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.