Spain continues to see a strong economic recovery

At the moment we could do with some good news. Saturday night’s dreadful terror attack was at a place I know well beginning from childhood as one set of grandparents lived near to Borough Market. A place that has found some economic good news in the past couple of years or so has been Spain. This followed something of a double whammy as the initial impact of the credit crunch was then followed by the Euro area crisis. As I look back it feels a little strange to see its ten-year bond yield above 7% as it was in July of 2012 when the latter crisis was raging. Of course those with the courage and foresight to buy Spanish government bonds back then were well rewarded if they held onto the position.

Today’s business survey

From Markit:

The recent strong growth rates generated by the
Spanish service sector continued in May. Further
sharp increases were recorded in business activity
and new orders. With workloads rising, and the
prospect of new projects in future, companies took
on extra staff again. Meanwhile, inflationary
pressures moderated during the month.

As you can see there are several points to not here. For example the situation looking ahead is strong.

Moreover, sentiment picked up to the highest in 26
months. More than 55% of respondents predict
output to be higher in 12 months’ time than current

Also we see that employment is on the rise which is welcome considering the still troubled unemployment picture.

Spanish service providers increased their staffing
levels during May, with new hires needed to work
on current and future projects. The rate of job
creation was solid and only slightly weaker than
April’s nine-month high.

Added to this is a decline in inflationary pressure which starts to make this look rather like a situation where Goldilocks porridge is at exactly the right temperature.

Inflationary pressures showed signs of easing in the
sector during May, with both input costs and output
charges rising at weaker rates than recorded in April.

At the end Markit are very bullish on GDP growth this quarter.

with nearly 1% being signalled for Spain

Should that prove to be true then the forecasts of the Bank of Spain will start to look a little pessimistic.

Based on our estimates, GDP could rise by 2.8% this year, before slipping to more moderate growth rates of 2.3% and 2.1%, respectively, in 2018 and 2019.

Although to be fair it was expecting a growth spurt based on something you do not often hear or read associated with the Euro area.

the expansionary fiscal policy

Official GDP growth

The first quarter of this year was a good one for economic activity in Spain according to its statistics office.

The Spanish economy registers a quarterly growth of 0.8% in the first quarter of 2017. This rate was one tenth higher than that registered in the fourth quarter of 2016.  The growth compared to the same quarter last year stands at 3.0%, the same rate as that recorded the previous quarter.

A phrase so beloved of economists can be deployed which is, export-led growth.

The contribution of net foreign demand of the Spanish economy to annual growth of the quarterly GDP was 0.8 points………Goods and services exports accelerated its rate of growth, increasing from 4.4% to 8.4%

This morning has brought more good news on this front. From Spanish statistics via Google Translate.

The total expenditure of international tourists who visit Spain in April increases by 19.7% compared to the same month of 2016. Average daily spending stands at 137 euros, 5.5% more than in April 2016……..During the first four months of 2017 the total expenditure of international tourists increased by 15.3% compared to the same period of the previous year, reaching 20,394 millions of euros.

Actually Spain was also a good global citizen in that it shared some of the benefits around too.

Imports of goods and services experienced an increase of 4.1 points, from 2.3% to 6.4%

As well as export-led growth there was also investment led growth.

Gross fixed capital formation registered a growth rate of 3.8%, indicating an increase of 1.6 points as compared with the previous quarter.


This is the achilles heel of the Spanish economy as the latest official quarterly survey informs us. Via Google Translate.

The unemployment rate stands at 18.75%, which is 12 cents higher than in the Previous quarter. In the last year this rate has fallen by 2.25 points.

The problem is shown by the fact that even after 3 good years for economic growth unemployment is still at a rate of 18.75% meaning that 4,255,000 Spaniards are recorded as unemployed. The good news is that until this quarter the rate has been falling and with the rate of economic growth the increase seems strange. As does the quarterly fall in employment of 69.800 which tells a different story to the GDP report.

Employment of the economy in terms of jobs equivalent to full-time employment registered a quarterly variation of 0.7%, three tenths higher than that registered in the previous quarter.

Over the past year we see that the two roads give similar answers ( 408k versus 435k) so if pressed one would say that the fall in employment from the labour market survey seems most suspect here. Maybe the 65,000 households surveyed had seen a particularly poor phase.

Monetary policy

This is a little awkward for Spain as the very expansionary policy does not go well with the economic strength we have looked at above. If we look for any sign of the “punch bowl” being taken away as the party gets started we see only a reduction in monthly ECB bond purchases to 60 billion Euros a month from 80 billion. The deposit rate at the ECB remains at -0.4% and helped by some 182.5 billion Euros of buying by the ECB the Spanish government can borrow at negative interest-rates on short-dated bonds and only 0.06% for five year ones. A little bit of a brake will have been applied by the rise in the Euro to around 1.12 versus the US Dollar.

Accordingly policy could not be much looser and it is hard to think of an economy in the past that has tried this sort of experiment in terms of expansionary monetary policy in such a boom.

House prices

So far we are not getting much of a clue from the various indices which tell us that they may be going up or down! This was interesting via Spanish property insight.

The outlier is the 7.74% increase reported by the registrars, using their repeat sales methodology that only looks at the price of property that has sold twice in the period of study.

The catch is that it must be a rather small sample size. Spanish statistics has the annual increase at 4.5%. So is this a case of once bitten twice shy? The index provided by Spanish notaries was set at 100 in 2007 and  was 70.7 at the end of 2016. Mind you for PropertyEU up seems to be the new down or something like that.

Looking at property performance returns in Europe in the last 10 years, Spain is second on the list after Sweden with a 13% return, followed by Ireland and then Portugal with 12 per cent.

Some of the gap can perhaps be provided by rents where as I reported on the 27th of January there has been a boom. From RTN online.

THE AVERAGE price of rental housing in Spain rose 8.8 per cent in the first quarter of 2017 due to increasing demand, according to the rental price evolution report published on Wednesday by Idealista.


The good news theme coming out of Spain was reinforced by Real Madrid retaining the football Champions League trophy on Saturday evening. The dangers for now seem to be a combination of monetary policy which if we allow for the fact that policy changes take 18 months or so to operate seems way too lax and the way that if a housing boom is underway it is in the rental sector this time around.

Also there is still some ground to be gained as even the really good growth of the last few years has only just got Spain back to its previous peak. With 2010 set as 100 that was the 104.4 of the second quarter of 2008 which if the releases above are accurate should now have been regained. Whichever way you look at that it remains odd that Banco Popular has hit trouble now I think.

Economists letters

In spite of the track record of such events it would appear that some are not deterred.

21 thoughts on “Spain continues to see a strong economic recovery

  1. I must admit I did a double take when I saw your headline and as it transpires I was right to do so. It would appear that I’m behind the times in thinking that there is no such thing as good economic news when unemployment is 18.75%. At that rate I would expect emergency government statements and each release accompanied by a target of unemployment reductions.

    As The Script sang “all I want is words, but all I got nothing…” what is going on? Unemployment has been relegated form headline performer to bit part warm up act. That is why nothing adds up anymore the bill40 maxim is all economics breaks down without full employment.

    • Hi bill40

      It is a question of absolutes versus relativity really. Is 18.75% unemployment bad as an absolute? Of course it is. But it is a fair bit better than it was. As to full employment that is a difficult concept these days, how would you define it?

      • I define Full Employment as zero involutary unemployment by way of a Job Guarantee. This would provide jobs when and most importantly, where they are needed.

  2. Hi Shaun,

    Like yourself, I have memories of Borough Market and its environs that go back to a time when the market really was a market, when the area would have been largely deserted at the weekend, when that whole riverside section between Southwark and London Bridges was pretty much a cultural wasteland, when The Anchor at Bankside was a nice, quiet little place at the weekend. It will take more than a few sad sacks with knives to reverse the progress that has been made and make London grind to a halt. (Nothing short of an inch of snow and some leaves on the line can do that!)

    I looked at that economists’ letter in The Groan with a sinking feeling in my heart, not because I necessarily disagree with what is stated therein but rather in trepidation at how such letters are received these days. Also, the long, long list of illustrious (or otherwise, depending on one’s point of view) names at the end was surely unreadable for all but the most dedicated of economic twitchers.

    • Ah yes, the Anchor at Bankside! I lived for four years about 500 yards from Borough Market (1980-1984), when they were still using the deserted warehouses for horror film sets and for Dickens’ films.
      I think that the letter from the economists probably serve as a reminder that you wouldn’t really want academics to run anything, let alone a country.

  3. I wonder what has happened to all the billions of non performing loans that spain was sitting on? Repaid? (doubt it), Kicked into the long grass? Still on the books but reclassified as good loans (most likely) so none of the banks have to own up. They cant just have been magicked away!

    • Hi Pavlaki

      The Banco Popular saga that I looked at on Friday continues to rumble on. Here is Bloomberg on the subject.

      “Banco Popular Espanol SA, racing to sell assets and find a buyer, is reviewing how to improve liquidity and plans to meet with regulators this week, according to people familiar with the matter.

      The Madrid-based bank will discuss options with the European Central Bank on Tuesday, the people said, asking not to be identified as the plans are private. The lender may request additional central bank loans, one of the people said.”

      The share price dropped another 18% today oh and it always amuses me when articles saying liquidity when everyone is really thinking solvency.

    • Hi Stevie

      Thanks for the link and those are grim figures. One would hope that they have improved since 2014 as the economy has turned so fingers crossed. As to one of my subjects of Friday I agree that there is plenty of mileage in the Banco Popular saga.

  4. Great blog as always, Shaun.
    Regarding Spanish housing prices, I would suspect their repeat sales price index, even if it is an outlier,could be closer to the mark than the official index. Repeat-sales price indexes have their problems, and smaller sample sizes may not even be the most important one. They can be upward-biased due to failure to take account of renovations to homes between sale dates. (With more work done to control for renovations this bias could be reduced.) Nevertheless they do have a key advantage over other indexes. They control in the most rigid way for location, since they only make comparisons between the same houses on the same sites. Hedonic regressions to account for locational bias have encountered a lot of problems and are not always politically correct. The Canadian Teranet National Bank HPI is a repeat sales price index, very deliberately modelled on the US Case-Shiller HPI, also a repeat sales price index, and the most closely monitored American index It probably is upward biased in its inflation estimates, but if you had to choose one number or another on a take-it-or-leave-it basis, I would certainly take the Teranet estimate of an annual inflation rate of 14.7% in March 2017 over the official new housing price index (NHPI) estimate of 3.3%. You cannot dismiss this as an apples-and-oranges comparison, even if the NHPI does not relate to existing homes. The Canadian CPI uses the NHPI in its proxy for land transfer taxes and even for real estate commissions, so StatCan maintains it is an adequate price indicator for the existing housing market as well as the new housing market.

    • Hi Andrew and thanks.

      That is an intriguing reply as I have used the Teranet numbers from Canada without being aware it too was a repeat sales index. I will make a mental note to check every now and then the series in Spain to see what it tells us.

  5. Hi Shaun, could this increase in service hires in May be seasonal as Spain gears up for the tourist season, or is it that by dent of the fact the statement does not mention seasonality that it is not a seasonal fluctuation?

    One other thing, whilst reading your comments on the Euro the immense strength of the Euro suddenly struck me. -0.4%, massive unemployment throughout the Euro area (admittedly it’s economy is looking good this year and into next) soverign debt going through the roof in quite a few of it’s member states/countries and yet the Euro is only marginally weaker against the dollar than the UK £!. How can that be?

    • …and I forgot more and more QE every month flooding the markets with ever more Euros. What’s going on? Why hasn’t the Euro weakened considerably? I think Mario would probably like an answer to that question too!

      • Hi Noo2

        It is a question that the Bank of Japan will be mulling as well after all it is pouring Yen into the system and discovering that demand means it is at 110 to the US Dollar. The old assumption that more of a currency reduces the price has not had much of a credit crunch. What we see is a combination of an announcement and expectation drop but then the currency seems to ignore the flow of new issuance. It seems as though there is a sponge that soaks it all up. Returning to the Euro the trade surplus may help to explain things a bit but yes it is by no means economics 101.

  6. Two words ‘Banco Populaire’ the Spanish banking crisis has not gone away and is about to rear its head again

  7. repeat property purchases ? there is room there for dubious tricks. Seems unlikely that a real pruchaser would resell so quickly.

    However if you can acquire under value and then re-sell at profit then the transaction makes sense.

    The 7.74% looks like a marketing scam targetting gullible buyers

      • In Canada, we can probably trust the reported sale price. But I’d be more sceptical in Spain. People under-declare and include a purple wad -> which saves on transaction costs.

        We don’t need consensus, and I’d distrust the Spanish resales index. garbage data in, garbage data out

        • Hello, Expat in BG. I’m sure you know much more about Spain than I do as I’ve never been there and Shaun Is my major information source on its economy. Just the same, I would not dismiss the Spanish repeat sales price index as junk. The average of the official and the repeat sales house price inflation rates is 6.1%. So the question is, which of these estimates comes closer to the truth. Is house price inflation more likely to be above or below 6.1%?
          Shaun says Spanish GDP growth in 2017Q1 was 1.0%, which I assume is still a forecast estimate. The actual estimate of Canadian GDP growth for 2017Q1 was 0.9%. If one looks at 2016Q4, for which actual estimates are available for both countries, the Spanish four-quarter growth rate was 3.0% as opposed to 2.7% for Canada. So the Spanish economy has been growing faster and their central bank, the ECB has followed an even more aggressively stimulative monetary policy than the Bank of Canada. Although you can quibble about the exact inflation rate, no-one seems to dispute that house price inflation in Canada is in the double digits. So why would you be skeptical that Spanish house price inflation is higher than 6.1%?

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