Tuesday, January 27, 2009

The Spanish government makes official the collapse of the Spanish economy.

Sources: Financial Times: Britain and Spain: a tale of two house market bubbles; Spanish unemployment surges above 3 millions. Diario El Mundo: The Crash of 2008. Diario Expansion: The OCDE warns of “big risks” to the Euro Zone; The Spanish Government forecast a 1,6% decrease in the GDP and a 5,8% public deficit in 2009.Diario El Economista: Brussels forecast an increment of 19% in the Spanish unemployment rate. Sofia A. Perez & Jonathan Westrup: Finance and the Macro-Economy: The Politics of Regulatory Reform in Europe.

On January 16, the Spanish Government made public its economic forecast for 2009: an unemployment rate of 15.9% (which means that more than 730,000 workers will lose their jobs this year, resulting in a total of almost 3 million unemployed people), a decrease of 1.6% in the Spanish GDP and a public deficit that will reach 5.8% of the GDP. In short, the Spanish Government made official the catastrophic economic situation that is facing the country that reportedly was, during the last two decades, one of the fastest growing economies in Western Europe. What is worse, the European Commission forecasts a deeper decline for the economy for 2009: a decrease of 2% in the Spanish GPD, a deficit of 6.2% of GDP and an increase to 16.1% for the unemployment rate, which could reach 19% in 2010. What caused the dramatic downturn in the Spanish economy?

Both the economic analysts and the Spanish government have agreed about the causes of the disaster. The current crisis―the worst that Spain has faced since the nineties―originated from the combination of two main factors: a worldwide financial crisis that began in the United States and the collapse of the Spanish housing market. In the last two decades, in conjunction with Spain’s accession into the European Union, the housing market has been the most important business in Spain. Even in the first months of 2008 this sector made up 17.9% to the total Spanish GDP and more than the 13% of the total employee population. The real estate and land speculation (the so-called “housing market bubble”) has been the main cause of the collapse of the housing market. Basically, land speculation was caused by the corruption among development companies and city councils as well as misunderstanding by the vast majority of Spaniards of the future of the Spanish housing market. During the last decade, it was more profitable for people to buy houses than to rent them, because the monthly mortgage payments were similar to the monthly rental costs. In fact, since the beginning of the 21st century, only 15% of Spanish citizens were renting their houses, making Spain the European country with the most real estate owners.

In 2008, the housing market collapse in Spain coincided with the subprime mortgage crisis in the United States. This in turn intoxicated the global financial system, causing a climate of distrust between the banks. Spain, as the rest of the world, is affected by this financial crisis and is now having difficulties obtaining liquidity in the economy, affecting companies as well as households. The economy has been hit also by inflation, which reached almost 5% in 2008. The inflation was mainly caused by the increase in the price of crude oil, as well as by an incredible increase in food prices. In fact, the Spanish CPI reached 5.3% in July 2008. The policy of the European Central Bank, on which Spain depends, has mainly focused its fight against inflation and has imposed high interest rates. These measures have affected the Spanish mortgages subject to the Euribor (the rate at which euro interbank term deposits within the euro zone are offered by one prime bank to another prime bank) because the monthly payments that the households have had to make have increased substantially, and have caused flow of credit to dry up. As the Spanish government admitted, the mortgage debt of the Spanish households reached 700.000 million Euros in 2008.

As a consequence of the liquidity shortage, household incomes have dropped dramatically, inducing the decline in consumption, and ultimately the decline of the Spanish economy and the loss of thousands of companies and jobs. The OECD and the European Union both project that this year will be worse than 2008 for the European economies. They forecast a decrease of 1.9% of the Eurozone’s GDP and an unemployment rate of 10% in the Eurozone for 2009, but they hope for some recovery at the beginning of 2010. For its part, the Spanish Government has projected a 1.2% growth for the economy in 2010, although it has also forecasted that the country will face a public deficit of more than 3%, even in 2011. Having in mind that after the crisis of the nineties the Spanish government intensified its supervisory role over the financial market (mainly in order to adjust the country to European Union economic policies) it is clear that it will face a great challenge in order to return the country to normality. There is no doubt that Spain will face a long and exhausting period of unemployment and recession.

1) Do you think that the Spanish government should focus primarily in reducing the unemployment rate?
2) The beginning of the economic recovery for the European Union in general is estimated to happen in the beginning of 2010. Do you think that Spain could recover that fast?


toronto realtor said...

Nice analyses! To answer your question:
1) High unemployment should be the priority no. 1 in my opinion, because the strength of any state economy is partially dependent on the purchasing power of its citizens.
2) I don't think so.
Best wishes,

Costa Calida Property said...

good piece of analysis but I think even if the Spanish central government did not make the truth official it would have made no difference to the reality and that is that the Spanish economy has collapsed.