After the Fiesta – The Spanish Economy
in Trouble
Tutor2u Economics – February 2009
Vulnerable to the crisis
• Spain likely to see a 3.5% decline in GDP in 2009 – the first recession
since 1993
• The return of mass unemployment after 10 years of labour market
successes
• Real danger of price deflation
• Fiscal deficit will balloon to more than 6% of GDP
• Economy became over-dependent on a booming property sector which
has now gone into reverse – over 1m empty new homes
• Very high level of private sector debt (similar to Ireland)
• Spanish manufacturing businesses seem to be affected more by the
credit crunch than elsewhere in the Euro Zone
Recession hits and confidence drops
Spain - Growth and Consumer Confidence
125.0
120.0
115.0
115.0
110.0
110.0
105.0
105.0
100.0
100.0
-10
-20
-10
Consumer confidence
-20
-30
-30
-40
-40
-50
-50
Percent
Index
Index
120.0
125.0
Spanish House Price Index
5
5
4
4
3
3
Real GDP growth
2
2
1
1
0
0
-1
-1
Q1
Q3
05
Q1
Q3
06
Q1
Q3
07
Q1
Q3
08
Source: Reuters EcoWin
Spain enjoyed a decade long boom
“In the decade to 2006, real growth ran at an annual
average of 3.7 per cent, compared with 2.1 per cent for
the rest of the Euro Zone. Per head, GDP has risen to
more than 90 per cent of the average for the European
Union’s core 15 western member states.”
“In previous crises, Spain simply devalued its peseta to
improve the competitiveness of its exports and attract
investment – the path now being taken by the UK and
the free-floating pound – but a unilateral devaluation is
no longer an option for a member of the single currency
zone.”
Source: Financial Times, Feb 2009
Relative living standards improved
Spain Growth and GDP per Capita
EU27=100
Percent
PPP adjusted GDP relative to the EU25 average
6
5
4
3
2
1
0
-1
6
5
4
3
2
1
0
-1
107.5
107.5
105.0
105.0
102.5
102.5
100.0
100.0
97.5
97.5
95.0
95.0
92.5
92.5
90.0
90.0
96
97
98
99
00
01
02
03
04
05
06
07
08
Annual % change in real GDP
Spain, GDP per Capita in PPS, Index, EU27=100
Source: Reuters EcoWin
But the economy over heated
Spain - CPI Inflation and Real Wage Inflation
Annual % change in consumer prices and real wages
9
9
8
8
Real Wages
Percent
7
7
6
6
5
5
4
4
3
3
2
2
Consumer Prices
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
98
99
00
01
02
03
04
05
06
07
08
Source: Reuters EcoWin
An example is the widening trade deficit
Spanish Balance of Trade
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
-7
-7
-8
-8
-9
-9
-10
-10
82
84
86
88
90
92
94
96
98
00
02
04
06
billions
EUR (billions)
Goods and services, monthly balance, Euro bn
08
Source: Reuters EcoWin
And an unsustainable current account
deficit of more than 10% of GDP
1
1
-1
-1
-3
-3
-5
-5
-7
-7
-9
-9
-11
-11
375
350
325
300
275
250
225
200
175
150
125
375
350
325
300
275
250
225
200
175
150
125
98
99
00
01
02
03
04
05
06
07
billions
EUR (billions)
PERCENT
Current account balance, as a percentage of GDP
08
Spain, Current account balance, as a percentage of GDP
Spain, Exports of goods and services
Spain, Imports of goods and services
Source: Reuters EcoWin
A familiar story to UK home buyers
Spanish House Prices
EUR/Square metre
Prices measured by Euros per square metre
2250
2250
2000
2000
1750
1750
1500
1500
1250
1250
1000
1000
750
750
500
500
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Source: Reuters EcoWin
Construction has gone into freefall
New Housing Starts in Spain
Number of
Number of new housing starts - per month
90000
90000
80000
80000
70000
70000
60000
60000
50000
50000
40000
40000
30000
30000
20000
20000
00
01
02
03
04
05
06
07
08
Source: Reuters EcoWin
Unemployment is already above 3 million
Spain - Unemployment Rate
Percent
Per cent of the labour force, seasonally adjusted data
26.0
26.0
24.0
24.0
22.0
22.0
20.0
20.0
18.0
18.0
16.0
16.0
14.0
14.0
12.0
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
76 78
0.0
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
Source: Reuters EcoWin
And much higher than in the UK
Comparing Unemployment Rates
Per cent of the labour force, standardised measure
20.0
20.0
PERCENT
Spain
17.5
17.5
15.0
15.0
12.5
12.5
UK
10.0
10.0
7.5
7.5
5.0
5.0
2.5
2.5
80
82
84
Spain
86
88
90
92
94
96
98
00
02
04
06
08
10
United Kingdom
Source: Reuters EcoWin
Constraints of Euro Membership
•
The ability of Spain to drag itself out of recession is limited by several
factors
1.
Membership of the Euro – Spain has no direct control over short term
policy interest rates
2.
Inability to engineer a depreciation / devaluation of the exchange
rate to boost her export industries
3.
Limits on the ability to increase further government borrowing – fiscal
deficit is already very high
4.
Evidence of occupational and geographical immobility in the labour
market – creating a structural unemployment issue
5.
Asset price deflation and a high level of debt created during the boom
years – a major constraint on consumer confidence and spending