Spain is on the journey from depression to Depression to DEPRESSION

We  awake this morning -those of us who went to bed anyway- to a rather similar electoral position in the United States to the one before. President Obama does have a new mandate but he also faces a rather deadlocked looking Congress spilt between the two main parties. Also there is food for thought in the fact that over 2 billion US dollars were spent! However the media might like to turn its eyes now to Europe and in particular the Euro area where September has seen some disturbing news on the economic front.


Back on the 18th of October I discussed some official data on the Spanish economy which actually showed an improvement which made a pleasant change and as a reminder I have put it below.

The General Index of Turnover Industry (CNI) undergoes a variation annual 3.8% in August, almost six points higher than that recorded in July.

The General Index of New Orders in Industry (IEP) undergoes a variation annual 1.0% in August, more than three and a half points above the July.

So we saw an improvement reported and enough of one to turn the numbers into positive territory. Also we saw that new orders were reported as positive. I would like you to hold that thought in your mind as we see Spain’s latest industrial production figures.

The annual variation of the Industrial Production Index (IPI) stands at –11.7% in September, as compared with –2.5% in August

The annual rate of the IPI, adjusted for the calendar effect, stands at –7.0% in September, as compared with –2.5% in August

In case you are wondering about the size of the calendar effect I have just checked and there were 22 business or weekdays last year but only 20 this. However these are shocking numbers for an annual drop with adjusted industrial production some 7% lower than the year before. Back in January I created something of an online stir by suggesting that Spain was moving into an economic depression and these numbers were the sort of thing I feared. I have placed a link to that post below.

Also we need to take the new industrial orders numbers with at least a pinch of salt in future! For new readers I operate a system whereby I accept official figures until they are shown to be unreliable as otherwise you end up picking and choosing according to ones own biases and predilections.

What caused this drop?

We see that the falls were widespread.

Every industrial sector showed negative annual rates.

Also we see that the capital goods sector was the worst affected.

Capital goods, with an annual rate of –17.5%….Almost the totality of the activities of this sector registered a decrease in production. Among them, worth noting, by its effect, the Manufacture of metal elements for construction and Manufacture of motor vehicles.

The two categories quoted were 41.1% and 21.4% lower respectively and if we look outside of Capital Goods we see that the manufacture of other chemical products fell by 36.9%.

Is this an economic depression?

To examine this we need to take a look at the underlying index for industrial production and also the performance in 2012 so far. Starting with 2012 we have seen this.

The average for the Industrial Production Index registered a variation of –6.2% in the first nine
months of 2012, as compared with the same period the previous year.

So grim but this could be a recession so let us now examine the underlying position. The Spanish statistics office has chosen 2005 as its benchmark of 100 and the unadjusted index now stands at 75 and the calendar/seasonally adjusted one stands at 78.4. So seven years later output is between a quarter and a fifth lower and that to my mind qualifies as a depression.

If we look at another way and look at the unadjusted underlying index for September since 2005 we see this as a progression We start at September 2005 with 105.5 and we go 106.1,104.7,99.8,87.1,86.1,84.9 and now 75. So depression is now Depression.

Spanish readers might like to sit down at this point because I then thought that I would look back twenty years for a September which was lower than 75 on the underlying index and I did not find one. So we now move to DEPRESSION as a ranking for Spain’s industrial production and we have to face what is now two lost decades in this area. The underlying index was 78.6 in September 1992 so on a generous basis we could say that it was pretty much the same as this years calendar/seasonal adjusted number. Trouble is that even trying to be generous we are talking about going back twenty years.

Is there any relief in sight?

Only yesterday I referred to the latest Purchasing Manager’s Indices for the Euro area and here are the excerpts covering Spain.

Steep contractions were signalled for Spain, France and Italy in October, although the rates of decline eased slightly in each of these nations compared with one month earlier……..The big-four nations all reported reduced levels of service sector output in October, with the steepest contraction in Spain

The actual reading for Spain in October was 41.5 which is a long way from the benchmark of 50 so any month on month improvement needs to be taken in that light. This is for all or “composite” output so includes services and construction as well as manufacturing.

If we look for numbers which specifically cover manufacturing we saw this last week.

The Markit manufacturing PMI  fell to 43.5 in October, from 44.5 in the previous month, and signalled a further marked deterioration of operating conditions in the sector. Furthermore, the latest decline was the fastest in three months.

So a higher absolute reading than overall but well below the benchmark 50 and also it is falling. If we consider that it is falling compared to the very weak September numbers discussed above we see the size and depth of the problem.

Retail Trade

Eurostat has published numbers for retail trade in the European Union and the Euro area as I type this. The leaders of the Euro are probably a bit underwhelmed by this as it was not supposed to be this way.

In September 2012, compared with September 2011, the retail sales index fell by 0.8% in the euro area and
increased by 0.3% in the European Union

But we see yet more signs of depression in Spain and this time it is in her retail sector which has fallen by the amount below over the past year.

Spain (-12.6%),


So as we have travelled through 2012 we have seen Spain slip inexorably towards the sort of economic depression that has been inflicted on Greece. In terms of retail sales and industrial production we have seen her go depression,Depression,DEPRESSION I am afraid. Not everything looks that grim as her export performance has offered a ray of light  But as we look around and see that even German industrial production dropped by 1.2% in September compared to last year one has to wonder how long that can be sustained.

Unfortunately we also have more austerity to factor in and we know now from the Greek experience what that does to economic output.


18 thoughts on “Spain is on the journey from depression to Depression to DEPRESSION

  1. Hello Shaun,

    An now Spain will bleed to death on the economic alter that is the Euro…

    such a crime should not go unpunshed bit who will save her?

    not her euro star struck politicos for sure – still getting their trotters in the trough….


    • I couldn’t agree more on the topic of the Euro struck politicians, but would like to put one more unmentioned element into the pot. At what point do the Spanish start to think that unemployment (ignoring all other things) is simply unbearable. I cannot really believe that both Spain and Greece have 25% unemployment (or 50% if you are young), but politicians are still not prepared to think out of the Euro box

  2. Not Spain’s population either Forbin, who remain inexplicably wedded to the idea of the Euro refusing to beieve it has any role in their problems. They are stuck like moths round a Euro-lamp, unable to leave it’s rosy glow even though it will either burn them to death, or they fly on until exhaust and fall on the floor drunk with fatigue.

    Shaun, the BBC said today that the US spent $3BN on the election but that last month Americans spent an estimated $6.3BN on Halloween costumes! I suppose that statistic provides some context!

    • Hi Andy

      I spotted a bit of inflation going on with the estimates for what was spent on the US Presidential election. Last night the BBC News 24 presenter said over US $2 billion but the person they told us was an expert was quite careful to say between 1 and 2 billion. So of course we now find ourselves at US $3 billion!

      Mind you hopefully those who spent their money on Halloween enjoyed it as the list of those who enjoyed the election (did you see the queues?) must be thin indeed.

  3. Hi Shaun,

    Another great piece on analysis.

    As Spain joined the EU in 1986, sadly, it is not going to be long economically before they are totally back to the future, so there will have been no overall economic benefit from joining the EU. As they joined the Euro in 1999 and the currency notes were not circulated until 2002. In 10 years Spain has gone from boom to bust.

    Although they have benefitted from much capital investment with motorways that go from nowhere to nowhere that nobody uses and regional airports that are now closed as nobody used them and 1,000,000 houses that nobody whats. Where has been the benefit and why do they keep clinging to this failed currency?

    Somebody I know, who lives in Spain me, has told me that they cling to the Euro as it is synonymous with the modernization of Spain with farmers trading in donkeys and horses for tractors and other modern farm machinery. If things keep going as they are it will not be long before they are back to using animals again where they can’t get or afford the fuel for their tractors. Go long on Spanish horse and donkey breeders as they may be about to come back into fashion!

    The frightening thing is that using Greece as a model Spain’s Euro austerity noose has hardly been tightened yet and they have hardly started on bank bailouts and recapitalization.

    • Agreed – they built a fake consumer/public sector economy based on artificially cheap debt and ponzi housing market.

      Hang on – sounds familiar ?

      Maybe they can export donkeys to us when we can’t afford fuel either ?

    • Hi Rods

      Thank you. I found it rather chilling today scrolling back on the industrial production numbers to see how far back I needed to go to see the same level. It was also a bit like HG Wells’ Time Machine as I found myself back in 1992.

      What happened then, oh a European Monetary System broke up as the UK was ejected and our central bank was overrun which made an impression on me as it was quite a day to say the least!

    • Although they have benefited from much capital investment…

      Well yes, the EU (the net contributors, that is) have given Spain over €200bn since 1986 excluding the CAP and there really is a lot to show for it. I know there are several silly airports and extravagant arts centres and some of the roads seem to have been built for the sake of it (and perhaps were), but the UK would be a very different place today if it had Spain’s roads and extensive high speed train network. Spain’s problems are to do with ‘get rich quick by property investment’ during a negative real interest rate period, massive immigration of cheap manual labour to build said properties (those immigrants now being unemployed and with no prospects), serious and ongoing labour inflexibility coupled with the virtual impossibility of firing the multitudes of permanent ‘funcionarios’ in the civil service and a disintegrating regional structure that makes the UK look advanced. In the south, people are on the bread line. Meanwhile, back in Madrid, it’s life as usual for the middle class. I don’t see anyone being deprived of their next Audi there. Shaun, you are partly right, quite a lot of Spain is in a depression and there is no obvious way out. Today, in a Spanish newspaper, it was stated that there are 300,000 families forced to depend on their elderly parents’ pensions to supplement their meagre incomes. That does not augur well for the coming year. Even the weather has been ghastly lately! Devaluation (post Euro exit) might help boost tourism, but can it really do enough?

  4. The Euro is the problem ?

    The UK isn’t in the Euro, we have devalued but I don’t see any evidence that we will export our way to growth – trade deficit is as bad as ever. And we are supposed to still be a major manufacturing nation (6th biggest in world or thereabouts).

    Our headline economic indicators look better (or rather less dire), but I would argue thats the artificial & temporary effect of QE (which doesn’t win much support on this blog). The pain of falling living standards is just being delayed – we will eventually catch up with Spain via inflation. In fact we have to if we are to compete on labour costs.

    Of course the BoE blames Euro austerity for our stalled recovery, but Euro break-up isn’t going to help much either. Even if the dominoes didn’t fall and Spain/Greece exited then we would just face more low cost competition (although not the $10 a day we face now)

    Austerity or inflation are different paths to the same poorer destination – the popcorn moment occurs when the citizens finally realise this

    • Hello DaveS

      I think the BoE will blame everyone and everything else except itself!

      I agree we have done very badly considering we can and did devalue – its not working like it used to is it?

      Spain cannot devalue – somebody else with a more intelligent mind than mind could work out where we would be if we had joined the euro ten years ago…..

      Its not just the low cost of labour – we get that from Hungary and Poland these days apart from China ( could we ever compete with their wages ? with our housing and infrastructure costs ? )

      I would add that we’ll get austerity here soon , we’ve got the inflation already , more to come

      Oil bailed us out – now its cost will become a mill stone around our neck because our leaders lead the high life and did not invest wisely. ( we used the money for day to day spending and did not saved it )


      PS: as Georg Carling once said – be detached from it , its a show, its getting to the interesting part now…

      Pass the popcorn 😉

    • Hi DaveS

      We are already facing much more competition from developing countries. You only have to go onto a website like to see not only the range of countries for software development, graphics etc, but also some of the rates.

      We all know which button the Government is going to press to get the UK cost base and property prices down along with their debts. The one marked I for inflation, it is just a question of how much and when. This will do much damage to our industrial base particularly manufacturing, but may in the longer term enable us to compete more effectively globally.

      The UK is already in a bad position with very high taxes which is driving a much bigger percentage of professional people abroad for work, where they have more disposable income, a better lifestyle and climate. With our poor educational system who is going to replace them?

      Likewise, with the UK population’s toxic attitude to wealth creation and profits, which starts at the top with the politicians especially the anti-business minister, noncompetitive energy prices and carbon taxes, with widespread electricity blackouts on the horizon from 2015 onwards. Not to mention the difficulties of doing business due to our unacceptably poor transport infrastructure.

      To me it is no surprise that our industrial base is shrinking and our balance of payments are getting worse. The only possible good news is: What is going to replace North Sea oil? Potentially shale gas and oil, providing the Government / EU allow its development. We have potentially some of the biggest reserves in the world.

      • Hi rods2

        I like to question the devalue and export your way out argument – not so easy in a globalised world unless you happen to have a nice commodity to sell (like fish, soy, oil, gold).

        I have no doubt we are about to find out that the inflate your way out argument doesn’t work either.

        Not sure I agree about UK’s toxic attitude to wealth creation ? Seems like wealth creation is alive and well for the few. Likewise as an IT entrepreneur within spitting distance of silicon roundabout, I don’t find the UK anti-business – sure our staff are expensive but then we get into the same labour cost arguments.

        I’m afraid I’m not convinced by the hype on fracking either – but thats a whole new debate,….

  5. We will drift slowly to a poor wage, lower house priced economy over the next 10 years, just going to take people a long time to get used to poorer living standards.

    • Hi catvet and welcome to my part of the blogosphere

      That is certainly a danger and if we continue to go down the “zombified ZIRP (Zero Interest Rate Policy) route I fear we may have a grind for more than twenty years. We need instead to get on with reforming our economic system which is what I argue for.

  6. Hi catvet, what’s wrong with lower house prices? Surely that would mean they are more affordable to buy and with less money wasted on repayments there’s more money to spend in the real economy. How have high house prices benefitted us as a nation over say the last fifteen years?

  7. Andy, most people agree houses are over priced but the question is whether they should fall gradually or quickly. Which will cause more dislocation?

    • Hi Dick

      As long as one avoids a collapse or rout I think that it is much better to get on with it. Otherwise the housing market rumbles on without much happening and what are zombie banks are allowed to survive.Also you do not get new entrants such as first time buyers in to support the market and restart things if you let things grind on for years and years

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