The mainstream financial press loves its Spanish recovery narrative and continues to tout it even as Spain remains in a depression. This is the growth that MFP is getting excited about:
0.1% could be a rounding error, but instead it is hyped as a win for Spain. As you can see above, Spain has only grown in 8 of the last 24 quarters and has not put together four consecutive quarters of growth since the GFC. Moreover, total employment and retail sales are still falling proving that the depression continues.
There is no reason why the facts should get in the way of a good narrative. This article cherry picks data, combines that with a couple of anecdotes from reliable, go-to permabulls, and declares victory. If you need to use a quote, at least pick one that’s accurate instead of this:
“We are optimistic on the euro periphery as a whole and Spain in particular,” said Robert Wood, an economist at Berenberg Bank, which forecasts growth of as much as 1.4 percent in 2014. “The country has made big structural changes, it’s been engaged in a lot of deficit reduction, business sentiment is improving and unemployment is probably close to a peak.”
Sell-side economist Wood makes a rosy growth prediction for Spain based on three facts and an additional prediction. Let’s see if the foundation can support the house.
First, the country has not made big structural changes. Firing workers is no easier today than it was a few years ago. A few superficial changes have been implemented, but these are largely ineffectual as illustrated by our second chart showing an ongoing reduction in the labor force (above). Second, it has not “been engaged in a lot of deficit reduction:”
Last year, the deficit was close to 11% having risen from 9.4% in 2011. Since the onset of the new normal, the Spanish government has underestimated its budget deficit by at least three full points. This year, Spain has an EU mandated deficit target of 3.8% for the year. Through July, it ran a 4.38% deficit. Extrapolating this number to the full year, we get a 7.5% deficit. Adding in the traditional Spanish forecasting “error” of three points, we come to a grand total of 10.5% for the year. There has been no deficit reduction, and total debt levels continue to rise. Spain will cross the 100% debt-to-GDP level sometime in the first half of 2014.
Third, business sentiment is improving:
but note that Spanish businesses remain unconfident as they have since 2008. They are just less unconfident than they had been.
Fourth and last, the shill bases his rosy GDP prediction on a rosy labor market prediction. Spanish unemployment is probably at the peak as companies have already fired everyone they need to for now, but this is much different from a growing workforce. Just like in the U.S. falling unemployment numbers belie the true, dismal state of the labor market.
Moreover, GDP growth was driven by export growth. The euro has appreciated since then and with weak economic conditions prevailing in Spain’s largest trading partners, continued export growth will be elusive.
The bottom line is that Spain remains in a depression, and the data points to continued economic pain despite the hype.
Original Published on October 23,2013