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

2017 is seeing the return of the inflation monster

As we nearly reach the third month of 2017 we find ourselves observing a situation where an old friend is back although of course it is more accurate to describe it as an enemy. This is the return of consumer inflation which was dormant for a couple of years as it was pushed lower by falls particularly in the price of crude oil but also by other commodity prices. That windfall for western economies boosted real wages and led to gains in retail sales in the UK, Spain and Ireland in particular. Of course it was a bad period yet again for mainstream economists who listened to the chattering in the  Ivory Towers about “deflation” as they sung along to “the end of the world as we know it” by REM. Thus we found all sorts of downward spirals described for economies which ignored the fact that the oil price would eventually find a bottom and also the fact that it ignored the evidence from Japan which has seen 0% inflation for quite some time.

A quite different song was playing on here as I pointed out that in many places inflation had remained in the service-sector. Not many countries are as inflation prone as my own the UK but it rarely saw service-sector inflation dip below 2% but the Euro area for example had it at 1.2% a year ago in February 2016 when the headline was -0.2%, Looking into the detail there was confirmation of the energy price effect as it pulled the index down by 0.8%. Once the oil price stopped falling the whole picture changed and let us take a moment to mull how negative interest-rates and QE ( Quantitative Easing) bond buying influenced that? They simply did not. Now we were expecting the rise to come but quite what the ordinary person must think after all the deflation paranoia from the “deflation nutters” I do not know.

Spain

January saw quite a rise in consumer inflation in Spain if we look at the annual number and according to this morning’s release it carried on this month. Via Google Translate.

The leading indicator of the CPI puts its annual variation at 3.0% In February, the same as in January
The annual rate of the leading indicator of the HICP is 3.0%.

Just for clarity it is the HICP version which is the European standard which is called CPI in the UK. It can be like alphabetti spaghetti at times as the same letters get rearranged. We do not get a lot of detail but we have been told that the impact of the rise in electricity prices faded which means something else took its place in the annual rate. Also we got some hints as to what is coming over the horizon from last week’s producer price data.

The annual rate of the General Industrial Price Index (IPRI) for the month of January is 7.5%, more than four and a half points higher than in December and the highest since July 2011.

It would appear that the rises in energy prices affected businesses as much as they did domestic consumers.

Energy, whose annual variation stands at 26.6%, more than 18 points above that of December and the highest since July 2008. In this evolution, Prices of Production, transportation and distribution of electrical energy and Oil Refining,
Compared to the declines recorded in January 2016.

In fact the rise seen is mostly a result of rising commodity prices as we see below.

Behavior is a consequence of the rise in prices of Product Manufacturing Basic iron and steel and ferroalloys and the production of basic chemicals, Nitrogen compounds, fertilizers, plastics and synthetic rubber in primary forms.

The Euro will have had a small impact too as it is a little over 3% lower versus the US Dollar than it was a year ago.

Belgium

The land of beer and chocolate has also been seeing something of an inflationary episode.

Belgium’s inflation rate based on the European harmonised index of consumer prices was running at 3.1% in January compared to 2.2% in December.

The drivers were mostly rather familiar.

The sub-indices with the largest upward effect on inflation were domestic heating oil, motor fuels, electricity, telecommunication and tobacco.

These two are the inflation outliers at this stage but the chart below shows a more general trend in the major economies of the Euro area.

The United States

In the middle of this month the US Bureau of Labor Statistics confirmed the trend.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index rose 2.5 percent before seasonal adjustment.

This poses some questions of its own in the way that it confirmed that the strong US Dollar had not in fact protected the US economy from inflation all that much. The detail was as you might expect.

The January increase was the largest seasonally adjusted all items increase since February 2013. A sharp rise in the gasoline index accounted for nearly half the increase,

Egypt

A currency plummet of the sort seen by the Egyptian Pound has led to this being reported by Arab News.

Inflation reached almost 30 percent in January, up 5 percent over the previous month, driven by the floatation of the Egyptian pound and slashing of fuel subsidies enacted by President Abdel-Fattah El-Sisi in November.

Ouch although of course central bankers will say “move along now……nothing to see here” after observing that the major drivers are what they call non-core.

Food and drinks have seen some of the largest increases, costing nearly 40 percent more since the floatation, figures from the statistics agency show. Some meat prices have leaped nearly 50 percent.

Comment

There is much to consider here and inflation is indeed back in the style of Arnold Schwarzenegger. However some care is needed as it will be driven at first by the oil price and the annual effect of that will fade as 2017 progresses. What I mean by that is that if we look back to 2016 the price of Brent Crude oil fell below US $30 per barrel in mid-January and then rose so if the oil price remains around here then its inflationary impact will fade.

However even a burst of moderate inflation will pose problems as we look at real wages and real returns for savers. If we look at the Euro area with its -0.4% official ECB deposit rate and wide range of negative bond yields there is an obvious crunch coming. It poses a particular problem for those rushing to buy the German 2 year bond as with a yield of 0.94% then they are facing a real loss of around 5/6% if it is held to maturity. You must be pretty desperate and/or afraid to do that don’t you think?

Meanwhile so far Japan seems immune to this, of course there will eventually be an impact but it is a reminder of how different it really is from us.

UK National Statistician John Pullinger

Thank you to John and to the Royal Statistical Society for his speech on Friday on the planned changes to UK inflation measurement next month. Sadly it looks as if he intends to continue with the use of alternative facts in inflation measurement by the use of rents to measure owner-occupied housing costs. These rents have to be imputed because they do not actually  exist as opposed to house prices and mortgage costs which not only exist in the real world but are also widely understood.

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.

 

 

Falling prices have provided quite an economic boost for the UK,Spain, Ireland and now France

Today as we observe in particular the consumer inflation numbers from the Euro area gives an opportunity to look again at one of the main themes of this website. That is my argument that low/no inflation provides an economic boost via higher real wages and hence domestic consumption and demand. Back on the 29th of January 2015 I pointed out this.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

I also pointed out that those in love with inflation and who claim that against all the evidence that it provides an economic boost – in spite of all the evidence to the contrary – would look away now.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

There are more than a few people around in the UK establishment for example who would like the consumer inflation target to be raised to 3% or 4% from the current 2% per annum.

The orthodoxy challenged

This has been provided by that bastion of orthodoxy the Financial Times already today.

Deflationary pressure persists in France

This gives the impression that something bad is happening there. It is based on this morning’s data release.

Year-on-year, consumer prices should decline by 0.1% in May 2016……..On all markets (French market and foreign markets), producer prices fell back in April 2016 (-0.3% following +0.2%). Year over year, they decreased by 3.9%, mainly due to plummeting prices for refined petroleum products (-30.9%)

The “end of the world as we know it” impression however was contradicted by the data released yesterday.

In Q1 2016, GDP in volume terms* increased by 0.6%, thereby revising the first estimate slightly upwards (+0.5%).

So the best quarter for economic growth driven by “consumption and investment”. Indeed we see this.

Household consumption expenditure recovered sharply (+1.0% after +0.0%).

This rather challenges the way the FT uses “headwinds remain” to describe something that I see as a benefit. Oh and they have used the wrong inflation number as regular readers will be aware of the way it rejects RPI and pushes to CPI in the UK. Well what we call CPI did this.

Year-on-year, it should be stable after a slight decrease during the three previous months (-0.1%).

Oh dear.

Ireland

The Emerald Isle was one of the countries I expected to do well in response to lower inflation so let us take a look again. From the Central Statistics Office.

The  volume of retail sales (i.e. excluding price effects) increased by 0.8% in April 2016 when compared with March 2016 and there was an increase of 5.1% in the annual figure.

This happened when we note that there was a fall in consumer inflation of 0.2% according to the Euro area standard and heavy price falls in the retail sector.

There was an increase of 0.4% in the value of retail sales in April 2016 when compared with March 2016 and there was an annual increase of 2.5% when compared with April 2015.

So volume up 5.1% but value up 2.5% shows there was both “deflationary pressure” and “headwinds remain” in fact are very strong. So a bit awkward to say the least to explain why volume growth was 5.1%. Actually the figures are very similar to what they were in January 2015 showing that retail sales have done their bit for the Irish economic recovery of the last couple of years.

Spain

Here too we have seen an economic recovery so let us look at the retail sales data.

In April, the General Retail Trade Index registered a variation of 4.1% as compared to the same month of 2015, after adjusting for seasonal and calendar effects. This annual rate was three tenths lower than that registered in March. The original series of the RTI at constant prices registered a 6.4% variation as compared to April 2015, standing 2.2 points above the rate of the previous month.

So with a 0.6% rise in the month itself we see that yes this has been a powerful player in the Spanish economic recovery. If we look back we see that the overall pattern does fit the theory whilst retail sales numbers individually can be erratic the overall series began a more positive theme in the autumn of 2014 which fits with the beginning of disinflationary pressure.

Also this is helping with the elevated level of unemployment in Spain.

In April, the employment index in the retail trade sector registered a variation of 1.5%, as compared to the same month of 2015.

Of course there are regional effects as we note one of the strongest growing regions was Comunidad de Madrid (8.3%). Real and Atletico will not be the Champions League finalists every year although they are both in strong patches. I guess for June there will be stronger growth in areas which support Real Madrid.

Again we see evidence of disinflation in the retail sector being much stronger than in the wider economy.

The annual change of the HICP flash estimate is –1.1%

We have to look fairly deeply for disinflation in the retail sector in Spain but when we do we see that volume gains of 5.1% in April are combined with turnover or value gains of 1% so disinflation was of the order of 4%. According to conventional economic theory the Spanish retail sector should be collapsing rather than booming. Will they tell us next that the Madrid clubs cannot play football?

This improved phase for Spanish retail sales is very welcome after a long winter and in spite of this better phase it is below that levels of 2010 by just over 5%.

The UK

We have long learned that the UK consumer needs very little excuse to splash the cash.

Continuing a sustained period of year-on-year growth, the volume of retail sales in March 2016 is estimated to have increased by 2.7% compared with March 2015. This was the 35th consecutive month of year-on-year growth.

Indeed I note that the Office for National Statistics now agrees with and backs up my theme. The emphasis is mine.

Figure 1 shows that the quantity bought remained fairly constant until late 2013, but began to increase steadily as average prices in store started to fall. The amount spent increased steadily during the period, however, as prices in store decreased the amount spent remained steady, implying that as prices fell, consumers bought more goods.

The inflation measure here or implied deflator is at 95.1 where 2012=100 so we see that yet again conventional theory was wrong. Looking forwards it is the return of inflation which troubles me as I fear it will reduce and possibly end retail sales growth via its impact on real wages. Whereas inflationistas will be left yet again scrabbling for excuses and refusing to play Men At Work.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake

 

Comment

There is much to consider in the burst of disinflation which has hit many of the world’s economies. It has mostly been driven by the lower oil price as I note that energy costs in the year to April fell by 8.1% in the Euro area. This is something that Mario Draghi and the ECB (European Central Bank) is trying to end with negative interest-rates and 80 billion Euros a month of QE bond purchases. Yet in Ireland and Spain we have seen a strong rise in retail sales in response to this as purchasing power and real wages rise. What is not to like about that? The central planners and their media acolytes should be quizzed a  lot more on this in my view.

Of course lower prices are not the only thing going on but in economics there is no equivalent of a test-tube experiment. It is also true that the economies which seem to be more in tune with the UK are seeing a stronger effect. But lower prices have led to higher retail sales via higher real wage growth which will presumably reverse when the central bankers get back the inflation they love so much.

 

 

 

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 )