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?
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.
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,
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.
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.
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.
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….