We can pick up on quite a lot of what is happening economically by taking a look at Spain which has been something of a yo-yo in the credit crunch era. It was hit then began to recover then was affected by the Euro area crisis but from around 2014/15 was maybe the clearest case of the Euro boom as it posted GDP (Gross Domestic Product) growth as high as 4.2% in late 2015. Since then in something of a contradiction for the policies of the ECB economic growth has slowed but nonetheless Spain was an outperformer. Indeed such that things were quiet on the usual metrics such as national debt and so on. It shows how a burst of GDP growth can change things.
Of course that was this and we are now in the eye of the economic storm of the Covid-19 pandemic. At the end of last month Spain’s official statisticians fired an opening salvo on the state of play.
The Spanish GDP registered a variation of ─5.2% in the first quarter of 2020 with respect to the previous quarter in terms of volume. This rate was 5.6 points lower than that
recorded for the fourth quarter…….. Year-on-year GDP variation of GDP stood at ─4.1%, compared with 1.8% in the previous quarter.
To be fair to them they had doubts about the numbers but felt they had a duty to at least produce some.
Markit INS offered us some thoughts earlier.
Record falls in both manufacturing and service sector output ensured that the Spanish private sector overall experienced a considerable and unprecedented contraction of economic activity during April. After accounting for seasonal factors, the Composite Output Index* recorded a new low of 9.2, down from 26.7 in March.
A single-digit PMI still comes as a bit of a shock as we recall that Greece in its crisis only fell to around 30 on this measure. Here is some more detail from their report.
The sharp contraction was driven by rapid reductions in
demand and new business as widespread government
restrictions on non-essential economic activity – both
at home and abroad – weighed heavily on company
performance. There was a record reduction in composite
new business and overall workloads – as measured by
backlogs of work – during April.
We can spin that round to an estimated impact on GDP.
Allowing for a likely shift in the traditionally strong linear relationship between GDP and PMI data, we estimate the economy is currently contracting at a quarterly rate of around 7%.
They then confess to something I have pointed out before about the way they treat the Euro area.
Whilst startling enough, this figure may well prove
to be conservative, with the depth of the downturn
undoubtedly greater than anything we have ever seen
For our purposes we see that a double-digit fall in GDP seems likely and even this morning’s forecasts from the European Commission are on that road.
For the year as whole, GDP is forecast to
decline by almost 9½%.
I do like the 1/2% as if any forecast is that accurate right now! One element in the detail that especially concerns me is the labour market because it had been something of a laggard in the Spanish boom phase.
The unemployment rate is expected to rise rapidly, amplifying the shock to the economy, although job losses should be partly reabsorbed as activity picks up again. However, the recovery in the labour market is expected to be slower amid high uncertainty, weak corporate balance-sheet positions, and the disproportionate impact of the
crisis on labour intensive sectors, such as retail and
This was the state of play at the end of March.
The unemployment rate increased 63 hundredths and stood at 14.41%. In the last 12 months, this rate decreased by 0.29 hundredths.
Actually if we note the change in the inactivity rate then the real answer was more like 16%. As Elton John would say.
It’s sad, so sad (so sad)
It’s a sad, sad situation.
This bit is like licking your finger and putting it out the window to see how fast your spaceship is travelling.
This, together with a strong positive
carry-over from the last quarters of 2020, would bring annual GDP growth to 7% in 2021, leaving
output in 2021 about 3% below its 2019 level.
Perhaps the European Commission is worried about the effect on its own income which depends on economic output in the member states and does not want to frighten the horses.
I have already pointed out that Euro area monetary policy has been out of kilter with Spain. In fact the ECB got out the punch bowl when the Spanish economy was really booming in 2015 as an annual economic growth rate of 4.2% was combined with an official interest-rate of -0.2% and then -0.3%. Oh Well! As Fleetwood Mac would say.
One area that will have benefited is the Spanish government via the way that the QE bond buying of the ECB has reduced sovereign bond yields. Thus Spain can borrow very cheaply as it has a ten-year yield of 0.86% which reflects the 271 billion Euro purchased by the ECB. This will have oiled the public expenditure wheels although this gets very little publicity as the official bodies which tend to be copied and pasted by the media have no interest in pointing it out.
Yesterday though there was something to get Lyndsey Buckingham singing.
I should run on the double
I think I’m in trouble,
I think I’m in trouble.
This was when we learnt a couple of things from the German Constitutional Court. Firstly it would appear that judges everywhere were a quite ridiculous garb. Next that they discovered something they had previously overlooked was an issue and posed questions for the ECB QE programme or at least the Bundesbank version of it. This did affect Spain as whilst it still borrows cheaply yields have risen this week.
The first context is one of sadness as the Spanish economy recovery not only grinds to a halt but engages reverse gear and at quite a rate. As an aside I wonder what those who use “output gap” style analysis are doing now? I would say they would be hoping we have forgotten that but it is like an antibiotic resistant bacteria that keeps coming back. As to 2021 I find it amazing that we have forecasts when we do not even know where we are now!
Switching to the Bank of Spain ( which operates QE in Spain on behalf of the ECB) it must be having a wry smile. I expect a Euro area version of Yes Prime Minister to play out where the German Constitutional Court ends up taking so long to act that by the the new PEPP programme is over. There is a deeper issue though about the fact that the ECB has found itself trapped in a spiders web of QE and negative interest-rates from which it has been unable to escape from.
Also an important area for Spain which will have benefited from the NIRP policy is this.
The annual rate of the Housing Price Index (HPI) in the fourth quarter of 2019 decreased one
percentage point, standing at 3.6%. This was the lowest since the first quarter of 2015.
Let me leave that as a question. What do readers think will happen next?
The Investing Channel