Spain has gone from "Crisis?What Crisis?" to a "a national emergency demanding maximum attention"

26th April 2013 by The Harried House Hunter

Yesterday saw a new wave of anti-austerity protests in Spain as for example her parliament in Madrid was surrounded ahead of the announcement due midday from her government about the next steps in its economic programme. This is something that was brought into sharp focus by her unemployment and indeed employment numbers which were released yesterday. Also she is facing the consequence of an austerity programme supposedly designed to reduce her (public-sector) fiscal deficit which in fact saw it rise from 9.4% of her Gross Domestic Product in 2011 to 10.6% in 2012. So the objective was missed at the cost of wrecking further destruction on her economy and deepening her economic depression. It is hard to see how Euro area style austerity could have performed any worse as we review that the definition of austerity in my financial lexicon for these times (a supposed decrease in a fiscal deficit leading to an increase in reality) operating yet another time.

As we review the situation I am reminded that another feature of this situation has been the way that Spain’s political class refused to face the realities of the situation as illustrated by this from the then Prime Minister Zapatero in June 2008.

Crisis? What Crisis

Perhaps he is a fan of the group Supertramp and was influenced by an album title but such an attitude contributed to Spain’s leadership sleep-walking into a malaise which has fed her current depression. If you think that this is using 20/20 hindsight I would point out the consistent track record of this blog and also this from El Pais on that day. These are the words recorded by chance of a businessman replying to Zapotero’s optimism.

No,No you will aggravate the crisis

He was right was he not?

Spain’s economy

The underlying position is illustrated by the fact that the Spanish economy is still a long way short of the level it was at in 2008 as using it as a base of 100 then 2012 was only at 94. Even worse the downturn deepened at the end of 2012 as the economy shrank by 0.8% in the final quarter of 2012. In short a brief weak recovery from the credit crunch has been followed by further declines. So we see the austerity begats economic weakness begats more austerity which begats more economic weakness treadmill running one more time.

Unemployment

Yesterday produced the news which we all feared informing us that Spain’s unemployed ranks had stretched beyond 6 million to 6,202,700. So we see that these ranks have swelled by 563,200 or 10% over the past year and more grimly that some 237,400 had been added in the first three months of 2013, showing a troubling acceleration.

The unemployment rate rose to 27.16% which was up 1.14% compared to the end of 2012 and 2.72% compared to a year ago.

There was a further chilling number in the report which reminded me of the television series The Boys From The Black Stuff from the 1980s.

The number of households in which all economically active members were unemployed, increased by 72,400, standing at 1,906,100…..In an interannual comparison, the number of households in which all economically active persons were unemployed increased by 177.700,

Employment

With respect to the unemployed their numbers tell us what has happened in an economy whereas the employment numbers are of more use in predicting the future. So the numbers below are a bad portent for the rest of 2013.

The number of employed persons decreased by 322,300 persons in the first quarter of 2013, standing at 16,634,700. The quarterly variation rate of employment stood at –1.90%.

Again we see an acceleration in the rate of loss of jobs as 798,500 Spaniard’s had lost their job compared to a year before. Such an acceleration is particular concern with unemployment so high and employment so low already.

Inactivity  is a problem too

This section is a confirmation that troubles have an unendearing habit of arriving in threes. We have already seen unemployment and employment and now we see this.

The economic activity rate decreased 12 hundredths, reaching 59.68%

Those who follow the unemployment numbers from the United States will be aware that there is plenty of concern about the implications of a participation rate that has fallen to 63.3%. Well if you look at the number for Spain you will get my point and that number is flattered by a considerably higher percentage for foreign born workers.

Migration?

We received a hint as to what may be happening here from the labour force report.

The economically active population experienced a decrease of 85,000 persons in the first quarter of 2013, standing at 22,837,400 persons. In annual terms, the number of economically active persons was reduced by 235,300 persons.

A hint there although of course there are other influences such as birth and death rates. But if we look back we see that the Spanish population had been growing at around 600,000 a year between the 2001 and 2011 censuses (censi?). So it looks as if rapid growth has not only reversed but a contraction may be in evidence.

What about business conditions?

The European Central Bank has updated us this morning about the situation for small and medium sized businesses or what are called SMEs. As you can see below its summary was poor.

By contrast, SMEs in Greece, Spain, Italy and Portugal reported, in net terms, the largest decrease in turnover.

The reported decline in profits was most prevalent for SMEs in Greece (a net 77% of respondents), Spain (60%), Italy (58%) and Portugal (64%).

As we peruse a grimly familiar list I looked further into the detail for Spain. We see that the reductions in official interest-rates not only have not reached smalled Spanish businesses but in fact they have seen the opposite.

Across all euro area countries, the net percentage of SMEs reporting an increase in bank lending rates was highest in Spain (66%), Italy (62%) and Portugal (56%), indicating strong risk aversion of banks in an environment of weak economic activity and difficulties in the banking systems

So we see that weak banking systems unsurprisingly lead to finance problems for businesses particularly the smaller ones who in general most need the banking industry’s help. Those does the contagion spread from the housing market to the banking sector to commerce in general. It reminds me that some of my earliest posts on this blog were about the gap between official and market or unofficial interest-rates and whilst those were about the UK the theme has turned out to be international too. All this has a logical consequence highlighted by the numbers below.

SMEs reported a continued decline in profits, but at a broadly stable rate, in the period from October 2012 to March 2013 (-33%, compared with -34% in the previous survey period) to which SMEs in Italy and Spain contributed most.

This illustrates in a practical sense one of the impacts of the total balance sheet of the Spanish banking sector falling from 3733 billion Euros in March 2012 to 3531 billion this March.

Financial Markets

These have divorced themselves from the economic reality as they seem to apply to a place “far,far away” as the film Star Wars put it. Whilst the Ibex 35 equity index is falling today it is up over 22% over the past year at 8282. The government bond market has improved too and her ten-year bond yield has now fallen to 4.34%. But whilst there are gainers from this in Spain there are also risks. Her social security funds which are stuffed to the gills with Spanish bonds will be making a profit here as will the Spanish banks and indeed the European Central Bank.

Unfortunately though much of this is being backstopped by the Spanish taxpayer and when they run out of money the Euro area taxpayer as of course much of this depends on ECB support. There is a world wide dash for yield right now so maybe there would have been a rally in Spanish bonds anyway but the way that the backing is so circular troubles me.

Comment

I have highlighted the problems today in Spain’s economy. It is also true that Spain has strengths. For example it has improved its competitiveness which has boosted  exports but this is not on the same scale as the difficulties being faced. There are hopes that her black economy could be mobilised to help but a rising tax burden seems likely to only increase her black economy further. Also whilst the black economy no doubt exists estimates of its rise have the problem of the way that retail sales have fallen so heavily as you would expect to pick it up at least some of it somewhere.

Whereas on the other side of the coin we see that her businesses are facing severe problems not the least of which is a banking system which is in distress.The fall in employment is accelerating and the business surveys forecast more declines too if the purchasing managers indices are any guide. This has led the newspaper Cinco Dias to declare this today.

a national emergency demanding maximum attention.

So today what should Spain do? In a nutshell less austerity and more reform….

 

17 thoughts on “Spain has gone from "Crisis?What Crisis?" to a "a national emergency demanding maximum attention"”

  1. Drf says:

    Hi Shaun,

    “…but a rising tax burden seems likely to only increase her tax burden further.” Well Shaun, I do not think anyone could possible disagree with that!! I think you perhaps meant “…but a rising tax burden seems likely to only increase her Black Economy further.” ?

    1. Anonymous says:

      Hi Drf
      Indeed I did! Corrected now and thank you.

  2. Anonymous says:

    Re the Spanish black economy. The Spanish government itself, a couple of years ago, estimated this at 24% of the total economy, that is, one third of the declared part. Quite recently there was a very good article in El Mundo about this issue, quoting a figure of 21%. Personally I think both figures are too low. Of the total economy I suspect the black part is about a third. That has very interesting implications for the reliability of Spanish economic statistics upon which EU decisions are made.

    How exactly the ‘black’ and ‘white’ parts interact is not clear, but as ever there are various degrees of dark grey. But I suspect that the reason why there are few demonstrations relative to the supposedly enormous impact of 27% unemployment is not just that whole families are living on Granddad’s tiny pension (no, seriously, that is what they say), or that young people have either never left home or they have returned. I think the complex way Spain operates partly ‘in the black’ has, up to now, shielded it from many of the adverse effects of the issues with the visible economy.

    My conclusion is that we should be very careful in drawing conclusions about Spain from its government pronouncements and state statistics.

    1. JW says:

      Hi

      Yes the support system from extended families and ‘the Church’ is something the ‘anglo’ countries have difficulty realising play such an important role. Swopping produce and labour is common in the Med belt. Most families still have ties and access to ‘the land’ through the inter-generational ties. The ability to hunker down and last through times of hardship is something not lost here.

      This is not to excuse the sheer incompetence of officials, married to corruption being an ‘art form’. ‘Democracy’ is a fragile flower in such environments.

      1. Anonymous says:

        Hi JW and Barncactus

        We are back to an age old problem which is trying to measure something which by definition does its best to be unmeasureable! I take your points about the nature of Spanish life being such that it is likely to be a substantial factor but we are left unsure and maybe thinking that we have found something more unreliable than the official statistics…

        However we do have a clear implication for the fiscal deficit which is that on such logic it will be very misleading and also that austerity measures were more unlikely to work than usual. The higher the tax rates the larger the black economy and the smaller the “white” economy for the same effect.

        If only the IMF had stuck to its old criteria of trade issues and not let politicians seduce it into the world of fiscal difficulties….

  3. Justathought says:

    Hi Shaun,

    Good article, years ago I witnessed the following argument … In order for
    a country to be “healthy” it should possess a “black economy” of about 40 to
    50% of its total economy. I really would like to read again this argument but
    about what I am recalling the main point was the balance between citizenry and state power (We can never trust any government and its propaganda’s machine).
    Ultimately the citizen is the one who have to be self-reliant.

    1. Anonymous says:

      Hi JW,

      I’d strongly disagree – any state which has a large black economy will have major problems with corruption and incompetent bureaucrats. Corruption brings many ills, including redistributing wealth to the rich with the right political connections.

      I’d suggest for a country to be healthy the politicians and bureaucrats need to be accountable for their deeds. By this definition, the UK is failing – nobody has been held accountable for state losses on RBS, Northern Rock. Nobody has lost their job for the BOE’s inflation failure. Nobody has lost their job for the FSA’s failure to jail a single participant in the LIEBOR scandal. Spain probably has examples including the convicted banker Shaun posted about recently.

      By comparison, Iceland has attempted to hold it’s banksters accountable, with some success. Iceland has a rare genuine economic recovery.

      1. Patrick says:

        I’m not disagreeing per se, but is there consistent evidence that a country with a large black market economy always has major problems with political corruption, and incompetent bureaucrats… Do we have an example of a very low Black Market activity ratio country with a corresponding increase in competent and/or moral political leadership?

        Is it just the likelihood that lower tax receipts means smaller government, means smaller state, means less controls, means human being get to be self-interest obsessed shits more often?

        1. Anonymous says:

          I don’t have any such scientific evidence to quote. The Economist magazine writes strongly against corruption.

          I’d point out the difficulty of measuring both black market receipts and alleged smaller state receipts – remembering than bribes are paid cash to undeserving corrupt state employees.

          Corrupt states tend toward byzantine rules that are impossible to comply with. This makes it easy for a corrupt bureaucrat to find a fault that can be ignored for a small fee …..

        2. Anonymous says:

          It would be useful to have a graph of countries using Transparency International Corruption perception index on one side and median annual income per person on the other.

          You might also look at this study http://economics.usf.edu/pdf/corruption.growth.inequality.africa.econgov.02.pdf
          which links African corruption to lower wealth and increased inequality.

          1. Anonymous says:

            Hi ExpatInBG

            Thank you for the link which points out something which the foreign aid debate often ignores.

            “. The best estimates of the growth effect of foreign development assistance is about 0.5 percentage points a year; far lower than the growth effect
            of corruption calculated in this study (World Bank 1998). This means that African countries could achieve better economic performance by reducing corruption than they could through increase external assistance.”

            I have some contacts which reinforce that point as athletes I know who go to train in the Rift Valley area take plenty of cash to pay the inducements/bribes/fees necessary to be allowed to do so.

            I also have a friend who is working to try to improve things in Ghana but from his reports it is a long hard road (or rather train line..).

            This leaves us with the “Aid industry” and why it behaves like an Ostrich on this issue.

          2. Anonymous says:

            Yes, you raise a very good point about the aid industry. Often their results are disappointingly poor value for money. I guess it’s easier for NGOs to spread money about that benefits the politicians than to promote honesty that reduces the politicians income.
            Microfinance and mobile phone networks are reported to give strong economic benefits to Africa – (source The Economist mag), both are legitimate profit making businesses.

  4. James says:

    Hi Shaun,
    How depressing!!
    Two points:
    1. Great typo in para 1 where you have wrecking instead of wreaking. Wrecking somehow seems to fit!
    2. I heard a Spanish professor on the radio this morning who claimed that (I can hardly believe it) private sector unemployment was up by 3 million over the recent years but that government jobs had actually increased (by 57000). This is not exactly going to help

    1. Anonymous says:

      Hi James

      The latest report shows that government employment was rising in the first three quarters of 2011 (at an annual rate of 3.16%,4.28% and 1.41% respectively) before turning downwards in the last quarter. Whereas private-sector employment has been negative in every quarter from Q1 2011…However the annual rate of fall of government jobs is now faster at 8.32% compared to 3.77%.

      Here are the numbers for government workers in thousands

      Both sexes

      Absolute value

      2012 3,013.6

      2011 3,190.0

      2010 3,129.6

      2009 3,062.0

      2008 2,958.6

      2007 2,913.0

      2006 2,882.2

  5. Andy Zarse says:

    Hi Shaun, I just saw on El Pais the Spanish Govt is revising its projection for the economy to contract by 1.3% in 2013, compared with its earlier estimate of
    -0.5%. However, it also expects the unemployment rate to fall to 26.7% in 2014 and the economy to return to growth next year with a predicted expansion of 0.5%…

    And now over to our Sportsdesk, where Alano Partridgio reports the Spanish Govt still predicting it’ll be an all-Spanish final in the Champions league…

    1. Anonymous says:

      Hi Andy

      We are likely to see further downgrades as the year goes on as the expected fiscal deficit is revised upwards…

  6. forbin says:

    Hello Shaun,

    I think what is required is a close look at the banks or cajas – theres evidence that the debt is much larger.

    Like any debtor if they can keep up the repayments and pretense then I think they’re muddle through

    over stretched banks on over stretched mortgages and liar loans – a bit like us really . But at least they’ve had their property bubble deflated a little .

    Our solution is to invite all the rich from around the world to London!

    Might work -certainly kept the London bubble going !

    the issue for rising unemployment is that the less employed the less taxes you get – with a larger black market theres more lost revinue

    So the debt problem gets worse

    Forbin

    Now as

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