Spain: a stark reminder that caution is still required

Data from Spain reveal appalling unemployment, exceptionally weak household income trends and an almost 3% decline in real credit outstanding in the private sector over the last 12 months.  In context, the European regional economy remains subdued at best.

On top of the official data series, anecdotal evidence that has been emerging from Spain over recent weeks paints a picture of economic depression, with cash spending in major retail stores reportedly down heavily during the fourth quarter, perhaps by as much as 20%, and the official settlement system data, which showed a very significant fall in transaction volumes within the banking system late last year, suggest that this rumoured number may not be too far wrong.  Moreover, the latest (December) total banking system credit report was very disturbing indeed, with real private sector credit growth now down to minus eleven percent in year on year terms.

The harsh reality is that double digit rates of decline now seem to be the norm in many of the Spanish data sets. Thus, the official retail sales data showed retail sales in real terms falling at a 16% annualised rate during the fourth quarter (and down by 9% YoY), while nominal sales were down by a little more.  The fourth quarter retail turnover data was around 90% of the level prevailing in the fourth quarter of 2011.

Meanwhile, in the industrial sector, unless the economy picked up meaningfully during December (which seems particularly unlikely), it looks likely that overall industrial production declined at a 21% rate in the fourth quarter, and was off 8% year on year. Consumption goods may have performing slightly better (expected to have been down ‘only’ at a 17% annualised rate in the fourth quarter than capital goods which appear to have experienced a 36% rate of contraction (meaning -12% year on year).

Interestingly, although the industrial confidence indices had been improving during the fourth quarter, on the back of an improvement in expected – rather than experienced – conditions, even these have fallen back this year.  At the same time, service sector confidence indices have continued to languish at very depressed levels, with the employment intentions components now at all-time lows.  Unemployment itself has increased by 600,000 to 5.9 million over the last 12 months, the equivalent of 26% of the working population (another ‘modern era record’). Against this backcloth it seems discordant that Eurostat report that average wages rose 1% last year, and perhaps by a little more according to the (rather inconsistent) Spanish data.

In trying to make sense of the incongruity between overall economic conditions and the wages numbers, it would seem that, as a result of the still generous provision of social security benefits, Spanish workers are still able to demand generally positive rates of nominal wage inflation at present. There has also been a much heralded 5-10% decline in average Spanish unit labour costs, but this may reflect somewhat darker changes afoot than the obvious shift up in output per employee euro spent that would normally explain the observation. Thus, many workers in the relatively low productivity construction and service sectors have simply passed into the ranks of the unemployed, and therefore out of the productivity data series and this is very different to a fall in effective unit labour costs experienced by in the ‘real world’.

Take as a whole, even if there are some improving trends, there can be little doubt that Spain’s economic performance has been poor and deteriorated further in the fourth quarter.

The risks and challenges that lie ahead are not just straight economic and finance – there must be a real chance that when the weather finally warms up, Spanish companies and individuals protest with vigour at the strictures of the Euro System, particularly since they seem to be making little progress in improving their objective or – as the World Bank noted – their more subjective measures of international competitiveness despite their sacrifices.

Accordingly we conclude that despite the obvious enthusiasm of the financial markets, it’s way too early to pronounce that the economic crisis in Euroland is over – and studied caution remains appropriate.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla