Foros de la Plataforma por una Vivienda Digna

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Spain's Services Sector Continues To Take a Pounding In November

Well the news from Spain at the moment never ceases to surprise on the downside, with this months Services PMI reading giving us just the latest example. According to the the November survey activity, new orders and employment all hit new lows and some firms are now starting to accept that the economic slowdown will stretch into 2010 at least. The Markit PMI, covering Spanish service companies ranging from hotels to insurance brokers, dropped to 28.2 in November from 32.2 in October, showing the sharpest monthly contraction since data was first collected in 1999. It goes without saying that the figure is way, way below the "neutral" 50 level which separates growth from contraction.








"The latest PMI data are very, very bad with falls in output, new orders and employment at an extent which would have been unthinkable just one year ago," said economist at Markit Economics Andrew Harker.


The services data mirrors the equally dismal figures from Spain's manufacturing sector which I reported on on Monday, which also hit record lows in November.

With consumer confidence sliding, unemployment soaring and business conditions worsening by the day, expectations continued to be pessimistic with some surveyed going so far as to suggest they thought the economic downturn would last into 2010.

The rather later deterioration of Spain's services sector (when compared with the more longstanding contraction in the industrial sector - see yesterday's post) is also reflected in the quarterly services index published by the INE with the national accounts. Spain's services obviously hung out rather longer than the manufacturing sector, but now this too - in its turn is folding, which means on the provider side we now have all major sectors - industry, services and construction in sharp slowdown. It no longer makes any sense at all to talk about this as a "housing slowdown" - really it never was, since it has always been a financial crisis (or at least since the summer of 2007 it has), with construction just being the first sector to get hit really hard, since without mortgages you can't sell houses, and now we are discovering that without loans you can't sell cars etc, etc.


Accelerating Slowdown After The Summer

Thus while the PMI headline index has now shown business activity among service providers shrinking continuously since last January, the pace of decline has accelerated significantly over the last three months. Both new business and employment contracted at the steepest rate in the series history in November. Companies have now been cutting jobs every month since March.

Also, for those who are following the deflation argument, it is worth noting that service providers cut their charges during the month at the fastest pace recorded by the survey, as the attempted to compete for what is now increasingly scarce new business, while energy costs and other input prices continued to rise, squeezing profits. Meanhwile Joaquim Almunia said today that deflation is not a real risk in the euro zone. Of course, in one sense this can be quite intentional splitting hairs, since while the deflation threat in the whole zone may not be that great (although we do need to wait and see on what happens in Germany here), in countries like Spain and Italy it is becoming an increasingly pressing issue.

Also interesting was the reason why he felt deflation was unlikely:


"We have different conditions than in other countries. We have a labour market that is organised in such a way that makes it extremely, extremely difficult to go towards deflation."

This seems to be saying that we won't be talking about labour market reform as one of the tools in confronting the crisis, and hence, as demand for their products contracts, we will simply sit back with folded arms and let them close, one by one, rather than adopt any kind of aggressive policy to bring back competitiveness. If this is what he has in mind, then this kind of "quietism" is surely a serious error, and anyway (do correct me if I am wrong) but isn't he being paid at this point to promote the Lisbon strategy (labour market reforms and all) as one pillar of our response to the crisis?



Another Shoe To Drop?

My feeling is basically that there is another shoe to drop here. Some of the PMI respondents seemed to accept that Spain's contraction would now almost certainly last on well into 2010, but others continued to express hope that the crisis would prove to be a short-lived one, and expectations for business in 12 month' time bounced back a bit from October's survey low (although we should note that the response remained pessimistic overall). This also seems to mirror a response from Spanish consumers (as covered in my last post) that things would start to get better in the middle of 2009 (my guess is that the really serious part will only be hitting us by then, and maybe not even until later, depending on when builders and property companies go bust big time), but the view is getting support from the insistence by the Spanish government that the Spanish economy should begin to register growth from mid-2009. Joaquim Almunia also reflects this view:


"I hope we will adopt decisions using the fiscal stimulus, using monetary policy ... to avoid a protracted recession and to prepare the economy for a recovery that I hope will come in the next quarters, hopefully in the second part of 2009,"


This view is hopelessly optimistic and superficial, and I do therefore worry about what will in fact happen to business and consumer confidence when it becomes plain that this much hoped for recovery simply isn't going to come. We built the station, but someone unfortunately laid the rail tracks to pass through another town.
Posted by Edward Hugh at 4:05 PM 2 comments
Tuesday, December 02, 2008
As Spanish Unemployment Rises Sharply Again, Just When Did Spain Enter Recession?
The number of people presenting jobless claims in Spain soared to nearly 3 million in November, following a 6 percent rise in registrations over October, providing us with yet further evidence, if we needed it, of the gravity of the situation which is now unfolding before our eyes.




The Spanish Labor Ministry stated that an additional 171,243 people signed on for unemployment benefits last month, bringing the total to 2.99 million. Year on year the increase was of 42.7%. Obviously it is hard to make exact forecasts for how the situation will evolve, but on a rough and ready (back of the envelope calculation) basis - which is as good as any here, since the degree of undertainty is so large - if the contraction continues at the same pace over the next twelve months, then by December we could have an increase of around 50% - or a total of about 4.5 million (15% of the labour force) unemployed, and rising, of course, assuming we won't hit bottom in 2009.



Basically, since I assume the contraction continues at the current rate (ie no further acceleration in the contraction on average, and no significant deceleration) then this is what you might call the median forecast, where upside risks and downside risks more or less balance. Clearly the situation could be worse than this, but then again it could be better. My instincts tell me that the rate of unemployment creation will accelerate over the next six months, as industry takes a terrific beating, but then may slow down in the second half. But then these are only that - instincts, or guesses. Nevertheless I have little doubt that unemployment will still be rising when we reach December 2009, since the earliest this can hit bottom will be in 2010, and even horizon this isn't a sure thing at this point, given the downside risks which are floating around.


Consumer Confidence Slides

Spanish consumer morale also fell back again in November, reaching 48.7 from the 50.1 registered in October - according to the latest data from Spain's Official Credit Institute (ICO). The result is hardly surprising given the way layoffs have been soaring and the economic contraction deepening. Consumer confidence, which was at 76.1 in November last year, hit a record low of 46.3 in July just as European Central Bank rates interest rates to a cycle high of 4.25 percent and oil prices hit a record $147 a barrel, since which time they have bounced back slightly.



Confidence was down in most of the main index components, although we might like to note that it is the sub-component referring to expectations for the economy going forward which is the main factor keeping the index up above the July level. In particular the outlook for the economic situation of the country is well up above July, which is surprising since during this time the economic outlook has evidently deteriorated. Could this be a case of a "we didn't get an earthquake today, so maybe one tomorrow is now more likely" type rule application, with the idea being that things have gotten so bad, that surely they now have to get better, especially with oil prices coming down. Self perpetuating wishful thinking would be another way to describe this thought process, since nothing could be farther removed from reality, unfortunately. Still, we should bear in mind that any reading of less than 100 on this index (which was only started in September 2004) indicates pessimism dominating over optimism, and whichever way you look at it we are certainly well below 100 at this point.




Just When Did Spain's Recession Actually Start?

Now all of this raises another very interesting question: just when did Spain's recession begin? This is a very timely question since the NBER Business Cycle dating committee have just decided that the US recession started in December 2007. They arrived at this conclusion since the apply a rather different methodology to the simple "two consecutive quarters - seasonally adjusted - of contraction". Their explanation can be found here, but the gist of the reasoning is based on this idea:


"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion."


So leaving aside all the politically embarrasing awkard little issues of just how you decide on how to call a recession in terms the general public can understand, what really interests economists is the business cycle process itself, and identifying the peak (the moment when one cycle draws to a close) and the trough (the moment the next cycle begins). And again leaving aside the evident asymmetry in the popular discourse on the topic (namely that people are clearly far more prone to overanticipate when it comes to determining the trough than they are when it comes to the peak), identifying both peak and troughs is important since it should enable us to make more appropriate, targetted and effective decisions in both the monetary and fiscal policy areas. So the economic nitty gritty here is, OK, two consecutive quarters of contraction does constitute a nice "rule of thumb" guide, but far too often, the devil is in the details, and this kind of simple rule of thumb simply does not get to the heart of the matter. And to validate this argument even further, let's take a look in the Spanish case which is indeed a very interesting one.

In reaching their decision the NBER dating committee relied on two key indicators, domestic production and employment:


"Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity."

That is, they use these two indicators because they feel that they offer (in what is evidently an imperfect world) the best available measure of where an economy actually is at at any given moment in time. Employment I would have thought was an obvious indicator, but domestic output is also important since it strips out all kinds of misleading data-skews which derive from movements on the external trade side.

Now if we look at the Spanish labour market in terms of the trend in unemployment, then it is easy to see in the chart presented above that the annual change in unemployment altered trend around June 2007. Up to that point unemployment had been falling, while subsequently it started to rise.

Now if we turn to the seasonally adjusted employment data prepared by the INE for the national accounts we find, well surprise-surprise, that the number of people employed in the Spanish economy reached it peak between July and September 2007 (the third quarter). So the Spanish labour market definitely turned in the summer of 2007.



The NBER offer a number of measures of domestic output, among them:


The last monthly measure of production is the Federal Reserve Board’s index of industrial production. This measure has quite restricted coverage—it includes manufacturing, mining, and utilities but excludes all services and government. Industrial production peaked in January 2008, fell through May 2008, rose slightly in June and July, and then fell substantially from July to September. It rose somewhat in October with the resumption of oil production disturbed by hurricanes in the previous month. The October value of the industrial production index remained a substantial 4.7 percent below its value in January 2008.
Well here we could simply consult the INE's seasonally adjusted quarterly industrial output data. And guess what we find, well yes, you guessed, the series peaks in the third quarter of 2007.



Now obviously industry is only one part of domestic output, although it is remarkable to note how this sector, and not only construction, started to decline after the summer of 2007. This seems to suggest that Spain, right from the start, was having something more than a "housing slowdown". On the other hand, the services sector, as I argue in this post, did hold out somewhat longer, and as a result the cycle peaked somewhat later in this sector, possibly during the first quarter of 2008, although aggregate services do seem to have continued to expand - even if at a very slow rate - right up to the third quarter (which just shows how difficult it is to get a really precise measure on a process like this), and this may explain why so many "Spaniards in the street" have been going round saying "crisis, what crisis, I see no crisis, the bars and restaurants are full..."




Since services account for over 60% of the Spanish economy, this is, of course, more than just a detail. Then again, if we look at the entire path of the Spanish services sector since Q1995 (which is when the INE time series begins) we can begin to get an idea of just how significant this "peak" is, and how it is obvious we are now in for a major correction (since the upside has been so large and extended, or you could say "distorted"), and how talk of a short term setback is completely off the mark. Basically Spain's current "business cycle" has run from the last quarter of 1993 till the summer of 2007, which is, well, "one hell of a business cycle", and the question we will now have to get down to is just why it has been like this, especially if the correction is, as seems likely, a lengthy and painful affair. Let us hope that at least we will be able to say in the future "once bitten, twice shy".





Retail Sales Peak In November 2007

If we move from the production over to the demand side, then of course one very useful measure of domestic demand is provided by the volume of retail sales. In Spain the relevant index, in fact, peaked in November 2007.



And since the year-on-year measure turned negative around the same time, it is not unreasonable to suggest that domestic demand was entering contraction at around this point. It is important to remember here that Spain had been experiencing a mild "housing slowdown" for some months before the financial turmoil of the summer started to bring things to a grinding halt (see more on this below), and the effect of this slowdown can be clearly seen in the year on year retail sales chart in the months prior to the summer of 2007. Retail sales momentum had clearly passed its expansionary peak in late 2006.


Spain's Recession Started A Lot Earlier Than Q3 2008 On Any Reasonable Measure


So, what am I doing and what am I not doing here? Basically there is no doubt that for historical record purposes the 1 July 2008 will go down as the date the Spanish economy entered the current recession (or whatever it is we finally decide to call what is happening at the present time). But for economic analysis purposes we should be aware that the last business cycle very clearly turned, and went past its peak (thus "entering" recession in another sense of the term) not in the summer of 2008, but rather in the late summer of 2007 (on my best estimate, but then I am not a committee, and I have no authority whatsoever here), and thus, if we had all been a little less worried about defending our rears, and a little more concerned to actually get something done, they obviously the large structural problems which now lie out there before us could have been gotten to work on much earlier. In particular both fiscal and monetary policy could have been made more appropriate from a much earlier point.

If we look at the evolution of headline GDP itself, we can clearly see two "breaks" in the data, the first in the middle of 2006, representingwhat we could call the "housing slowdown". This was evidently provoked by the interest rate raising cycle at the ECB together with the rising cost of mortgages and the impact of both of these on growth. The second break is alos clear enough even for the untrained eye, and comes in the second half of 2007 (following the closing of the wholesale money markets to Spanish financial products), and this is when, in any meaningful sense, the long boom in the Spanish economy really and decisively reached its peak and the downturn - or recession as defined by being "a broad contraction of the economy, not confined to one sector" - really got underway. Remember, a car travelling at 120 Km per hour on the motorway which runs out of petrol can still roll on for another couple of kilometres before coming to a complete stop.






Lastly it is worth pointing out that one of the principal reasons the internal demand contraction didn't show up so clearly in headline GDP data was the simultaneous evolution of the external trade balance, which, while remaining very negative, lessened as we moved through the quarters. This was becuase exports have continued to increase while imports - despite a very large increase in oil prices - have remained almost stationary (see chart above). Thus the net impact of external trade on recent q-o-q GDP has been - ironically - positive, even though the substantive impact over time is hugely negative. I mean, going back to the car, try putting the handbrake on hard, shoving the thing in first gear, accelerating like mad, and then easing of the handbrake slightly. The handbrake is still breaking, but off you go shooting forward. This is what reducing a negative influence can mean. Be careful you don't have a wall in front of you when you try this.

Another thing we need to think about here is that as the external environment deteriorates further (global recession in 2009 etc) this positive boost from exports may well not last too long (at least in the short term - although in the longer run this increase in exports is precisely what will be needed, although, again as is clear in the chart, getting exports to catch up with, and ultimately overtake, imports is going to be quite a long haul process for the Spanish economy). So basically, depending on how much further imports fall, the "positive external trade effect" may well be a very short lived one.




Returning, in conclusion, to the main topic of this brief review, Spain's long boom, just how long the run up has been is very clear indeed from the final chart I present. The point is here, I think, we now know where the peak was, but we don't know how long it will be before we see that employment chart turn up again, and even more to the point, how long it will be before Spanish employment gets back to the levels which were being enjoyed in the Summer of 2007.



Posted by Edward Hugh at 11:04 AM 0 comments
Monday, December 01, 2008
Spanish Manufacturing Breaks Yet Another Record In November
Operating conditions in the Spanish manufacturing sector is deteriorated sharply again in November,and the seasonally adjusted Markit Purchasing Managers' Index dropped to 29.4 in November from 34.6 in October. It isn't simply a question of the fact that Spanish industry has now been contracting since December of last year, the pace of contraction also continues to accelerate, and the Spanish November reading marked a manufacturing survey-record pace of deterioration for the third consecutive.

On such surveys a reading above 50 indicates expansion in the sector, while below 50 suggests contraction.

Economist at Markit Economics, Andrew Harker said, "As Christmas approaches, those in the Spanish manufacturing sector will find nothing to celebrate in the latest PMI data. The marked input cost deflation will make it easier for firms to discount prices, which they will need to do given the dramatic falls in new business."




New orders also declined at a series record rate due to the lack of demand caused by the recession in the wider Spanish economy. On the other hand, input cost inflation dropped significantly in November, after rising for thirty-nine months in a row. The decline was mainly due to a fall in the cost of raw materials, and particularly a fall in the cost of steel.


Sacyr Sells Itinere

Spanish builder Sacyr Vallehermoso also announced today and agreement to sell their highway operating unit Itínere Infraestructuras, S.A to a Citigroup Inc. for 2.87 billion euros in cash, plus Citgroup will accept 5.01 billion euros in debt. Itinere operates highway concessions in Brazil, Chile, Spain, Portugal and is currently constructing highways in Chile, Costa Rica, Spain, Ireland and Portugal.


The deal has a total value of 7.89 billion euros, and will obviously ease the immediate pressure on Sacyr to sell its 20% stake in Repsol YPF.

Sacyr, which is Spain's fifth-largest construction company, indicated that the transaction is expected to reduce its debt by 37% to 12.48 billion euros from 19.73 billion euros as of January 1, 2008. The deal will obviously take some of the immediate pressure off them, but since their Repsol stake is also accompanied by debt, and their liquidity providing requirements on the debt are set to rise in late December, then they still need to get out from under the Repsol stake at some point, so my guess is that they will still need to sell.

http://spaineconomy.blogspot.com/