Economic clouds gather as Spain faces recession

A demonstrator burns a note during a protest in downtown Madrid as Spain’s economic miracle threatens to unravel

For years, it has been a staple of daytime television, alongside the inane chat, creaky old movies and decorating do’s and don’ts – the “let’s-go-live-in-the-sun” show, in which Stoke and Stoke Newington are swapped for, much more often than not, Spain.

But now it has an evil twin. You may have seen it. The we’re-not-celebrities-but-please-get-us-out-of-here show, in which the dream has gone horribly wrong. And it is symptomatic of the wider malaise that has gripped what was once a land of boom and money.

After a decade in which per capita income doubled – and household debt tripled – the Spanish economic fiesta is well and truly over. More than 40,000 workers are losing their jobs each week, a far higher rate than elsewhere in Europe. Unemployment is at 2.99 million, a 12-year record of 12.8 per cent of the workforce and the highest unemployment rate in the eurozone.

And there is no respite in sight. According to Pedro Solbes, the Economy Minister: “There is a risk the unemployment rates will be worse next year.”

In November, the grim jobless figures were compounded by a further decline in the services sector as activity, new orders and employment plunged to a record low.

The Markit Purchasing Market Index, which covers service companies ranging from hotels to insurance brokers, dropped to 28.2 in November from 32.2 in October, the sharpest monthly decline since figures were first collected in 1999. The figure is drastically below the 50 level where growth begins.

And underpinning it all is the Spanish construction industry, which accounts for 9 per cent of GDP. It has collapsed. After those years of boom, more than 150 property companies have gone bust so far this year, going into administration as debts mounted and they were unable to pay back creditors.

Metrovacesa, one of Spain’s biggest property companies, reached a debt-for-equity deal this week with six creditor banks, which will take a 54 per cent stake in the business.

In doing so, it became the second big property company to fall into the hands of its creditors this year, after Colonial suffered the same fate in April. Martinsa Fadesa, once one of the biggest real estate firms in Spain, went into adminstration in July.

According to Sergio Diaz Valverde, an economist at Caja Madrid: “What started in the construction sector has extended to the entire economy.”

Thus, after more than a decade of the highest growth in the eurozone, Spain’s GDP decreased by 0.2 per cent in the third quarter. By the end of the year, it is expected that Spain will officially be in recession.

José Luís Rodríguez Zapatero, the Prime Minister, has budgeted more than €50 billion (£43.5 billion) on stimulus measures to combat what analysts believe will be the country’s worst recession in half a century.

The Government announced an €11 billion emergency spending package last month focused on public construction projects, as well as aid for tourism and car manufacturing.

With the country’s largest companies struggling to pay their creditors, many are shedding jobs. Consumer confidence is dwindling, with house prices sinking by as much as 10 per cent in big cities such as Madrid and Barcelona.

Car sales, another key indicator of the health of the economy, halved last month. Many manufacturers, including Nissan, Ford and General Motors, are cutting jobs in an increasingly desperate effort to reduce costs.

Yet through the gathering clouds, some see sunlight. Alfredo Pastor, a macroeconomics specialist at the IESE Business School in Barcelona, is more optimistic than many. “I think we will see slow growth of between 0 and 0.1 per cent for the next two or three years,” he said.

Moreover, the country’s banking sector has not suffered the same fate as Britain’s. There have been no Northern Rocks. Instead, the two main banks, Santander and BBVA, have – so far – remained largely untouched by the present global financial crisis.

The “big two” concentrated on commercial banking, rather than investment banking or derivatives, which have struck down institutions elsewhere.

More strict regulations, introduced by the Bank of Spain after Spain’s last slump, also stopped most Spanish banks from lending recklessly.

Francisco González, the chief executive of BBVA, said: “We’ll pass through a storm, there will be wounds – but those who emerge will be winners.”

The 45 smaller savings banks, which are more closely involved with mortgages and hence more at risk from the housing slump, may be subject to mergers. Two in the Basque Country have already merged.

Even when Spain begins to emerge from the crisis, deep problems will remain. Productivity grew by an average of only 0.3 per cent a year between 1990 and 1997, according to figures from the Oorganisation for Economic Co-operation and Development. It estimated that between 1998 and 2006, total productivity fell by 0.2 per cent annually.

There are more than one million unsold new homes – enough for four to five years of sales at current levels – and bad loans that could triple to 9 per cent of outstanding debt by 2010, according to Credit Suisse.

Education levels are consistently low. One in three secondary pupils drops out. There has also been a brain-drain as the most talented Spaniards seek higher-paying jobs abroad.

According to Professor Pastor, all this indicates that if the country is to emerge from its slump, it must change: “Spain must improve to get away from its dependence on construction and tourism,” he said.

“We must improve our education, productivity and learn how to keep our most talented people.”

It must, in short, learn to rely far less on the things that attracted all those Britons to the Costas in the first place.

Chill wind blowing

2.99m The present total of unemployed in Spain

40,000 Number of people who are losing their jobs each week

12.8% Proportion of the workforce that is now idle

12 years since the situation was looking so bleak

Source: Spanish Economy Ministry

December 6, 2008
Graham Keeley and Rory Watson

Source: The Times

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