Research Dept. News
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Monthly Report, num 353 - January 2012
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Spain: overall analysis - Economic activity
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2012, recession or recovery?
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Significant drop in growth prospects.
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Numerous challenges are facing Spain's economy at the beginning of 2012. After posting a positive GDP growth rate for almost two years, the bulk of the evidence available suggests that the engine is faltering again. According to our forecasts, the decline will be modest, just 2 tenths of a percentage point in the fourth quarter of 2011 and, after a first quarter that will also be weak, the economy will be back on the road to growth in the second quarter. This should allow activity to advance by 0.2% for the year as a whole. But the significant drop in growth prospects revealed by the consensus of analysts in December highlights the significant risks threatening the Spanish economy. According to this, growth for the whole of 2012 will be clearly negative, specifically -0.2%, whereas an advance of 0.5% was still being expected for 2012 in the month of November.
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Whether this scenario will be confirmed or not depends essentially on the resolution of the sovereign debt crisis and the measures taken by the new government. The European summit held at the beginning of December served to confirm that the process towards greater fiscal integration is underway. But it also confirmed that the road will be long and probably quite bumpy. Europe's main leaders announced new measures to ensure fiscal discipline and greater coordination in drawing up national budgets. But the negotiation of the details, which are no less important, is going to keep uncertainty high over the coming months. This will make it difficult to revive investment and consumption in the euro area as a whole and the contribution by the foreign sector is therefore unlikely to be the same as in 2011.
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Uncertainty lessens but remains high.
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The risk premium fell notably throughout December. The spread between Spanish and German 10-year bonds, which in November averaged 426 basis points, had fallen to 325 basis points by 23 December. This partly reflects the warm welcome given by the markets to the agreements reached at a European level. The ECB holding three-year liquidity auctions also very probably helped to considerably reduce tensions in the financial markets. However, although the drop has been significant, the risk premium is still moderately high.
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The new government's measures are crucial.
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On the other hand, the new government is facing the trial of sorting out the public accounts, restoring the credibility of the financial system and taking measures to ensure the Spanish economy becomes more competitive in the medium term. A none too easy challenge but one which the new president of the Spanish government and his economic team have made a top priority. The different measures that will probably be revealed over the coming weeks, and particularly the details of the central government budget that must be approved in March, will be fundamental for determining the route to be taken by the Spanish economy.
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All this will have to be achieved within a weak context that does not seem to have touched bottom as yet. One of the few leading indicators to provide a positive surprise was the consumer confidence index. After posting significant drops in the third quarter and, above all, in October, in November it regained part of the ground lost. The rest of the demand indicators, however, do not reveal any encouraging trend. Vehicle registrations, for example, continue to wane considerably and retail sales have accentuated their downward trend.
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Significant drop in supply indicators.
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The news from the side of supply is not encouraging either. One of the most surprising indicators has been the large drop in industry's confidence, which to date had been relatively resistant to downward pressure but which, after November's figure, is now at the same level as February 2010. The industrial production index in October was also very weak, falling by 4.0% year-on-year, 2.6 tenths of a percentage point below the figure for September. It's true that this index is quite volatile but a 4.0% drop has not been seen since November 2009. All this results in a production capacity utilization that has once again decreased. After the recession of 2009, this rose gradually in 2010, reaching 74.7% by the second quarter of 2011. In the second half of the year, however, it started to fall again and investment is unlikely to recover this year.
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Spain is very likely to enter a recession.
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Given this situation, the Spanish economy is therefore very likely to enter a recession again. This is very clear from the trend in the purchasing managers' index (PMI), as it continues to fall and is moving away from 50 points, the level from which GDP generally posts positive growth rates. Consequently, the question is not whether a recession will occur but rather its intensity and duration. If there is more bad news about the trend in the so-called peripheral countries, risk premia might rise again. An upswing in uncertainty would increase the incentive to save for precautionary reasons, both in households and firms, which would further weaken domestic demand. Moreover, it would also make it difficult to restore the flow of credit, something of the utmost importance for the economic recovery to be solid.
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However, it's also true that investors will become more confident as the new euro pact is defined further; a process that might be faster than expected and, if this is the case, might revitalize investment during the second half of the year.
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The new government is therefore facing ambitious challenges. The scenario in which the Spanish economy finds itself is not the most desirable. Moreover, the high level of uncertainty surrounding it will not help either. However, everything points to the new government's agenda also being ambitious and it plans to attack, from the very start, the key problems facing Spain's economy. In this respect, any announcement of the measures it's going to take becomes particularly relevant and must be monitored with the utmost attention.
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