Impressions from Spain: Prepare for a hard landing

Just coming back from a short holiday in Spain, I am now more confident than ever that the Iberian economy is heading for a nasty period of adjustment. Even though growth in Q4 of last year surprised on the upside (0.8 percent quarter-on-quarter compared to 0.4 percent in the euro area as a whole), it already feels like a recession in Spain. Unemployment has risen by about half a percentage point in seasonal adjusted terms since last summer, retail sales and industrial production have dropped below the level from one year ago. The newspapers already write about “la crisis”.

At the same time, for a casual observer, there were a number of signs which point at large macroeconomic misalignments.

  1. Studying the real estate offers, I was surprised that a small appartment in some small town 30 to 40 kilometers off the Mediteranean coast is now sold for more than an appartment of comparable size in the centre of Berlin, even though buildings in Germany are usually more solidly built (no offense against Spanish builders, but we just need better heating and more insulation up North).
  2. However, this price increase seems to have run too far. I have never seen as many “for sale” signs on buildings in Spain before as in this vacation.
  3. Coming from the proverbial prudent German background, I was surprised how aggressively the Spanish banks were advertising their mortgages. There were special offers for those under 30 and special offers with mortages with teaser rates – i.e. Euribor minus 50 basis points for the first six months with rate adjustments later on. As far as I remember, these teaser rates are one of the problems of the American subprime market, so this might just point towards more problems in Spain to emerge.
  4. Once known for low prices for non-durable consumer goods, Spain now seemed to be outright expensive for daily necessities such as bread, cottage cheese etc, even if you go to large super-markets.
  5. I took the chance to compute my own Big-Mac-Index: As you might know, the Economist is using the price of a Big Mac to compute the misalignment of nominal interest rates (click here for the latest article on this). However, the magazine is only publishing one value for EMU as a whole, not for the individual countries. According to the Economist, the EMU average for a Big Mac has lately been at €3.06. I checked two McDonald’s in Spain and they sold the Big Mac now for €3.40, some ten percent above the euro area’s average.

Of course, this is all only anecdotal evidence. However, the macroeconomic data does not look much better. The financing situation of Spanish corporations and households has deteriorated incredibly since 2000. The current account deficit is the world’s second largest in absolute terms and with about 10 percent of GDP the largest deficit I remeber for any medium sized economy. The construction sector has reached a size unknown by any medium or large economy. And as we know from the German experience of the past 15 years, the deflating of an overgrown construction sector and the correction of a real overvaluation in a currency union can be an extremely painful and time-consuming matter.

I think it is sure to say that the next government being elected on March 9 will have a much worse time than the past governments. Spain has not only to prepare for a hard landing, but for a dire decade ahead.

This post has been co-posted at Eurozone Watch.

3 Responses to "Impressions from Spain: Prepare for a hard landing"

  1. interested reader   February 27, 2008 at 3:30 pm

    Many financial institutions apparently followed the Northern Rock model relying aggressively on wholesale funding rather than deposits. http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=373130&sector_flag=3&marketsector=1&detail=

  2. Detlef Guertler   March 7, 2008 at 3:45 pm

    Welcome in the hard landing camp, Sebastian! Two months ago, just crunching numbers, you were much more optimistic for Spanish growth in 2008. How some days of vacation can change the point of view…By the way: Spain will be lucky if they get a hard landing. Because that means they’ll find a place to land. I doubt that.

  3. Flanders   June 21, 2008 at 1:02 pm

    Thank you very much for this article. I appreciate this a lot.