Spain Fails to Leave Recession in Q4

Spanish Economy Remains in Recession

The economy contracted for a sixth successive quarter in the fourth quarter of 2009, keeping Spain in recession, according to a final estimate released by the National Statistics Institute (INE). Real GDP declined 0.1% quarter-on-quarter (q/q), after falls of 0.3% q/q in the third quarter, 1.1% q/q in the second and 1.6% in the first. In annual terms, the economy contracted by 3.1% year-on-year (y/y) in the fourth quarter, an improvement from 4.0% y/y contraction in the previous quarter.

This implied that real GDP shrank by 3.6% in 2009 as a whole, a record fall since the Institute of National Statistics started reporting the series in 1971. This compares to rises of 0.9% in 2008 and 3.6% in 2007.

The breakdown of the GDP data for the fourth quarter of 2009 shows that the economy is through the worst, and there are increasing signs that q/q growth could resume in early 2010. Domestic demand (excluding the change in inventories) edged down by 0.4% q/q in the fourth quarter, compared to falls of 0.3% q/q in the third and 1.6% q/q in the second. Meanwhile, the y/y contraction slowed to 5.0% in the fourth quarter, compared to 6.1% in the third quarter and 6.0% in 2009 as a whole.

Private consumption (excluding non-profit institutions) recovered marginally in late 2009, helped by a spike in new cars. Overall household spending grew by 0.3% q/q in the fourth quarter, after stabilising in the third quarter which ended a period of uninterrupted decline since late 2007. In annual terms, it was down by 3.5% y/y in the fourth quarter, implying a fall of 5.0% in 2009 as a whole. Consumer spending retreated markedly during 2009 with households enduring considerable stress from rising unemployment, tighter credit conditions, falling property prices, and high indebtedness. Consequently, households continued to consolidate their debt, while ramping up precautionary savings. Indeed, the household savings rate (rolling four-quarter average) standing at 18.7% of household disposable income in the third quarter of 2009. A breakdown by type of good and service reveals notably stronger new car sales, with new registrations rising 29.2% y/y in the final quarter of 2009—the first increase since end-2006. This is a welcome relief after the steep falls of 33.7% y/y in the second quarter and 43.1% y/y in the first. Clearly, car sales have benefited from the scrappage scheme introduced in Spain from 1 June 2009, giving buyers who scrapped an old car and bought a new, environmentally friendly one an incentive of 2,000 euro. However, spending on other goods and services remained weak. According to the National Statistics Institute, the average volume of working-day-adjusted general retail sales in the fourth quarter declined 3.2% y/y, compared with falls of 4.1% in the third quarter, and 6.1% y/y in the second. Spending on services continued to contract, highlighted by still gloomy PMI survey results from the sector.

Investment Activity Continues to Shrink

Domestic demand was curtailed by falling fixed investment spending. It plunged by a further 1.0% q/q in the fourth quarter, after dropping by 2.4% q/q in third and 1.0% q/q in the second. This was the eighth successive q/q decline in fixed investment, causing it to fall by 12.9% y/y in the fourth quarter and by 15.3% in 2009 as whole. Ongoing concerns about the health of the property market continued to diminish construction activity, which contracted by 2.2% over the fourth quarter and was 10.2% lower than a year ago. This implied that construction activity shrunk by 11.2% in 2009 as a whole. Spending on equipment expanded 3.1% q/q, only the second increase since the final quarter of 2007. Nevertheless, it was still 15.3% lower than end-2008, resulting in a 23.1% fall between 2008 and 2009. Investment in other products continued to spiral down in the fourth quarter, down by 2.6% q/q and 18.5% y/y. Clearly, markedly weaker industrial production and falling capacity utilisation continue to mute business investment intentions. Meanwhile, stocks edged up in the fourth quarter of 2009.

Government Spending Starts to Retrench

An additional negative drag on domestic demand in the fourth quarter of 2009 came from government spending, which fell by 1.7% q/q, the first quarterly fall since late 1997. In annual terms, it rose by just 0.8% y/y in the fourth quarter, down from rises of 4.1% y/y in the third and 3.8% in 2009 as a whole. The government is winding up its fiscal stimulus measures after spending heavily to prop up the economy. The official Plan E 2009 had been set to fill the void left by the residential construction slump, with central and local governments spending 8 billion euro on some 30,000 infrastructure projects all over Spain during 2009.

Spanish Exports Continue to Revive

Exports of goods and services continued to recover in the fourth quarter, rising by 3.0% q/q, only the second increase since early-2008. Encouragingly, exports were down by just 2.7% y/y, compared to a 10.8% y/y drop in the third quarter of 2009 and 11.5% in 2009 as a whole. Spanish exporters probably benefited from modestly stronger demand across the Eurozone, United Kingdom and United States. Imports continued to revive in the fourth quarter. Imports of goods and services increased by 2.1% q/q, after a 1.7% q/q increase in the previous quarter, which ended unbroken period of decline starting from early 2008. In annual terms, imports were down by 9.6% y/y in the fourth quarter and 17.9% in the year as a whole.

Outlook and Implications

Spain Expected to Emerge from Recession in Early 2010

As expected, Spain remained in recession in the final quarter of 2009. Nevertheless, we are confident that Spain will emerge from its technical recession in early 2010, but the recovery is likely to be laboured, given the backdrop of ongoing problems in the housing sector, high unemployment, and excessive private-sector debt. Worryingly, the recovery is expected to stall temporarily in the third quarter of 2010, with real GDP likely to contract as the planned rise in VAT on 1 July hits consumer spending. Clearly, the economy continues to face strong headwinds, with real GDP projected to contract by 0.5% in 2010 before rising by a modest 0.7% in 2011 and 1.1% in 2012, according to the February interim forecast.

Domestic spending will contract again in 2010 and remain muted in 2011, partly due to poor investment activity. Residential construction activity remains under pressure, with the property market enveloped by oversupply at a time of falling house sales. Meanwhile, equipment investment is likely to be uneven as firms endure diminishing profits, still disrupted credit markets, and still near-record-low capacity utilisation. The slump in private consumption has bottomed out, but the recovery will be slow. Households will continue to consolidate their debt when faced with uncertain job prospects and falling housing equity. In addition, consumers are accumulating precautionary savings, with the household savings rate (rolling four-quarter average) standing at 18.7% of household disposable income in the third quarter of 2009. The rise in the value-added tax rate by 2 percentage points to 18% from July 2010 could encourage higher spending prior to the increase, as consumers bring forward their planned purchases, but it will hit spending in late 2010. In addition, the government is planning to phase out the car scrappage scheme gradually during 2010 which will impact on new car sales in late 2010 and 2011. The boost to activity from government spending will fall sharply in the next two years as Spain implements an exit strategy from the exceptional fiscal stimulus measures. Government consumption contributed around one percentage point to the per cent change in real GDP in 2008 and 2009, which is expected to fall to 0.4 in 2010 and zero in 2011.

The slump in external demand appeared to bottom out in the second half of 2009, with Spanish exports expected to recover gradually during 2010 and then evolve more solidly in 2011. The immediate outlook for exports remains difficult against a backdrop of still fragile spending across the Eurozone, while the recent firmness of the euro presents a significant problem to many Spanish exporters already struggling to compete in non-Eurozone markets. More encouragingly, Spanish export growth is projected to pick up in the latter half of 2010 and 2011, helped by stronger global growth. Nevertheless, exports will struggle to pick up the baton of growth from the previously dynamic household and construction sectors. 

The outlook in 2010 and beyond remains challenging, as the economy is likely to be weighed down by high unemployment and poor public finances. The government will need to consider further fiscal consolidation to rein in the budget deficit over the medium term, placing additional strain on the uncertain economic recovery. Finally, Spain had been quite attractive to foreign capital, but this has ended abruptly as a result of the global credit crunch and the troubled housing sector. This suggests that Spain will need to adjust to the weaker inflow of foreign capital, primarily through falling debt ratios for the household and corporate sectors. This could also curtail the pace of the recovery in the medium term.