Celebrating The Spanish Recovery

Includes: EWP, QESP
by: Frances Coppola

Lots of people have been celebrating the Spanish recovery. "From boom to bust to export-led recovery", crowed one Twitter commentator.

This is the reality:

Well, real GDP growth is now positive. I suppose that is a recovery, sort of. Though 0.5% growth is not exactly robust. In the UK we call 0.5% growth "stagnation", not recovery.*

But look at this:

Note the red at the far right. That is deflation. Consumer prices in Spain are falling by about 0.5%, according to the latest figures. To be sure, this is an annual chart: using annual GDP figures, NGDP is about 1%. I don't call that much of a recovery.

And I doubt if the Spanish see it as recovery, either. This is GDP per capita:

Yes, the Spanish are worse off now than they were in 2003. Ouch.

So if the "recovery" is largely due to falling consumer prices flattering real GDP, what about those exports?

Here's the Spanish current account:

This looks like something of a success story. The current account is indeed slightly positive, which might indicate a trade surplus (more on that shortly). More importantly, though, the very large imbalances that built up prior to the 2008 crisis largely due to inflows of capital into Spain's overblown construction industry have unwound. This is a much healthier current account than six years ago. But the cost has been terrible. Spain's construction industry was a major source of employment. This is what happened when the property bubble burst and the construction industry collapsed in 2008:

Spain's unemployment rate is now beginning to fall - though how much of that is due to emigration is unclear. But at 23% for adults and double that for 18-24 year olds, there is an awfully long way to go. Indeed it is by no means certain that unemployment can ever return to pre-2008 levels. The OECD's latest forecast of the sustainable (i.e. non-inflation accelerating) rate of unemployment is 18.9%. This is based upon a Phillips curve relationship which assumes growth returning to something like 3%. But structural unemployment at this level is a considerable drag on both growth and public finances. Putting it bluntly, if Spain is to recover AND put its public finances on to a sustainable path, about a fifth of its current population must leave.

So for the Spanish people, there really is not much to celebrate, is there? But wait. What about those exports?

Here are Spain's exports:

And these are imports:

Now, maybe my eyes are deceiving me, but this doesn't look like a story of export success to me. Exports appear simply to have returned to their pre-2008 trend growth rate - in fact if anything the export growth rate appears now to be declining slightly. The real story is the collapse of imports. And that is unquestionably due to the fall in household incomes from benefit cuts, tax increases, wage falls and above all unemployment, coupled with unserviceable debts and an extraordinarily harsh attitude to mortgage defaults. This is no export-led recovery. The current account balance has been achieved almost entirely through a massive fall in the standard of living of Spain's population.

I can't see anything to celebrate.

*This is a chart of quarter-on-quarter percentage RGDP growth. Annual percentage growth is 1.6%.