The economy of Spain has received a fiscal stimulus as well as monetary easing

Today I wish to open with what has become a good news story and that is the economic recovery which has been taking place in Spain. The dog days which followed the bust in the housing construction and banking sectors has been replaced by an economic boom which reminds us of the song Y Viva Espana. This is reflected by this month’s Economic Bulletin from the Bank of Spain.

Specifically, GDP is estimated to have grown by 0.7% in the first quarter (0.8% in the fourth quarter of 2015).

As they point out this is in fact a slow down although of course it continues a pace which so many countries especially in Europe would love. Looking forwards they are quite optimistic too.

Specifically, GDP growth is estimated at 2.7% in 2016, with a slightly declining profile over the course of the year, and at 2.3% in 2017.

It is nice of them to also confirm an influence which I pointed out on January 29th last year where lower oil prices have boosted consumption and hence economic output.

such as the successive declines in oil prices since mid-2014…. such as the recent declines in oil prices.

Today’s numbers

The favourable position has been backed up this morning by new data on what is a continuing problem in both Spain and indeed the Euro area which is the elevated level of unemployment. From the labour ministry via Google Translate.

The number of unemployed registered at the offices of the Public Employment Services declined in March in 58,216 persons in relation to the previous month. In 2015 it fell by 60,214. Thus, the total number of registered unemployed stood at 4,094,770.

In seasonally adjusted terms, unemployment fell in March by 45,466 people.

Care is needed as this is registered unemployment but it is falling consistently now and we see that progress has indeed been made over the past year.

In the last 12 months unemployment has fallen by 357,169 people. Registered unemployment has fallen by around 8% (8.02%).

There has been some progress recorded in reducing youth unemployment too.

Unemployment among young people under 25 has decreased in the last year by 43,416 people. Thus, youth unemployment is reduced by 11.1% year on year,

Monetary Policy

Jostling at the front of the queue to take the credit for the improvement will be Mario Draghi and the European Central Bank (ECB). They have undertaken a whole panoply of policies to ease monetary policy. We have interest-rate cuts highlighted by a deposit rate of -0.4%, ever more Quantitative Easing now at 80 billion per month for the whole Euro area and new lending schemes ( LTTTROs) which may also lend down to -0.4% or if you like free money ( actually it is in fact better than free) from the central bank.

This has been highlighted this morning by the new interest-rate figures from the ECB which show that the composite cost of borrowing for companies fell to 1.98% in February. This compares to the recent peaks of just over 6% as the credit crunch hit and 3.72% at the end of 2011 as the Euro crisis reached a peak. On this score the ECB will be high-fiving in Frankfurt especially if they also note that the cost of household borrowing has fallen to 2.2%.

The Euro

Much more problematic for the ECB has been the recent strength of the Euro. Indeed I suggested an extra glass of Chianti to soothe the nerve of Mario Draghi as the Euro nudged 1.14 versus the US Dollar on Friday. It has led to a rather extraordinary Open Mouth Operation by Peter Praet this morning. From @mhewson_CMC

PRAET SAYS ECB `SO DETERMINED’ TO RAISE INFLATION

So he wants to take away one of the factors which has boosted the economy of Spain and other Euro area nations? Oh dear! But the issue here is that the initial impact of QE reducing the value of the Euro now sees a similar effect to what has happened to Japan where the currency has later strengthened. The Bank of Spain is on the case.

the strengthening of the euro……the depreciation of the euro over much of 2015…… an appreciation of the effective euro exchange rate and a fall in stock market prices,

Putting that into numbers the trade-weighted Euro which dipped under 89 just under a year ago was 95.4 on Friday. A bit awkward when you are employing 80 billion Euros of QE  a month to help weaken the currency and then see it rise. From a UK perspective the Euro has rallied to 1.25 versus the Pound £ or 0.8 if you prefer.

Fiscal Policy

This development blind-sided more than a few people. After all Spain was supposed to be in the grip of Euro area style austerity. Of course regular readers of this blog and the financial lexicon of these times will be well aware that a sub-section of claimed austerity includes what rather looks like what used to be called a fiscal stimulus. The Bank of Spain describes it thus.

the more expansionary fiscal policy stance last year

The Financial Times puts it like this.

Last week Madrid unveiled a budget deficit of 5.2 per cent of GDP for 2015, almost a full percentage point worse than the deficit target set by Brussels.

With an economy growing at around 3% per annum that is a clear fiscal stimulus and in fact quite a strong one. You would think it was election year in Spain! The stimulus has been hidden under the badge of claimed austerity as discussed above and as I have pointed out before shows that in terms of economic cycles Spain is often very similar to the UK.

In terms of the Euro area position there are all sorts of issues here. After all the fiscal deficit limit is supposed to be 3% and Spain has very few excuses with a strongly growing economy. Nonetheless it was given leeway to 4.2% and then in a more desperate move 4.8% but it exceeded the lot!

The ECB does have a role here because its QE purchases of Spanish debt have not only kept the “debt vigilantes” at bay it has added to the stimulus. As of the end of February the ECB had bought some 69 billion Euros of Spanish government bonds meaning that some short-dated bonds are in negative yield territory and even over ten years Spain is paying only 1.46%. The ECB will not want to be reminded that the low bond yields it has created helped the Spanish government to pump up a pre-election stimulus. It must be particularly grateful for the fast rate of economic growth which has kept the debt to GDP ratio under 100% albeit only just.

Comment

Whilst there is an economic good news story here as the Spanish economy powers ahead there are caveats. After all if we see monetary policy and fiscal policy both running hard we wonder what is left should there be any sort of a slow down? Also whilst 2014 and 15 were good years for the Spanish economy the legacy of the previous ones is that the economy is still some 3.7% smaller than the pre credit crunch peak leading to this consequence in today’s overall unemployment  numbers.

Spain (from 23.2% to 20.4%), and youth unemployment Spain (45.3%)

So better but still very poor. The Financial Times has a rather odd banking centric view of prospects.

Investment bankers, for example, are finding it increasingly hard to make money by advising on mergers and acquisitions or preparing companies for a public listing.

And an even odder view of unemployment,really?

Spain still has the highest unemployment in the western world

So as you can see the outlook for 2016 is still pretty good but Spain cannot afford any slow down and of course another housing bubble would be the last thing it needs. As ever it shows quite a few similarities to the patterns in the UK although at least our Royals seem so far to have steered clear of trouble in the Panama Papers. But Spain did get in ahead of the current economic stimulus fashion.

There’s a brand new talk,
but it’s not very clear
That people from good homes
are talking this year
It’s loud and tasteless
and I’ve heard it before
You shout it while you’re dancing
on the whole dance floor
Oh bop, fashion ( David Bowie )

 

 

 

 

 

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6 thoughts on “The economy of Spain has received a fiscal stimulus as well as monetary easing

    • Hi JW

      Thanks for the link. This bit caught my eye

      ” Between 2011 and 2015 Spain’s central government managed to spend a whopping €121 billion – the equivalent of 12% of annual GDP – on interest payments. ”

      The ECB is doing its best to help with that as it ups its QE purchases. As to the regional issue the government seems to have been squeezing regional governments a bit which echoes local authorities in the UK. But when you add the 2 together Spain has the issue of how would it respond to a slow down?

      As to the Germans and Greece well there is also the IMF.

      “IMF chief Christine Lagarde has dismissed reports that the body is trying to push Greece towards default as “simply nonsense”

      Never believe anything until it is officially denied!

  1. I had heard that the Spanish banks had a lot of toxic bad loans on their books, which were not acknowledged on their balance sheets. Is this correct and have you any figures on the scale of this?
    Please, keep up the good work, we need your view on issues, not TPTB or the media poddles!

    • Hi Foxy

      The official figures for January were 133.4 billion of doubtful loans out of a total of 1319 billion. This is an improvement but not that great a one when you consider the economic recovery. Then as you imply there are doubts about the doubtful loan numbers! Then there is the bad bank Sareb although its fact sheet seems stuck in December 2014.

      “Sareb was created with
      a portfolio worth €50,7
      billion, of which 80%
      represented real estate
      related loans and 20%
      were all classes of real
      estate assets.”

  2. 5% deficit ? Believing that you can borrow indefinitely …. The similarity with Greece a decade ago is scary.

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