% above that registered in June 2012.
A marginal increase but an increase all the same over a time period where the ECB official interest-rate fell from 1% to 0.5%.
As ever there is much to consider. There has been a recorded pick-up in Spain’s economy but as we can see her mortgage and housing sector still looks troubled. Against this is the fact that there is a trend these days towards cash deals which is actually true in many countries. Also we note the tendency to revise the past downwards which seems to be occurring somewhat regularly.
Meanwhile Spain has to battle with a Euro which is set much more for the German economy than for Spanish economic circumstances. Also like all oil importers Spain will feel both inflationary and deflationary effects if the oil price persists to climb as a barrel of Brent Crude Oil is at US $116 as I type this.
As a final note is it not symbolic of the times that not only is the transfer of Gareth Bale to Real Madrid inflating into the stratosphere in terms of expected amount but also that nothing has actually happened yet?!