Research Dept. News
|
|
|
|
Monthly Report, num 356 - April 2012
|
|
|
Spain: overall analysis - Economic activity
|
|
|
|
|
The green shoots of spring?
|
|
Some leading indicators point to recovery.
|
|
Spring has brought the first green shoots, as least so it appears. Last month we already announced that a significant number of leading indicators had stabilized and some of them had even started to pick up. This, now, has become a recovery in composite activity indicators. Nevertheless, the market's overall perception regarding the Spanish economy's ability to recover has worsened. One sign of this is that the risk premium for Spain's public debt has risen significantly instead of improving, as is the case of Italy and France. One of two things: either the upswing in leading indicators is transitory or the markets are being guided by the wrong signs. Which is right?
|
|
|
|
A good example of the general improvement in leading indicators is the good performance of the composite activity index (ISA in Spanish), produced by the Ministry of Finance, and the leading indicator of the Organization for Economic Cooperation and Development (OECD). As can be seen in the graph below, their trend is closely related to that of gross domestic product (GDP) and consequently these are good leading indicators of its performance. The Ministry of Finance ISA index saw a large decline in the last quarter of the year but its quarter-on-quarter rate of change has picked up significantly this year so far. The performance of the OECD indicator is similar. According to this, the drop in GDP of the first quarter of 2012 should be very modest. However, it's very important to remember that the predictive capacity of these indicators improves as the different indicators for the first quarter are published. For example, the latest data available for industrial production are the figures from January. These indices will therefore change once February and March's figures are announced.
|
|
|
Demand indicators are not encouraging.
|
|
To be able to evaluate just how far these composite indicators might end up changing, we need to look at the main indicators that comprise them in more detail. Regarding demand, the data are actually far from encouraging. The consumer confidence index, far from stabilizing, has once again posted a sharp drop after the large decline it suffered in January. The level it's at now is equivalent to the minimum it reached in 2010. The data for non-energy imports in January reinforce the idea that consumption does not seem to be picking up in the first quarter of this year. The decline in year-on-year terms was 6.8%, more than double the drop that occurred in the last quarter of 2011. The data for car and industrial vehicle registrations don't point to any change in trend either.
|
|
|
|
But we must add a significant proviso to this battery of negative indicators. The sales of large consumer firms did see notable improvement in January. While they had fallen by 4.8% year-on-year in December, in January their percentage change stood at 1.3%. However, it is still too soon to evaluate whether this figure is the result of the volatility inherent to the series or whether, on the other hand, it's the first indication of a possible change in trend. In general, what can be stated is that we cannot find any indicators on the side of demand to justify the improvement in the composite indicators. Quite the opposite, in fact.
|
|
The push is coming from supply.
|
|
The push is coming from the supply side. Electricity consumption is still showing clear signs of stabilizing. Whereas, in the last quarter, this fell by 4.2%, in February the drop in year-on-year terms had decreased to 1.2%. Industrial production also seems to be showing signs of stabilizing. A trend that is reflected in the slow improvement in the industrial confidence index.
|
|
|
|
One possible explanation for the better performance by supply indicators could be the good performance by the foreign sector. In the last quarter of 2011, the drop in exports in quarter-on-quarter terms was much less than the fall in imports, -1.6% and -6.5% respectively. This meant that the foreign sector's contribution to economic growth was clearly positive, namely 1.3 percentage points. The export figures for January, however, have not been so positive. It's true that the year-on-year change is still in clearly positive terrain, i.e. 3.9%, but the downward slide shown by the figures over the last few months has not only not stabilized but has speeded up. This contrasts with the economic activity figures for the main countries in the euro area, where the signs of stabilization do seem to be sturdier. This suggests that, although January's export figures were not very good, the downward slide should hit bottom over the coming months.
|
|
The support from exports weakens.
|
|
Having reviewed the main supply and demand indicators, it seems clear that the recovery shown by the main composite indicators for activity should be taken with a great deal of caution, as they might change tone a little as more data are announced. The markets' loss of confidence in the Spanish economy's ability to recover, however, is difficult to justify with the figures commented so far.
|
|
|
|
A detailed analysis of the different indicators does not show such a robust recovery as that shown by the composite indices, but neither have they got much worse. The increase in the lack of confidence is surely the result of the uncertainty that still surrounds the fiscal consolidation process and the restructuring of the financial sector. By the end of 2011, the public deficit had risen to 8.5%, 3.5 percentage points above the target set by the European Commission. This means that this year's target has had to be revised, finally being set at 5.3% of GDP. The adjustment that will have to be made is huge, around 50 billion euros. The approval of the central government budget for this year is fundamental to being able to evaluate the probability of success. Similarly, in April we will also know the strategies of the different financial institutions to tackle the new requirements imposed on the sector.
|
|
The central government budget and restructuring of the financial sector are crucial to restore confidence.
|
|
So April will be a crucial month. The information we will gradually obtain about the first quarter performance will be much more solid, as will be the position taken by the market regarding the country's capacity to adjust its public accounts and successfully restructure its financial sector.
|
|
|
You can susbcribe now to be nofified by email every time the Monthly Report is updated in the internet.
|
All documents are in Adobe Acrobat format (PDF).
To view a document in PDF format you need the Adobe Acrobat Reader. If you don’t have it already loaded on your computer, you can donwload it now.
|
|
Direct link to the Research Dept. in your mobile
We'll send you a free SMS with the link
|
