Real Recovery in Spain is Still Far Away
By Walter Kurtz, Sober Look
CNBC ran an interesting story today about the possibility that Spain may begin an economic recovery fairly soon. In particular, two items that are worth pointing out may provide some tailwinds for Spain’s economy.
1. Exports:
CNBC: – … a healthy export sector that has increased market share throughout the recession; of these exports, steel and chemicals make up for 26 percent of the total, followed by capital goods (20 percent) and automobiles (17 percent); food products, Spain’s traditional source of foreign exchange, are now only 16 percent of the total.
2. Improved competitiveness in the labor markets – something that France for example is struggling with (see post).
CNBC: – While public servants have had pay cuts of between 10 and 25 percent, cuts of 20 to 40 percent are not uncommon in the private sector. In short, Spain has regained competitiveness and is in a position to benefit from growth in her trading partners.
This second item is particularly interesting given Spain’s large temp workforce which provides an additional level of flexibility (see discussion).
The one area the article didn’t discuss in sufficient detail is Spain’s banking system other than to say that the restructuring is nearly complete.
CNBC: – The restructuring of the banking system is nearly completed (partly at the cost of a higher public deficit), and de-leveraging of the banking sector is slowly proceeding (from 19 in 2007 to 16.7 in 2011)
Technically Spain has made the right moves toward stabilizing the banking system. More importantly the ECB has been instrumental in bringing some degree of confidence and stemming depositor flight out of the country (see discussion). But the Spanish banking system, especially among domestically focused institutions, still has a long way to go before it becomes fully functional. In particular analysts feel that the housing correction in Spain has not run its full course, which means that property loan portfolios have a long tail of failures (see post). Clearly Ireland’s situation was different, but the comparison below leaves investors asking questions.
Housing price indices for Spain and Ireland (source: CS)
We are certainly going to see economic improvements in Spain in the next couple of years, but the full blown recovery may be some time away.
7 Comments
I very much agree with the point on the Spanish banking problem. I have a small business here in Spain and we export about 90% of our product (all of which is 100% made in Spain). Our business is growing slowly and steadily but we face three major headwinds.
1) The government withholds sales tax that we pay for our products for up to 6 months. We pay 21% sales tax and when we export this tax is not charged to our clients. Technically, we are exempt from paying this sales tax as an exporter, but the Spanish tax agency collects and delays repayment on technical issues. This causes quite an issue for cash flow. Currently we are awaiting pay back of roughly 5% of the amount of our yearly turnover in these withheld sales tax.
2) Spanish banks are cutting credit. We have faced tighter credit conditions that have gotten worse over the two years (in light of all the good news reported above). This puts more pressure on our operating cash flow. The little credit that can be accessed in running between 7 and 8%.
3) They have raised income taxes as well as sales taxes as part of the austerity measures. They are also cutting back on health care and education services while asking the tax payer (those that are still left) to foot the bill for the ongoing bank bailouts.
In short, the Spanish banking system and the Spanish central tax agency are the weights around the neck of small business here in Spain. We have a long way to go until the banks here have deleveraged and our tax system is reformed to allow for true growth. We have a long hard road ahead of us.
Wow… that’s more interesting than the article. Thanks!
Glad I could offer something useful. Thanks for the positive feedback.
How do you think the average wage earning Spaniard views the situation? Do they see a “race to the bottom” to cut wages and bail out banks so that exporters can prosper? Or are they largely on board with what is happening?
I think it goes without saying that most of the average wage earning Spaniards are first of most concerned about maintaining their jobs. Beyond that, I would say that there are two major points of view on the current situation here in Spain.
The first viewpoint is that the euro project and the bank bailouts will eventually lead to a better, more united Europe. This group believes that the policies being dictated by the Spanish government and the ECB and EC will lead to a more prosperous nation and a stronger EU trading block.
The second group believes that the that bank bailouts are an unfair burden on society in the face of the hard cuts being imposed through austerity. There is a feeling that the bank insolvency issue will only grow and that the tax burdens being placed will stifle growth.
There is actually quite a bit of general social awareness by the average wage earning Spaniards on this issue.
How much has your labor costs decreased?
We have 6 full time employees and we outsource the production of our goods. I have not reduced our labor costs for our employees. We have maintained wages stagnant for roughly three years.
The only living cost that is going down in Spain is housing. I can give you a rough idea of what the situation is like here for our employees. Our employees work in customer service, IT, and accounting.
The average monthly salary after taxes is about 1350 euros per month after taxes for my employees. These employees spend roughly 650 euros a month on rent. The company pays roughly 1000 euros in income and social security taxes for our employees.
If I cut my employees salaries by the 20 to 40% they would be in a very precarious position.