Spain, Bottoming Out
“It’s not how far you fall, but how high you bounce that counts.” Zig Ziglar
I have mentioned in interviews for a few months that indicators show that Spain is bottoming out and showing signs of improvement. Nobody can deny that in the past I have always doubted the so-called “green shoots”, but this year the encouraging data accumulation is significant.
It is worth noting two things:
- Positive data begins to seem plausible for the investment community , wary of the eternal “we are improving” messages of our country that end up being mirages.The UBS report “Spain is getting better” is a relevant example.
- We must avoid the risk of complacency. The fragility of the economy remains huge and, as we saw in the past, slowing don the pace of reforms and maintaining structural inefficiencies can lead the country to a standstill. Hitting the bottom and staying there is the biggest risk that I’ve been mentioning for months. The “Japanisation” of Spain and another lost decade.
Unemployment data and expected GDP are two elements. Spain might leave recession this quarter with an 0.2% growth. That unemployment fell down to 26.26%, 225,000 less, is a positive. Even if we take the data with all the caution in the world and knowing that unemployment is still unacceptably high, it shows that the trend of stopping job destruction, which timidly began to show in April, is now evident.
Spanish exports have reached a record high absolute and relative to Europe, but our current account balance has not deteriorated, in fact, it has improved massively to be in surplus.
This improvement is not only due to the much needed decline in internal demand. Spain does not need more wasteful infrastructure spending. The improvement in exports and margins show a combination of entrepreneurial effort and commitment to value.
Another important factor to note is that corporate debt has fallen to 2006 levels and that, following general declines in recent years, the country has started to see large multinational companies post better figures in Spain (IBM, L’Oreal, Carrefour).
Where should we focus attention to trust this timid recovery?
Consumption continues to fall. It is essential that the government understands that disposable income should improve, not through forced wage increases, which would lead to cost inflation, lack of competitiveness, unemployment and prolonging the recession, but cutting taxes. It is the only way to improve consumption and revive the economy. BBVA’s report “Consumption Outlook First Half 2013” clearly shows that importance.
Excessive debt and deficit. The fact that there is no pressure to reduce the deficit below 6.5% in 2013 and 5.8% in 2014 does not remove the risk that such amount of new debt creates, more than 130 billion euro. It involves an enormous drag on an economy here debt already exceeds 90% of GDP. Because the current environment of low interest rates, investor appetite and moderate risk premiums may change in a global economy.
Administration reform and adjustments . The government emphasizes that the structural adjustment was 4 percentage points of GDP and 300,000 public jobs have been cut, but spending on public wages has not dropped significantly and the weight of public expenditure is still extremely high (almost 50% of GDP including public enterprises). Relaxing the reforms has an immediate negative effect on an economy as fragile as the Spanish. New issuance of debt (€ 136 billion) and net requirements (€ 76 billion) continues to be at record highs, almost four times higher than the 2005-2007 average. If Spain’s rating is lowered, the castle could crumble.
Non performing loans will continue to rise, probably to 13% due to the recognition process of refinanced loans, which continue to hinder the credit market, but the Spanish banking sector is no longer a danger of being a black box where no one knows what is hidden. It has carried out a process of transparency and capitalization unlike any other European countries.