The economy of Spain provides some welcome good news for the ECB

A rush of economic data over the past 24 hours allows us as to follow Sylvia’s “I’m off to sunny Spain”. This gives us another perspective as we switch from the third largest economy ( Italy) yesterday where economic growth has ground to a halt again whereas in the fourth largest it is doing this according to the statistics office.

The Spanish GDP registers a growth of 0.6% in the third quarter of 2018 to the previous quarter in terms of volume. This rate is similar to that registered in the second quarter of the year. The annual growth of GDP stands at 2.5%, a rate similar to that of the quarter preceding.

As you can see two countries which were part of the Euro area crisis are now seeing very different circumstances. At the moment Spain is a case of steady as she goes because quarterly growth has been 0.6% for each of 2018’s quarters so far.

If we back for some perspective we are reminded of the trouble that hit Spain. It did begin to recover from the initial impact of the credit crunch but then the Euro area crisis arrived at economic growth headed into negative territory in 2011-13 peaking at a quarterly decline of 1% at the end of 2013. This was followed by improvements in 2014 such that quarterly growth reached 1.2% in the first quarter of 2015. Since then quarterly growth has been strong for these times varying between the current 0.6% and the 0.9% of the opening of 2017.

So we see that Spain saw the hard times with annual economic growth falling to -3.5% late in 2012 but can rebound as illustrated by the 4.1% of late 2015. Those who have followed my updates on Greece will recall that I often refer to the fact that after its precipitous and sustained decline it should have had in terms of economic recovery a “V-shaped” rally in economic growth. Well Spain gives an example of that whereas Greece has not. If we switch to yesterday’s theme Spain is a much happier case for the “broad-based economic expansion” claims of Mario Draghi and the ECB because whilst economic growth has slowed it is still good and is pulling the Euro area average higher.


If we continue with the mandate of the ECB we were told this by Spain statistics yesterday.

The annual change in the flash estimate of the CPI stands at 2.3% in October, the same registered in September
The annual rate of the flash estimate of the HICP is 2.3%.

So inflation is over target and has been picking up in 2018 with the current mix described below.

In this behavior, the decrease in the prices of electricity stand out, compared to the increase
registered in 2017, and the rise in gas prices.

From the point of the ECB if we look at inflation above target and the economic growth rate and point out that it is withdrawing the stimulus provided by monthly QE. However the water gets somewhat choppier if we look at another inflation measure.

The annual variation rate of the Housing Price Index (HPI) in the second quarter of 2018 increased six tenths, standing at 6.8%. By type of housing, the variation rate of new housing stood at 5.7%, remaining unchanged
as compared with the previous quarter. On the other hand, the annual variation of second-hand housing increased by seven tenths, up to 7.0%.

The first impact is the rate of annual change and this is more awkward for the ECB as it is hard not to think of the appropriateness of its -0.4% deposit rate for Spain. Its impact on mortgage rates especially when combined with the other monetary easing has put Spain on a road which led to “trouble,trouble,trouble” last time around. For those of you wondering what Spanish mortgage rates are here via Google Translate is this morning’s update.

In mortgages on homes, the average interest rate is 2.62% (4.3%) lower than August 2017) and the average term of 24 years. 59.8% of mortgages on housing is made at a variable rate and 40.2% at a fixed rate. Mortgages at a fixed rate they experience an increase of 3.9% in the annual rate. The average interest rate at the beginning is 2.43% for mortgages on variable-rate homes. (with a decrease of 5.5%) and 2.99% for fixed rate (3.1% lower).

As fixed-interest mortgages are only around half a percent per annum higher the number taking variable-rate ones seems high. However I have to admit my view is that Mario Draghi has no intention of raising interest-rates on his watch and the overall Euro area GDP news from yesterday backs that up. Of course we are switching from fact to opinion there and as a strategy I would suggest that any narrowing of the gap between the two types gives an opportunity to lock in what are in historical terms very low levels.

Labour Market

The economic growth phase that Spain has seen means we have good news here.

The number of employed increases by 183,900 people in the third quarter of 2018 compared to the previous quarter (0.95%) and stands at 19,528,000. In terms seasonally adjusted, the quarterly variation is 0.48%. Employment has grown by 478,800 people (2.51%) in the last 12 months.

Higher employment does not necessarily mean lower unemployment but fortunately in this instance it does.

The number of unemployed persons decreased this quarter by 164,100 people (-4.70%) and it stands at
3,326,000. In seasonally adjusted terms, the quarterly variation is -2.29%. In recent months unemployment has decreased by 405,800 people (-10.87%).  The unemployment rate stands at 14.55%, which is 73 hundredths less than in the previous quarter. In the last year this rate has fallen by 1.83 points.

But whilst the news is indeed better we get some perspective by the fact that the unemployment rate at 14.55% is not only still in double-digits but is well over that Euro area average. Indeed it is more than 10% higher than in the UK or US and around 12% higher than Japan.

As to the youth employment situation the good news is that the number of 16-19 year olds employed rose by nearly 12% to 165.500 over the past year. However some 137,800 are recorded as unemployed.


The Spanish economy has provided plenty of good news for the Euro area in the past few years, but that does not mean that there are no concerns. We have already looked at the issue of house prices and the past fears which arise from their development. Also for those who consider this to be because of the “internal competitiveness” model will be worried by this described by El Pais.

External demand, which helped in the worst moments to pull the Spanish economy, subtracted 0.5 points per year from GDP. And in the quarter, exports fell by 1.8%, entering for the first time negative rates since the third quarter of 2013. While it is true that imports also decreased by 1.2%.

Some of this no doubt relates to the automotive sector which for those who have not followed developments has been a success for Spain albeit that some of the gains have come from cannibalising production from elsewhere in the Euro area. An example of a troubled 2018 has been provided by Ecomotor today by revealing that VW Navarra has cut its production target by 10,000 cars for 2018. Oh and I nearly forgot to mention the Spanish banks especially the smaller ones hit by the court ruling on Stamp Duty.

But returning to the good news the economic growth means that Spain has seen the debt to GDP ratio that had nudged above 100% drop back to 98.3%. That is the road to a ten-year bond yield less than half that of Italy at 1.56% in spite of the fact that the planned fiscal deficit at 2.7% is higher.

20 thoughts on “The economy of Spain provides some welcome good news for the ECB

  1. What happened to the enormous bad debts held by Spanish banks? The figures quoted to me several years ago, by a Spanish banker, were truly staggering. Have they been majicked away?

    • Mark to market was suspended “temporarily”, giving banks with massive losses on their books the green light to value worthless loan portfolios, assets and securities at imaginary valuations, thus giving the illusion of solvency and profitability. UK banks have done the same.

      • Do you know if that is still the case? In other words – are there still hidden losses or have the intervening years reduced the exposure?

        • Impossible to say, they aren’t likely to admit the deception is over are they? so their share prices are the only real indicator that gives an idea into their solvency, as far as banks like RBS are concerned, to me the shares represent little more than option money on the survival of the company.

    • Hi Jason

      These things are difficult to measure but we do have one metric to consider. We have an average mortgage rate of 2.62% whereas if we go back to July 2012 for the “Whatever it takes” speech the average mortgage rate in Spain was 4.11%. So was it Whatever it takes to turn out the Spanish mortgage and housing markets? Which of course helps the banks….

  2. Hi Shaun

    I understand that Spain had a significantly overvalued currency on entry into the Euro and, in this respect it is in a similar position to Germany. Therefore within the Euro it has been able to enjoy a structural advantage as its incorporation into the Euro was a de facto devaluation which has, and continues to, support its export trade in particular.

    All of this may be good news for Spain, especially the unemployment figures, but it isn’t all good news. The fact that economies like Germany and Spain are doing reasonably well just emphasises the divisions within the EZ. Those that are not doing well, and those that had a weak currency at entry into the Euro, are forced to take internal measures, some of which are very difficult in order to bring their economies onto a sustainable growth and inflation track. This will do nothing for European solidarity and every report of alternate joy and gloom is likely to hasten the day when the Euro breaks up.

    • Hi Bob J

      The other catch for Spain is that if we continue your theme after its devaluation via joining the Euro it should have been “boom,boom,boom” Black-Eyed Peas style. Whereas we got boom,boom, bust because the devaluation also came with interest-rates which were too low for Spain.

  3. Window dressing. Structural problems relating to construction industry are still evident. Chronic underemployment. Banks are sitting with large positions of risky emerging debt. Crows will come home to roost Ibex 35 heading to 6000.

    • Hi Bruce

      The banks are an issue particularly the smaller ones which had the Stamp Duty ruling go against them. Of course one can say that in quite a few places around the Euro area and beyond! From their point of view the house price rises boost the asset book. But like so many it has not been a good phase for share prices with BBVA down 33% over the past 12 months.

  4. I have a home in Mallorca which I bought with a low interest euro mortgage back in 2004. I intended to pay the mortgage off when I had the means in 2005 but didn’t bother as I could earn more interest on the money in the UK than I was paying in interest on the mortgage in Spain. Needless to say I got badly stung with the rapid fall in the value of the pound in 2008. If only Shaun’s blog had been around in those day’s I could have been forewarned. Anyway, to get to the point, using analysis similar to Shaun’s cranes visible in Battersea measure, between the end of my trip to Mallorca in June and my return here at the end of August, I was astonished that 6 or 7 new bars and restaurants had opened in such a very short space of time in the marina in Cala D’Or (not excactly cheap real estate) and a pre financial crash development that had remained largely empty since was now fully utilised. If you talk taxi drivers and local businessmen, they tell you that tourist numbers aren’t great this year and they are not spending much (mucha gente, no dinero). It seems to me there is a lot of cheap money around but possibly not being used to invest in sustainable business. It all has a feel of 2007 to me. If there is a bubble to be burst it’s very concerning that even before it happens Spain’s unemployment rate is still so high. At least my house is probably now worth more than I paid for it (in sterling if not in euros).

    • I’ve noticed on my recent visits to Spain (Costa del Sol) lots of bars and restaurants and hardly anyone either local or tourists in them.

      I’m in Madrid next month so will see what that’s like too

      • Just back from Portugal and I am quite sure tourist numbers are down which is echoed by the local media. Portuguese tourist numbers are up but that only applies to summer months. Locals in the western Algarve told me that this year was much quieter than last – which was a very busy year. Prices in restaurants and coffee shops are up quite a bit unless you seek out places that the local workers eat at. In those places the value is amazing- and so is the food! Can’t comment on the Lisbon area but media again say it’s quieter.

  5. When you have disparate economies under one financial jurisdiction, then that financial jurisdiction can set policy for only one and the rest invariably suffer, either in real terms or by failure to reach capacity. That is the problem so obvious for Italy and which will hogtie Spain.
    Like City of London in the UK, so Germany in the EU, the rest suffer not just because of their difference, but even similar economies out of step in the economic cycle suffer. An exchequer cannot serve two masters, and eventually this will become obvious with Spain, regardless of how “well” it fares temporarily.
    Hence the ECB has a lifetime (or until collapse) of “firefighting” to look forward to.

    Many have said political union will save the Euro area, it won’t: many Catalans don’t feel Spanish, nor Scots British.

    Germany paying for breadline-level benefits in Portugal or Greece or Italy won’t save the Euro long-term, just as temporary good news for other economies won’t lead to their permanent well-being.
    The Euro is doomed, the EU with it.
    Voting remain, or a second referendum (called for, strangely enough, only by people who refuse to accept the result of the first) are exercises in futility.

    • But do remember to follow the example of the wealthy hard-Brexit promoters and move your money to Europe and short the pound.

      • 1) Remain had far more wealthy donors than Brexit.
        2) It is mostly remainers who are moving their money, as part of Project Fear.
        3) Who makes money out of it is irrelevant in the long term, in terms of the eventual outcome, because there is not enough money in the World to turn Greeks, Spaniards or Italians into Germans, and even if there was, they cannot all run an internal surplus.
        TPTB in EU will pauperise their people in their search for the alchemist’s stone, but to no avail.
        Picture the French subducting their nationalism in the name of European unity.

        It ain’t happening, the EU as envisaged by its officials is empty wishful thinking.
        What do you think, “France is France!” means?

        • Well you can hardly blame someone who has consistently claimed Brexit is a mistake if they act on their words. Now about all those saying a hard Brexit will be wonderful while moving their money abroad and making huge bets on a collapse in the pound…

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