Will the Spanish economic boom be derailed by separatism?

There is a truism that political problems invariably follow economic ones. If that is true in Spain at the moment then there has been quite a lag as it was several years ago now that the consequences of the Euro area crisis reached a crescendo. If we look back we see the economy as measured by GDP peaked at 103.7 in 2008 and then fell to 100 in the (benchmark) 2010 as the credit crunch hit. But then the Euro area crisis hit as GDP fell to 96.1 in 2012 and 94.5 in 2013 and the latter year saw the unemployment rate rise above 26%. So that was the nadir in economic terms as a recovery began and saw GDP rise again to 95.8 in 2014 and then 99.1 in 2015 followed by 102.3 in 2016.  So we see that in essence there has been something of a lost decade as earlier this year the output of 2007 was passed as well as a recent strong recovery. If economics was the driver one might have expected political issues to arise in say 2014.

What about now?

At the end of last week the Bank of Spain published its latest projections for the economy. Firstly it is nice to see that they have fallen in line with my argument that the lower oil price provided a boost to the Spanish economy mostly via consumption.

In particular, compared with the expansionary fiscal policy stance of the period 2015‑16 and the declines in oil prices observed between mid‑2014 and 2016 Q1

Of course that is a clear contradiction of the official inflation target of 2% per annum being good for the economy but I doubt many will point that out. You may note that they try to cover off the consumption rise as a response to the crunch.

Moreover, the expansionary effect resulting, in recent years, from certain spending (on consumer durables) and investment decisions being taken after their postponement during the most acute phases of the crisis is expected to gradually peter out.

Factoring in everything it expects this.

Indeed it is estimated that, in 2017 Q3, GDP growth could have decelerated somewhat, as anticipated in the June projections. As a result of all the above, it is estimated that, after growing by 3.1% this year, GDP will grow by 2.5% in 2018 and by 2.2% in 2019.

A driver of the economic growth seen so far has been export success.

Accordingly, for example in 2016, GDP growth was more reliant on the external component than had been estimated to date.

Also there are hopes that this will continue.

The data on the Spanish economy’s external markets in the most recent period have been more favourable than was expected a few months ago.

Although there is a worry which will be familiar to readers of my work.

owing to the exchange rate appreciation effect,

Oh and there is a thank you Mario Draghi in there as well!

by the continuing favourable financial conditions.

What could go wrong? Well……

Turning to the risks surrounding these GDP growth projections, on the domestic front, the political tension in Catalonia could potentially affect agents’ confidence and their spending decisions and financing conditions

This issue is currently playing out in the banking sector where some are fearful of no longer being backed by the Bank of Spain and hence ECB. Banco Sabadell has just announced it will have a board meeting this afternoon to consider moving its corporate address to Alicante in response. Of course if you wanted custom in Catalonia this is not the way to go about it as we mull the words of the Alan Parsons Project.

I just can’t seem to get it right
Damned if I do
I’m damned if I don’t

What about the business surveys?

Firstly the Euro area background is the best it has been for some time.

The final September PMI numbers round off an impressive third quarter for which the surveys point to GDP rising 0.7%.
The economy enters the fourth quarter with business energized by inflows of new orders growing at the fastest rate for over six years and expectations of future growth reviving after a summer lull.

However that sort of economic growth has been something of a normal situation for Spain in recent times. Let us look at the detail for it.

New orders rose across the service sector for the fiftieth month running, with the latest expansion the strongest since August 2015. Where an increase in new business was recorded, this was attributed by panellists to improving economic conditions.

From this there was a very welcome side-effect.

Responding to higher workloads, service providers increased their staffing levels solidly in September

If we move to the economy overall then we see this.

Taken alongside faster growth in the manufacturing sector, these figures point to a positive end to the third quarter of the year. Over the quarter as a whole, we look to have seen only a slight slowdown from Q2, suggesting a further robust GDP reading is likely. IHS Markit currently forecasts growth of 0.7% for Q3.”

Today’s Euro area survey on retail sales does not reach Spain but yesterday’s retail sales release shows they are struggling relatively with annual growth in August at 1.7% but retail sales are erratic.

Population and Demographics

There has also been some better news on this front as highlighted by this below.

The resident population in Spain grew in 2016 for the first time since 2011. It stood at 46,528,966 inhabitants on January 1, 2017, with an increase of 88,867 people.

This matters because the decline in population exacerbated a problem highlighted by Edward Hugh back in 2015. One of his worries was the ratio of births to deaths which had been shifting unfavourably and was -259 last year. This led to this and the emphasis is mine.

Furthermore, INE projections suggest the over-65s will make up more than 30% of the population by 2050 (almost 13 million people) and the number of over-eighties will exceed 4 million, thus representing more than 30% of the total 65+ population.
International studies have produced even more pessimistic estimates and the United Nations projects that Spain will be the world’s oldest country in 2050, with 40% of its population aged over 60. At the present time the oldest countries in Europe are Germany and Italy, but Spain is catching up fast.


Spain is an example of what is called a V shaped economic recovery as it has bounced strongly as opposed to the much sadder state of play in Greece which has seen an L shaped or if you prefer little bounce-back at all. If you were using economics to predict secessionist trouble you would be wrong about 100 times out of 100 using it. However if we move to what caused trouble in Greece when it had its recent political crisis we see that the driving force was the monetary system of which a signal is that the ECB is still providing over 32 billion Euros of Emergency Liquidity Assistance to it.

So as we stand the impact on the Spanish economy is small as businesses may be affected but moves if they physically happen will boost GDP and shift mostly from one region to another. However if there is any large movement of funds then all this changes as eyes will turn to the banking system at a point when people are wondering if and not when the Bank of Spain will step in? After all would it help a bank that is no longer in Spain? There are rumours that UK banks could have gone to the ECB if they had back in the day thought ahead about their locations. But imagine the scenario if a bank in Catalonia tries to go to the ECB when there is doubt over whether it was in the European Union?

Personally I would expect, after a suitable delay, the ECB would step in but the price would be high as Greece has found out from the years of the Troika which have been so bad they change their name to the institutions.


I have a morning appointment with my knee specialist so I intend to post an article but it could easily be somewhat later than usual.






Portugal is struggling to escape from its economic woes

Late on Friday (at least for those of us mere mortals who do not get the 24 hour warning) came the news that the ratings agency DBRS had reduced Italy to a BBB rating. These things do not cause the panic they once did for two reasons the first is that the ECB is providing a back stop for Euro area bonds with its QE purchases and the second is that the agencies themselves have been discredited. However there is an immediate impact on the banks of Italy as the Bank of Italy has already pointed out.

Italy’s DBRS downgrade: a manageable increase in funding costs…..Haircuts on collateral posted by Italian banks: the value of the government bonds collateral pool alone would increase by ~8bn. ( h/t @fwred )

However this also makes me think of another country which is terms of economics is something of a twin of Italy and that is Portugal.

When we do so we see that Portugal has also struggled to sustain economic growth and even in the good years it has rarely pushed above 1% per annum. There have also been problems with the banking system which has been exposed as not only wobbly but prone to corruption. Also there is a high level of the national debt which is being subsidised by the QE purchases of the ECB as otherwise there is a danger that it would quickly begin to look rather insolvent. In spite of the ECB purchases the Portuguese ten-year yield is at 3.93% or some 2% higher than that of Italy which suggests it is perceived to be a larger risk. Also more cynically perhaps investors think that little Portugal can be treated more harshly than its much larger Euro colleague.

The state of play

This has been highlighted by the December Economic Bulletin of the Bank of Portugal.

Over the projection horizon, the Portuguese economy is expected to maintain the moderate recovery trajectory that has characterised recent years . Thus, following 1.2 per cent growth in 2016, gross domestic product (GDP) is projected to accelerate to 1.4 per cent in 2017, stabilising its growth rate at 1.5 per cent for the following years.

So it is expecting growth but when you consider the -0.4% deposit rate of the ECB, its ongoing QE programme and the lower value of the Euro you might have hoped for better than this. Or to put it another way not far off normal service for Portugal. Also even such better news means that Portugal will have suffered from its own lost decade.

This implies that at the end of the projection horizon, GDP will reach a level identical to that recorded in 2008.

This is taken further as we are told this.

In the period 2017-19, GDP growth is expected to be close to, albeit lower than, that projected for the euro area, not reverting the negative differential accumulated between 2010 and 2013

You see after the recession and indeed depression that has hit Portugal you might reasonably have expected a strong growth spurt afterwards like its neighbour Spain. Instead of that sort of “V” shaped recovery we are seeing what is called an “L” shaped one and the official reasons for this are given below.

This lack of real convergence with the euro area reflects persisting structural constraints to the growth of the Portuguese economy, in which high levels of public and private sector indebtedness, unfavourable demographic developments and persisting inefficiencies in the employment and product markets play an important role, requiring the deepening of the structural reform process.

After an economic growth rate of 0.8% in the third quarter of 2016 you might have expected a little more official optimism as they in fact knew them but say their cut-off date was beforehand, but I guess they are also looking at numbers like this.

According to EUROSTAT, the Portuguese volume index of GDP per-capita (GDP-Pc), expressed in purchasing power parities represented 76.8% the EU average (EU28=100) in 2015, a value similar to the observed in 2014.

It is at the level of the Baltic Republics, oh and someone needs to take a look at the extraordinary numbers and variation in the measures of Luxembourg!

House Prices

Here we see some numbers to cheer any central banker’s heart.

In the third quarter of 2016, the House Price Index (HPI) increased by 7.6% when compared to the same period of 2015 (6.3% in the previous quarter). This was the highest price increase ever observed and the third consecutive quarter in which the HPI recorded an annual rate of change above the 6%. When compared to the second quarter, the HPI rose by 1.3% from July to September 2016, 1.8 percentage points (p.p.) lower than in the previous period.

What is interesting is the similarity to the position in the UK in some respects as we see that house price growth went positive in 2013 although until now it has been a fair bit lower than in the UK. Of course whilst central bankers may be happy the ordinary Portuguese buyer will not be so pleased as we see yet another country where house price rises are way above economic performance. Indeed a problem with “pump it up” economic theory in Portugal is the existing level of indebtedness.

the high level of indebtedness of the different economic sectors – households, non-financial corporations and public sector – ( Bank of Portugal )

The debt situation

In terms of numbers Portuguese households have been deleveraging but by the end of the third quarter of last year the total was 78.6% of GDP, whilst the corporate non banking sector owed some 110.8% of GDP. At the same time the situation for the public-sector using the Eurostat method was 133.2 % of GDP.

Going forwards Portugal needs new funding for businesses but seems more set to see property lending recover if what has happened elsewhere after house price rises is any guide. Also the state is supposed to be reducing its debt position but we keep being told that.

The banks

It always comes down to this sector doesn’t it? Portugal has had lots of banking woe summarised by The Portugal News here just before Christmas.

The Portuguese state provided €14.348 billion in support to the banking sector between 2008 and 2015, according to a written opinion submitted by the country’s audit commission, the Tribunal de Contas, last year and made public on Tuesday.

That’s a tidy sum in a relatively small country and we see that the banking sector shrunk in size by some 3.4% in asset terms in the year to the end of the third quarter of 2016. In terms of bad debts then we are told that “credit impairments” are some 8.2% of the total although the recent Italian experience has reminded us again that such numbers should be treated as a minimum.

Last week the Financial Times reminded us that the price of past troubles was still being paid.

Shares in Millennium BCP fell by more than 13 per cent in early trading on Tuesday after Portugal’s largest listed lender approved a capital increase of up to €1.33bn in which China’s Fosun will seek to lift its stake from 16.7 per cent to 30 per cent.

Oh and this bit is very revealing I think.

The rights issue, which is bigger than BCP’s market value,


Let us start with some better news which is from the labour market in Portugal.

The provisional unemployment rate estimate for November 2016 was 10.5%

This represents a solid improvement on the 12.3% of 2015 although as so often these days unemployment decreases comes with this.

These developments in productivity against a background of economic recovery fall well short of those seen in previous cycles……. Following a slight reduction in 2016, annual labour productivity growth is projected to be approximately 0.5 per cent over the projection horizon.

Also there is the issue of demographics and an ageing population which the Bank of Portugal puts like this.

the evolution of the resident population,
which has presented a downward trend,

I like Portugal and its people so let us hope that The Portugal News is right about this.

Portugal has been named as the cheapest holiday destination in the world for Britons this year. The country’s Algarve region came top in the Post Office’s annual Holiday Costs Barometer, which takes into account the average price of eight essential purchases, including an evening meal for two, a beer, a coffee and a bottle of suncream, in 44 popular holiday spot around the world.

That’s an interesting list of essential purchases isn’t it? But more tourism would help Portugal although the woes of the UK Pound seem set to limit it from the UK.





Can Portugal and its economy escape a similar fate to Greece?

This week has opened with another burst of optimism about a deal over extra bailout funds for Greece with the German Dax equity index rising by more than 2%. Although there is apparently a problem created by the fact that Greece has sent the wrong documents to the Eurogroup members. Also whilst it is early in the day the European Central Bank has already raised the amount of Emergency Liquidity Assistance for the Greek banking sector after reports that there were pre-orders for a billion Euros of withdrawals. So the issues highlighted by my post of Friday are clearly ongoing. However today I wish to look west to a country which must be wondering if it is next on the list which is Portugal. In a situation often described in North/South terms Portugal is definitely the West to Greece’s East but many of the same economic problems can be seen there.

Economic Growth

Portugal has had its problems too in this area but the pattern is different. Greece boomed into a bust albeit that we now doubt some of the recorded boom. However Portugal had struggled to sustain much economic growth even before the credit crunch hit it. From the 4th quarter of 2002 it saw a year of annual economic growth declines as the implications of 9/11 hit and ironically only showed some real flickers of recovery just as the credit crunch was arriving. Next saw perhaps not the nuclear winter which hit Greece but a long drawn out contraction starting in the last quarter of 2008. Again there was a flicker of recovery in 2010 before another period of decline. In spite of the recent recovery phase the Gross Domestic Product level of the beginning of this year was of the levels seen in 2003.

Thus we have had more than a lost decade in Portugal over a period where people were expecting growth not contraction. More and more may look back to the period before Euro entry when Portugal performed better peaking at an annual growth rate of 5% in the spring of 1998.


A consequence of the economic malaise seen in Portugal has been an elevated rate of unemployment.

The provisional unemployment rate estimate for April 2015 was 13.0%, down 0.2 percentage points from the definitive estimate for March 2015.

This is a solid improvement on a year ago when the unemployment rate was 14.6% but even so it leaves Portugal with an ongoing problem.  Back in the pre credit crunch times unemployment was heading towards 7% or to put it into round numbers there are approximately an extra quarter of a million unemployed in Portugal now.

A corollary of this has been to disproportionately affect the young as the youth unemployment rate is still 31.2%. There have been better times to be young in Portugal.

Debt Troubles

One of the reasons that a national debt to GDP ratio of 120% was used as a benchmark in the Greek crisis was to avoid embarrassing Portugal and indeed Italy. Both countries were below that number back in 2010 so the Eurocrats thought it safe to use it and ignored the fact that its actual significance was what exactly? As it turned out even picking an apparently safe benchmark soon went wrong as economic growth failed and turned downwards whilst Portugal found itself having to support its banks.

Accordingly a national debt to GDP ration which had been in the 70%s surged to 125.8% in 2012 and at the end of 2014 was 130.2% according to the Bank of Portugal. Also Portugal has continued to run a fiscal deficit on a substantial scale and frankly the 4.8% of GDP in 2013 did not shrink much as it was 4.5% in 2014. So one more time we find ourselves considering what austerity actually means as these are quite substantial deficits especially if we consider that Portugal has been in a program to reduce them since they rose above the Euro area limit of 3% of GDP per annum. So whilst we have austerity in terms of an effort to reduce the size of the annual deficit it is rarely pointed out that Portugal has also seen quite a fiscal stimulus if you look at the ongoing deficit numbers and the increase in the national debt.

Another way of putting it is that Portugal is running fiscal deficits on a similar scale to the UK. However its national debt is around as half as big again in relative terms and in some ways more worrying it now has a track record of struggling to grow the size of its economy.

Should there be a Greek departure from the Euro or Grexit then the total exposure of Portugal as a state is 4.3 billion Euros which of course it is in no state to pay.  This is because it was responsible for its share of lending to Greece by the Euro area until it called for a bailout itself. One bonus of the situation has been that the interest-rates charged on the bailout cash have been successively reduced in line with what has happened regarding Greece. Thus there is a capital problem but the cost of servicing the debt is relatively low.

UK Involvement

Portugal is the UK’s or perhaps one should say England and Wales’s oldest ally (it predates the 1707 union with Scotland)  so on that basis maybe it is not a surprise that we got involved in its bailout. More awkward of course is the way that the UK was in effect bailing out a Euro area which in overall terms was more than capable of doing so itself.

Portugal borrowed some 24.3 billion Euros out of the 26 billion available to it from the EFSM (European Financial Stability Mechanism) which the UK backs as part of its involvement in the European Union. This happened one night as the UK was switching from one government to another (both seem to blame the other) and was distracted by coalition negotiations and has rarely got much publicity. The EFSM did get some exposure I understand in the Daily Telegraph over the weekend as a risk to the UK over Greece but of course the sums are limited by the fact that of this fund much of its capacity has been used in Portugal and also Ireland.


This is an ongoing problem for Portugal as last weeks numbers from Portugal Statistics demonstrated.

the resident population in Portugal by 31st December 2014 is estimated at 10,374,822 inhabitants; demographic balance for 2014 is characterized by a decrease of -52,479 inhabitants, as a result of both a negative natural balance (-22,423) and a negative net migration (-30,056).

Also the structure of the population has worsened in age terms. I am reminded of this from last summer from Portugal News.

According to the Portuguese statistics agency, the number of 15 to 29-year-olds dropped in all but six of the country’s 308 municipalities between 2001 and 2011.
The office revealed that the number of young people in Portugal shrank by 21.4 percent during this period, despite the fact that the total population actually grew by about two percent during the first decade of this millennium.

In more recent times one would expect emigration from Portugal’s young to have only increased and especially from the “brightest and best”. Perhaps there should be estimates made of exactly how many are in Little Portugal not so far from me in Stockwell.


So far Portugal has been a model student in the Euro area detention class. It has pretty much done what has been asked of it and has raised few if any quibbles. Sadly the same economic policy which wrecked havoc in Greece sees Portugal also suffering economically. Frankly it cannot sustain an exchange-rate that is the same as Germany’s and its whole Euro area experience tells us that. Indeed Prime Minister Coelho has made himself something of a hostage to fortune.

“should something serious happen to Greece, Portugal will not be the next to fall”

Accordingly the chances of the Portuguese establishment singing along with the rock group Queen are as low as anywhere.

I want to break free
I want to break free
I want to break free from your lies
You’re so self satisfied I don’t need you
I’ve got to break free
God knows, God knows I want to break free.

Perhaps the Portuguese people will make the decision for them but for now there is a tightening of the noose on Portugal as it has seen its bond yields head higher to around 3% at the ten-year maturity. But underlying all this is the simple fact that economic life has been a struggle as issues like generalised corruption continue. The establishment seem to do very well but the people do not and here comes the irony which is that the Portuguese hoped that Europe would rescue them from their establishment. Instead they found themselves in an even worse mess. In this sense they find themselves in the same situation as Greece.

Portugal needs a change of the order of a quantum leap.


Day after day goes by with promises of a solution which means that Rosie Gaines must now be right surely?

Let’s get close closer than close
closer than you could ever imagine us
Let’s get close closer than close

Let’s get close closer than close
closer than you could ever imagine us
Let’s get close closer than close
closer than you could ever imagine us