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
levels.

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.

Unemployment

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.

Comment

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.

https://www.theguardian.com/news/2017/jun/03/the-big-issue-labour-manifesto-what-economy-needs

It is always the banks isn’t it?

Modern economic life invariably revolves around the banking sector or as it has been named “The Precious” in a nod to the Lord of the Rings saga. This is because it is inextricably linked to the supply of credit and hence money via the amount of lending they do. Today I wish to look at some ch-ch-changes which have happened this week but this comes also with another notable change from earlier this month. It came from a UK portfolio manager famous for not investing in banks.

New holdings that have resulted from this strategic shift include Lloyds Banking Group. I have often heard Neil say that banks should be viewed as warrants on economic growth. In a modern ‘fiat money’ system, banks play a pivotal role in the economy through the creation of credit. ( Woodford Funds).

Meanwhile if we remain with the UK some things have remained the same as this week saw yet more retrenchment and deleveraging.

Barclays  cut its stake in Barclays Africa Group  to 15 percent sooner than expected on Thursday, ending more than 90 years as a major presence in the continent. (Reuters)

There is something familiar here though as we look at the result of a bank going international.

it will lead to an initial 1.2 billion pound loss.

There is also much going on elsewhere including some familiar names.

Monte Paschi

The saga of the world’s oldest bank has gone as follows. It found itself with ever more non- performing loans which increasingly challenged the solvency of the bank itself. This was met with a barrage of denial and political rhetoric as Italy’s Finance Minister Padoan told us that there would be no bailout and a year or so ago Matteo Renzi who was Prime Minister declared that the shares were good value. After shareholders tired of putting ever more good money after the 8 billion Euros they had put in turned bad this happened last December. From Bloomberg.

Monte Paschi was forced to turn to Italy for aid after it failed to raise extra capital from investors in December. The European Central Bank said then it needed to secure 8.8 billion euros ($9.9 billion) to bolster its balance sheet. The government would contribute about 6.6 billion euros, according to a Bank of Italy calculation, with the rest covered by creditors.

As we have discussed before this looks something of a hybrid as there are both bailout and bail in elements to it. We also learnt never to take financial advice from Matteo Renzi. Another issue is the way that this has gone on and on and on, after all it is now June. The media yesterday proclaimed a solution had been found but the detail was weaker.

The deal, following “intensive” talks between Italy, the EU and the ECB, still requires formal approval.

Remember the miss selling scandal?

Monte Paschi will compensate retail junior bondholders who weren’t properly informed of the risk they were taking on that bonds might be converted to equity, according to the statement. The bank will buy the converted equity from those investors and pay them in “more secure senior instruments.”

That is what depositors were told – “secure” – when the existing bonds were miss sold to them! Also why would investors want to do this?

Monte Paschi is in discussions with funds including Credito Fondiario SpA and Fortress Investment Group LLC about investing in the riskiest tranches of the securitization, which is backed by loans with a face value of as much as 30 billion euros, people said last month. Atlante II, the private investment fund set up with the help of the state to invest in non-performing loans, is expected to buy the largest portion of the same tranches, they said.

Let us remind ourselves that in a bailout the taxpayer usually takes the riskiest debt, otherwise why is a bailout necessary? If I was an Italian taxpayer I would want to know what was going on here and also why I was backing a private fund like Atlante II?

The Veneto Banks

This saga seems to be something of a never-ending story.

the future of the Veneto banks is still uncertain. The 6.4 billion-euro precautionary recapitalization requested for the two small lenders were thrown into doubt last week after the commission rejected a request by the banks to reduce the 1 billion euros of private capital they’re required to raise, according to people with knowledge of the matter. ( Bloomberg).

Still I spotted this earlier and there are translation risks but Finance Minister Padoan does of course have a track record.

the problem of banks was exaggerated

Yet some seem to disagree with this. From Reuters.

“The effects of not solving the crisis at the two banks would not be smaller than those created by a default by Greece,” CEO Fabrizio Viola said in an interview with daily Corriere della Sera………Viola added that the effects should not be underestimated given that the two lenders have extended loans worth 30 billion euros, mainly in the industrial north eastern regions of the country, and “calling them back would create tremendous chaos”.

Usually we find people telling us that they are not Greece!

Banco Popular

This is a different type of situation as the Spanish economy has been doing well in recent times but Banco Popular has been unable to benefit enough from this to offset past troubles. From the Financial Times.

Popular, which earlier this month disclosed a €137m loss for the first quarter, linked to higher provisions on its real estate portfolio.

As ever pouring in more equity via rights issues has been unable to match the scale of the downturn.

Mr Lowe ( an analyst at Berenberg ) estimates the bank, which has a market capitalisation of €2.6bn and raised €2.5bn from shareholders in a rights issue last year, needs to raise €3bn-€5bn in additional capital, on top of asset sales. “If you were to raise €3bn, the market may still question the capital situation,” he said, adding that even in that case, the share count would more than quadruple, creating “huge dilution” for shareholders.

As we see shareholders being blitzed let me raise an issue which gets swept under the carpet. The official prospectus for a rights issue is supposed to be a true and fair record of the situation yet banks keep doing them and then heading south at full speed ahead. But no-one seems to go to jail for what must be misrepresentations. This is an international issue as for me the Royal Bank of Scotland rights issue of 2008 seems an example of this which could not be much clearer.

Bond Vigilantes have provided us with another example of the woes of Banco Popular.

Comment

This September marks the end of a type of lost decade for UK banks as it will be the anniversary of Northern Rock having to go cap in hand to the Bank of England. Who thought we would still be reviewing something of a mess this far down the road back then? However have one or two like Lloyds Bank finally seen the beginnings of a new hope? If so it will be because the UK did at least face up to some of the problems at the time. Sadly not all of them or we would be in a better economic place now.

However if we look at Italy we see an example of country that has used this lost decade to mostly stick its head in the sand and deny everything. So presumably it will take it much longer to even have a hope of a turn for the better.

 

 

Inflation is back!

Regular readers will be aware that as 2016 progressed and the price of crude oil did not fall like it did in the latter part of 2015 that a rise in consumer inflation was on the cards pretty much across the world. This would of course be exacerbated in countries with a weak currency against the US Dollar and ameliorated by those with a strong currency. This morning has brought an example of this from a country which I gave some praise to only on Monday so let us investigate.

An inflationary surge in Spain

This mornings data release from the statistics institute INE was eye-catching indeed. Via Google Translate

The estimated annual inflation of the CPI in January 2017 is 3.0%, according to the An advance indicator prepared by INE.This indicator provides an advance of the CPI which, if confirmed, would increase of 1.4 points in its annual rate, since in December this variation was of 1.6%.

Okay and the reason why was no great surprise to us on here.

This increase is mainly explained by the rise in the prices of electricity and The fuels (gasoil and gasoline) in front of the drop that they experienced last year.

So as David Bowie put it they have been putting out fire with gasoline. As we investigate further I note that El Pais labels it as an Ultimate Hora and gives us some more detail.

The agency blames the acceleration of inflation to the rise in electricity prices, which this month has exploded, affecting mainly consumers in the regulated market of light, 46.5% of households, Which pay according to the hourly evolution of electricity prices in the wholesale market.

Actually that sounds ominous in the UK as the National Grid was effectively promising no blackouts yesterday but at the cost of more volatile ( which of course means higher) domestic energy prices. The actual numbers for Spanish consumers are eye-watering.

The average price of the megawatt hour (MWh) in the wholesale electricity market was on January 1, 51.9 euros. This Tuesday, the last day of January, the average price stands at 73.27 euros, 43.4% more. On Wednesday 25, the average stood at 91.88 euros (78.9% more than January 1), with maximums of more than 100 euros for the time stretches with more demand. Consumers receiving the regulated tariff (Voluntary Price for the Small Consumer, PVPC) will see those increases already reflected in their next receipt of light and have already been noted in the CPI, which has registered the highest level for more than four Years,

I guess they must be grateful that this has not been a long cold winter as such prices would have appeared earlier and maybe gone higher. The push higher in the inflation measure was exacerbated by the fact that fuel prices fell this time last year.

Thus, in January 2016, electricity fell by 13% compared to the same month in 2015. The gas price fell at a rate of 15%, while other fuels (diesel for heating, butane …) went down To 19.9%. Finally, the fuel and lubricants registered a year-on-year decrease of 7.1%.

It would seem that El Pais has cottoned onto one of my themes.

 The evolution of oil prices largely explained the behavior of the CPI in Spain. In January of 2016, the oil marked minimums in less than 30 dollars. Now, with the price of a barrel of brent upwards (around 55 dollars), fuels are rising and expenses related to housing are rising: gas, of course, a byproduct, and electricity, which is generated Partly by burning gas.

So far we have looked at Spain’s own CPI but the situation was the same for the official Euro area measure called HICP ( which confusingly is called CPI in the UK) as it rose to an annual rate of 3% as well. This poses an issue for the ECB as El Pais points out.

In any case, inflation is already at levels above the ECB’s target of 2%

Also it points out that Spain will see a reduction in real purchasing power as wage growth is now much lower than inflation.

already at levels that imply a loss of purchasing power for pensioners – the government will only update pensions by 0.25 %, The minimum that marks the law, for officials, whose salaries will not rise above 1%, and the vast majority of wage earners, since the average wage increase agreed in the agreements remained at 1, 06%.

There are also other concerns as to how it may affect Spain’s economic recovery.

As Spanish inflation is above European, the Spanish economy may lose competitiveness, not only because it may affect exports, but also because it may lead to a rise in wages.

Germany

A little more prosaic and also for December and not January but we saw this from Germany yesterday.

The inflation rate in Germany as measured by the consumer price index is expected to be +1.9% in January 2017. A similarly high rate of inflation was last measured in July 2013 (+1.9%).

German consumers will be particularly disappointed to note that the inflation was in essential items such as energy (5.8%) and food (3.2%). Of course central bankers and their media acolytes will rush to call these non-core as we wonder if they sit in the cold and dark without food themselves?!

This poses another problem for the ECB as Germany is now pretty much on its inflation target ( just below 2%) and this morning has also posted good news on unemployment where the rate has fallen to 5.9%.

Euro area

This morning’s headline is this.

Euro area annual inflation is expected to be 1.8% in January 2017, up from 1.1% in December 2016, according to a flash estimate from Eurostat, the statistical office of the European Union.

So a by now familiar surge as we note that it is now in the zone where the ECB can say it is achieving its inflation target. Of course it will look for excuses.

energy is expected to have the highest annual rate in January (8.1%, compared with 2.6% in December), followed by food, alcohol & tobacco (1.7%, compared with 1.2% in December),

Accordingly if you take out the things people really need ( energy and food) the “core” inflation rate falls to 0.9%. But the heat is on now as Glenn Frey would say.

Weetabix

The Financial Times reported this yesterday.

Giles Turrell, chief executive of Weetabix, said on Monday that the company was absorbing the higher cost of dollar denominated wheat but that Weetabix prices were likely to go up later this year by “mid-single digits”.

Sadly the decline of the FT continues as the “may” is reported in the headline as “Weetabix prices hiked” . The Guardian was much fairer although this bit raised a smile.

Although the company harvests wheat in Northamptonshire, it is sold in US dollars on global markets, meaning the cost in pounds to buy wheat in the UK has gone up.

Comment

It is hard not to have a wry smile as it was not that long ago in 2016 that the consensus was that inflation is dead and of course before that the “deflation nutters” were in full cry. Any news from them today? Of course the official mantra will be on the lines of this as reported by DailyFX.

ECB’s Villeroy says concerns about rising inflation are exaggerated.

What was that about never believing anything until it is officially denied? It was only yesterday that another ECB board member was informing us that there would be no change in monetary policy for 6 months when today’s inflation and GDP data suggests it is already behind the curve, as I pointed out on the 19th of this month. Although as ever Italy ( unemployment rising to 12%) is lagging behind. As Livesquawk points out not everyone has got the memo.

Spanish EconMin deGuindos: Inflationary Trend In Europe Could Lead To Tightening Of MonPol, Higher Interest Rates

So we see a problem and whilst some of the move in Spain is particular to one month it is also true that the pattern has changed now and so should the response of the ECB as it looks forwards.

UK National Statistician

Thank you to John Pullinger for meeting a group of inflation specialists including me at the Royal Statistical Society last Wednesday. I was pleased to point out that his letter to the Guardian of a week ago made in my opinion a case for using real numbers for owner-occupied housing such as house prices and mortgage-rates as opposed to the intended use of an imputed number such as Rental Equivalence. This will be more important when the UK makes the changes planned for March. Here is the section of his letter which I quoted.

And there is a real yearning for trustworthy analysis that deals with both the inherent biases in many data sources and also the vested interests of many who try to cloak their own opinions and prejudices as “killer facts”.

 

 

 

 

 

The recent economic success of Spain makes a refreshing change

Back in the days of the Euro area crisis Spain found itself being sucked into the whirlpool. The main driver here was its housing market and the way that it had seen an enormous boom which turned to dust. Pick your theme as to whether you prefer empty towns or an airport that was never used. If we look back to my post yesterday on GDP I immediately find myself thinking that developments which are never used should be counted in a separate category. Of course the housing problems also caused trouble for the Spanish banks.

GDP

We do not yet have the data for the latest quarter but in recent times short-term forecasts by the Bank of Spain have been pretty accurate.

In Spain, economic activity has continued to post a high rate of increase in recent months. Specifically, in Q4, GDP is expected to have grown by 0.7%, unchanged on the rate observed in Q3 (see Chart 1) and underpinned by the strength of domestic spending.

We do have a link in that Spain seems to follow the pattern of the UK economy more than many of its Euro area neighbours and hence there might be for once some logic in using the same currency. But the main point is that such growth would continue what has been a much better phase for Spain. This meant that the official data for the third quarter told us this.

 Growth in relation to the same quarter of the previous year stood at 3.2%,

If we look back we see that the Spanish economy was hit hard by the initial impact of the credit crunch with the peak quarterly contraction being of the order of 1.5% of GDP. Then the economy bounced back but was then sent into decline as the Euro area crisis raged and quarterly economic growth did not turn positive again until 2013 moved in to 2014. However since then economic growth has been strong. If the fourth quarter does turn out to be 0.7% then it will follow 0.7%, 0.8%,0.8%,0.8%,0.9%,0.8% and 1%. Maybe a minor fading but I think that would be harsh on a country which has put in a strong performance.

If we look back for some perspective then let us compare with what sadly is often the laggard which is Italy. From Spain’s Royal Institute.

the contrast between cumulative growths is significant: 50% since 1997 in Spain versus 10% in Italy. Moreover, according to EU forecasts, in 2018 Spain will surpass Italy in per capita GDP (in PPP terms) for the first time ever.

Employment

The Euro area crisis has been characterised by high levels of unemployment so it was nice to see this in the GDP report of Spain.

In annual terms, employment increases at a rate of 2.9%, one tenth more than in The second quarter, which represents an increase of 499 thousand jobs
Equivalent to full-time in one year.

Yesterday we got a further update on this front from Spain’s statistics agency.

Employment has grown in 413,900 people in the last 12 months. The annual rate is 2.29%……….In the last year employment has risen in all sectors: in the Services there are 240,400 more occupied, in Industry 115,700, in Agriculture 37,000 and in Construction 20,800.

Not everything was perfect as the numbers dipped by 19,400 on a quarterly basis but overall the performance has been such that we can report this.

The number of unemployed falls this quarter in 83,000 people (-1.92%) and is in 4,237,800. In seasonally adjusted terms, the quarterly variation is -3.78%. In The last 12 months unemployment has decreased by 541,700 people (-11.33%).

Or if you prefer.

The unemployment rate stands at 18.63%, which is 28 cents lower than in The previous quarter. In the last year this rate has fallen by 2.26 points.

So we have a ying of lower unemployment combined with a yang of the fact that it is still high. If we return to the comparison with Italy then according to the Royal Institute the situation is better than it first appears to be.

From 1990 to 2014 female participation has risen from 34% to 53% in Spain and from 35% to only 40% in Italy (seeWorld Bank data). Hence, although there is a much lower unemployment rate in Italy, the latter’s inactivity rate is much higher than Spain’s.

The other point I would make is that whilst it is pleasing that Spain is creating more jobs the fact that the growth rate in them is similar to the economic growth means that it too will have its productivity worries.

Looking ahead

The Bank of Spain is reasonably optimistic in its latest Bulletin.

Hence, after standing in 2016 at 3.2% (the same rate as that observed a year earlier), average GDP growth is expected to ease to 2.5% in 2017 (see Table 1). In 2018 and 2019, the estimated increase in output would stand at 2.1% and 2%, respectively.

As to the private-sector business surveys Markit tells us this about services.

Rate of expansion in activity remains marked in December

And this about manufacturing.

The Spanish manufacturing PMI signalled that the sector ended 2016 on a high, with growth back at the levels seen at the start of the year.

Fiscal Position

The situation here has been summed up by El Pais this morning like this.

After missing its deficit targets for five straight years, Spain on Thursday made a commitment in Brussels to make additional adjustments “if necessary.”

If you look at its economic performance you might be wondering if Spain got it right although of course that is far from the only issue at hand. The current state of play is shown below.

Spain believes that the tax hikes slapped on companies, alcohol, tobacco and sugary drinks, as well as rises in a range of green taxes – together with strong economic growth – will be enough to keep the deficit at 3.1% of GDP. But Brussels is forecasting 3.3% instead.

If we move to the national debt it is in the awkward situation it has breached the 100% of GDP barrier. The reason this is awkward is that as described Spain has seen good levels of economic growth and the ECB has bought a lot of Spanish government debt keeping debt costs relatively low. It has bought some 150.3 billion Euros worth so far as of the end of last week and the ten-year yield is at 1.6% meaning that in spite of recent rises debt costs are very low. Thus the ratio has risen at a time when two favourable winds have been blowing in Spain.

House Prices

As this was a signal last time I can report that as of the end of the third quarter they were rising at an annual rate of 4% so relatively moderate by past standards. However as the last quarter of 2015 saw a quarterly 0% this seems set to rise. Price rises may also be capped by the fact that the bad bank Sareb is selling off some of the stock that it inherited ( believed to be around 105,000 homes). Mind you there does appear to be considerable rental inflation if this from The Spanish Brick is any guide.

The price of rental dwellings has increased in Spain by 5.8% during the second quarter of 2016, being the price of the square meter 7.8 euros per month. On an inter-annual rate, it is an 8.5% increase, according to the main property portal in Spain. ( BankInter)

Comment

There has been plenty of good economic news for Spain in recent times and we should welcome that. After all it makes a nice change from the many down beat stories that are around. But if we use the phrase “escape velocity” so beloved of Bank of England Governor Mark Carney we see that work remains to be done. If we look back and set 2010 at 100 then GDP peaked at 104.4 in the second quarter of 2008 but only reached 102.4 in the third quarter of 2016 so another just under 2% is required to scale the previous peak. Spain will need to do that relatively quickly to prevent a type of “lost decade” but even as it does so, which I expect it to do it then looks back on a decade which overall has been a road to nowhere overall.

Should Spain continue to follow the British economic pattern then worries for the UK of rising inflation affecting the economy may have a knock-on effect. As to literal links the UK Office for National Statistics has helped out a little today.

Spain is host to the largest number of British citizens living in the EU (308,805); just over a third (101,045) of British citizens living in Spain are aged 65 years and over.

Let us hope this economic renaissance for Spain can end its depression

Having looked at the travails and economic woe of Italy in the Euro area it is time to look at the other side of the ledger which is the recent economic improvement in Spain. As you can see the latest official economic growth data was strong.

The Spanish economy recorded a quarterly growth of 0.8% in the second quarter of 2016. This rate is similar to that recorded in the first quarter. The growth compared to the same quarter last year stood at 3.2% compared to 3.4% in the previous quarter.

In these times sustaining an economic growth rate of over 3% is good news indeed. This new better phase for Spain began in the middle of 2013 and was such that by the beginning of 2014  quarterly economic growth was 0.4% and it ended that year with it at 0.9%. However if we use 2010 as 100 we see that in the second quarter of 2013 the level of GDP (Gross Domestic Product) had fallen to 94.6 which is a long way below the previous peak of 104.36 in the second quarter of 2014. A decline of that size over such a time period brings the phrase economic depression into play and if you think on those terms whilst the situation is much better now with the latest data being 102 you see that Spain whilst doing well currently has not regained the lost ground fully.

Inflation is low

Today’s official data tells us this.

The annual change in the CPI in September is 0.2%, three
tenths above that registered the previous month….. The annual rate of core inflation decreased one tenth to 0.8%…. The monthly variation of the general index is 0.0%.

There was a time when annual economic growth of around 3% and little or no consumer inflation was seen as a form of economic paradise. Apparently no more according to the Financial Times.

Spanish inflation disappoints as prices hold steady……The reading will disappoint eurozone-watchers who expect the single currency area to record a steady rise in inflation over the coming months,

It will not disappoint Spaniards who will welcome news like this.

Inflation was pushed down by a 2.8 per cent fall in housing costs last month, while transport and recreation costs also fell.

Appalling isn’t it? Who wants things to be cheaper? Of course as it demonstrated over the Marmite issue the FT does not seem to want them to be more expensive either! But let me point out that Spaniard who like chicken, lamb,pork and fresh vegetables will welcome the fact they  are cheaper than this time last year. They will be less keen on potatoes which have risen in price by 14.7% over the past year and are now presumably the favourite vegetable of Eurozone watchers and the ECB,

The Spanish do not use what we call CPI as their headline and the equivalent to our was also steady on the month and rising at an annual rate of 0.7%.

If we look at wage costs it is also for the best that inflation is low. These are for the second quarter of 2016.

The wage cost per worker per month increased by 0.1% and amounted to 1,943.01 euros on average.

This is an erratic series but is we compare to the same quarter in 2015 (1941 Euros) and 2014 (1929 Euros) there has been very little wage growth.

The Bank of Spain

The latest monthly bulletin is upbeat on the current state of play in the Spanish economy.

The information available on the Spanish economy points to a continuation of the expansionary course of activity, at a quarter-on-quarter rate in Q3 which is expected to be 0.7%. …In 2016 as a whole, GDP growth in the Spanish economy is expected to rise to 3.2%, an upward revision of 0.4 pp on the June projections

Also it is upbeat on the future although it cannot resist blowing its own trumpet.

In the two years spanning 2017-18, the expansion of the Spanish economy is expected to run further, continuing to be underpinned by comfortable financial conditions associated with the prolongation of the expansionary monetary policy stance, by the headway in the ongoing deleveraging by private agents (meaning that additional reductions in indebtedness have an increasingly less adverse impact on activity), and, as the projection period unfolds, by the foreseeable strengthening of export markets.

What do other surveys say?

The Markit PMI (Purchasing Managers Index) was positive about the service sector.

Spanish services activity continued to grow at a solid pace during September, supported by a faster increase in new business. Companies also remained optimistic of further rises in activity over the coming year.

Also a pick-up in manufacturing was seen.

September saw growth momentum in the Spanish manufacturing sector recover somewhat as output, new orders and employment all rose at sharper rates than in August.

Tourism

This is also boosting the Spanish economy as the numbers below show.

Total expenditure on behalf of international tourists that visited Spain in August stood at 10,354 million euros, an increase of 3.8% compared with the same month last year.

There will of course be worries about whether growth from UK tourists (21% of the total so far in 2016) can be maintained with the lower value of the UK Pound. Also there does seem to have been a move from places that have had terrorist attacks.

Expenditure by tourists from France increased by 9.1%

Unemployment

This is a ying and yang type situation as whilst it has improved the situation is still bad.

The unemployment rate stands at 20.00%, which is one point less than in the previous quarter. In the last year the rate has fallen by 2.37 points.

Also the Bank of Spain is optimistic looking forwards.

Turning to the labour market, jobs are expected to continue to be created at a high rate during the projection period, with low growth in apparent labour productivity, as is habitual in upturns in the Spanish economy. Job creation will allow further reductions in the unemployment rate, which is expected to stand at slightly below 17% of the labour force at end-2018.

The productivity bit is troubling though isn’t it? Also there are problems with the participation rate which is flattering things.

However, in the current economic recovery in Spain, the participation rate has continued to decline, falling by slightly more than 0.5 pp to 59.4% since the employment creation process began. The pattern is particularly striking among Spanish men…

Those worried about youth unemployment will view this next bit with trepidation.

By age group, the decline in the participation rate of Spanish nationals has been concentrated among young people (16 to 24 years), although more recently it has also been observed, to a lesser extent, in the 25 to 34 age groups

The hope is that they are studying and improving themselves, the danger is that they get used to not being involved in the labour market.

Comment

The economy of Spain is in a much better phase and once again it has followed the timing of the UK improvement. On that subject there are solid links itemised by the Bank of Spain below.

In the specific case of tourism, the British economy accounts for 21% of total receipts……The United Kingdom is less important in comparative terms as a destination for Spanish goods exports (accounting for around 7% of the total)….. Spain’s bilateral commercial transactions with the UK economy yield a surplus of almost 1.5% of GDP.

As to more domestic matters I note that credit from banks to businesses has improved from the annual rate of -8% early in 2013 but is still falling. If we look at the source of “trouble,trouble,trouble” before then whilst quarterly growth in house prices was 1.8% in the second quarter of this year annual growth was a relatively sedate 3.8%.

Perhaps Spain should continue without having a government as it seems to be working out as well as it did for Belgium.

 

 

The ECB faces a stronger Euro and an unbalanced economy

One of the features of this time of year is that the ECB (European Central Bank) is quiet as its Governing Council gets in some research on holiday hot-spots and does its best to boost the economies of the southern countries. However in their absence there is little sign of a summer lull this year so let us take a look at what is happening. Firstly of course we have the deposit and current account rate set at -0.4% and the 80 billion Euros of QE (Quantitative Easing) per month which now includes corporate bond purchases.

Negative Interest-Rates

Standard and Poors has produced a report on this issue and it starts badly for the ECB. From the FT.

Almost 500 million people are living under negative central bank interest rates – an unprecedented policy move which is “a clear sign of desperation” with a host of unintended consequences for the world economy, Standard & Poor’s has warned.

Almost enough to make Mario Draghi choke on his lunchtime glass of chianti. There is more.

It warned of the danger of a “feedback loop”, where negative rates encourage irresponsible and excessive risk taking that could spillover into escalating defaults that would require yet more stimulus from central banks.

There are two further problems which will be familiar to readers of my work.

This has led to concerns for pension funds and insurance companies, “reducing the investment returns these institutions rely on to meet their long-term liabilities”. They could then be spurred to search for yield by investing in riskier assets.

And.

Should negative rates spread across the economy, it could lead to a “cash-only economy”: “This means increased transaction costs and rising risks of theft”

Then suddenly there is some better news for the ECB as Standard and Poors decides that it should fall into line with the IMF and tell us that this is working.

Negative rates in the eurozone are “having the desired stimulative effect”, managing to spur bank lending and leading to a sustained fall in the value of the euro.

Let us look at bank lending vis the ECB August Bulletin.

Loan dynamics remained on a path of gradual recovery………While the annual growth rate of loans to non-financial corporations (NFCs) recovered further in May, the annual growth rate of loans to households has remained broadly stable since February 2016.

Not entirely convincing is it? The truth is that the ECB has stopped such lending from falling but the numbers are barely positive.

The Euro

I was interested in the “sustained fall in the value of the Euro” claim as the Euro has been rising recently. The most obvious rise has been the post Brexit leave vote move against the UK Pound £ which has seen it push forwards to 1.15. However it has also been rising against the US Dollar and has pushed above 1.13 versus it this morning after the US Federal Reserve Minutes showed uncertainty last night. I guess it has absolutely surged against the Mongolian Tugrik which has required a 4.5% increase in interest-rates today to try to shore it up!

If we look at the effective or trade-weighted numbers we see that the Euro has been rising since it fell to just below 89 in early April 2015 and it is now 95.6. Or as Sober Look pointed out.

: ‘s tradeweighted euro index now highest since start of QE; has to be frustrating for the ECB –

If you are wondering why? I suspect that some figures released this morning give us at least a partial guide.

As a result, the euro area recorded a €29.2 bn surplus in trade in goods with the rest of the world in June 2016……In January to June 2016  the euro area recorded a surplus of €134.5 bn, compared with +€111.4 bn in January-June 2015.

As you can see whenever we are not in an ouvert crisis phase then there is steady and regular demand for Euros to pay for goods. Actually there is an elephant in this particular room as two thirds of the trade surplus in goods comes from one country Germany which recorded a 89.2 billion Euro surplus in the first half of 2016.  We are back to the view that I expressed some years back that the Euro is a vehicle for Germany to get a lower exchange-rate. The price for the other 18 nations is that they get a higher exchange-rate and this has compromised the economic performance particularly of countries like Italy and Portugal and of course especially Greece.

For all the media rhetoric and talk about Germany being a loser in the various Euro negotiations and bailouts it remains an enormous winner from its original currency devaluation. What it did not know back then was that we would see a post credit crunch era where a German Deutschmark would have soared.

The banks

The problem here is duofold. The first has been caused by the ECB itself and the way that negative interest-rates impact on the banking sector. An irony because of course so many policies are aimed at supporting the banks. Benoit Coeure of the Governing Council put it like this at the end of last month.

In the euro area, the potential adverse impact on bank profitability, if it materialises, would be compounded by low growth prospects and a legacy of high non-performing loans.

In fact virtually his whole speech was about the banks revealing his real interests! In essence on this road they are being given not far off “free money” from the QE program to offset losses elsewhere.

While average deposit rates only decreased by around 0.2 percentage point between June 2014 and May 2016, loan rates decreased by around 0.8 percentage point, effectively reducing the interest margin.

If we return to the lending figures I quoted early on you might reasonably have expected them to have done better in response to this.

The next problem is responded to rather euphemistically.

In the euro area, this translates into geographic differences based on national banking structures,

He means the banking travails of Portugal and Italy for example but does not want to say so explicitly. I note that Algarve News has reported this.

Portugal’s government has spent €14 billion of public money on ensuring the banking sector is ‘robust’ – but much of this money will never be seen again……….This overall €14 billion bill, as computed by the Court of Auditors and the National Institute of Statistics, represents nearly 8% of Portuguese GDP, hence Moody’s recent warning that the Portuguese banking system is one of the most fragile in Europe.

Even the traditionally insular US Federal Reserve is on the case.

However, European bank equities, especially those of Italian banks, underperformed, reflecting investor fears that lower interest rates will continue to weigh on profitability.

Not everywhere is on a downwards spiral as the economic growth spurt in Spain has helped improve things for banks there. This morning has seen a fall in non performing loans recorded although I also note that another consequence of the To Big To Fail strategy has also been seen as national debt to GDP which was 36% in 2007 looks like it has passed 100%.

Comment

There is much to consider for the ECB as it looks at its policies. It did originally manage a fall in the Euro exchange rate but as I have explained above that has been fading. As I have pointed out before both the main QE players right now ( Euro area and Japan) are seeing stronger not weaker exchange-rates these days. Actually one bit of relief for Mario Draghi and his colleagues has been that the Yen has risen even against the Euro.

Also whilst the economy is growing the rate of growth halved in the second quarter of 2016 to 0.3% from 0.6% previously. Whilst Spain has done well and Ireland has recorded some quite extraordinary numbers Italy and France recorded no growth at all in the latest quarter. I think that the ECB if Benoit Coeure is any guide is starting to think that it is struggling.

Fiscal and structural policies should act more decisively to support aggregate demand and productivity, thereby preventing the economy from falling into a low interest rate trap.

Yes especially in the struggling nations. Oh hang on the ECB as part of the institutions or troika has been enforcing exactly the reverse there!

Should the oil price continue to edge higher some of the gains from its lower phase will start to ebb away as well.

 

 

 

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 )