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7/31/2019 Danske-Spain s unrealistic expectations
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www.danskeresearch.com
Investment ResearchGeneral Market Conditions
The Spanish government expects the recession to come to an end by mid-2013. In an
environment of fiscal tightening and sliding house prices, that appears to be wishful
thinking.
Even if Spain manages to deliver the anticipated -0.5% growth in 2013, this does not
justify the governments expectations that the unemployment rate should decline
slightly in 2013. It is simply at odds with the empirical evidence.
We expect that the Spanish economy will contract 1.5% or more in 2013, that Spain
will miss its fiscal target and that the unemployment rate will rise to at least 26.5%.
Export-driven growth
The Spanish government expects an export-driven recovery that will bring Spanish
growth back into positive territory by mid-2013. The assumption is that Spanish exports
can grow 6-7% annually in 2013-15. This may materialise if global growth picks up
notably or Spain manages to win global market shares, e.g. in services and green energy.
We find that it is an ambitious target that may prove difficult to reach, though not
impossible. A driver for winning market shares is to become more competitive. The new
government has undertaken a lot of reforms during the last 10-11 months. But it is no
time for complacency. Looking at the business climate and unit labour costs, we believe
that Spain is really only halfway through the needed reform agenda.
However, our real concern is that even if exports grow as much as anticipated, the
contraction in domestic demand will be much bigger than the government anticipates.
Austerity and fiscal multipliers
The Spanish government needs to reduce the fiscal deficit by at least 1.8% of GDP next
year to reach its target. This will have a substantial negative impact on growth. In an
economy operating close to its capacity constraint the fiscal multiplier is probably close
to zero, as the private sector will replace public sector cuts. However, when demand is
lacking, as is the case in Spain, there is little reason why cuts in the public sector should
cause an increase in private sector production. Until recently, IMF consensus was a fiscal
multiplier around 0.5, but in October IMF chief economist Olivier Blanchard and Daniel
Leigh emphasised that during recessions the multiplier is probably in the range of 0.9 to
1.7. In the absence of a central bank response, the multiplier is probably at the high end of
this range. Assuming a fiscal multiplier of 1.5 means that a 1.8% cut in the budget deficit
should pull GDP growth down by as much as 2.7%.
31 October 2012
Important disclosures and certifications are contained from page 3 of this report.
Senior Economist
Frank land Hansen
+45 45 12 85 26
Chief Strategist
Bernt Christian Brun
+47 23 13 91 90
Spanish government budget
00 02 04 06 08 10 12 14-10
-8
-6
-4
-2
0
2
4
-10
-8
-6
-4
-2
0
2
4% of GDP % of GDP
Budget Balance
Source: Reuters EcoWin, Spanish government
ResearchSpains unrealistic expectations
Spanish export growth
00 01 02 03 04 05 06 07 08 09 10 11 12
-20
-15
-10
-5
0
5
10
15
20
25
-20
-15
-10
-5
0
5
10
15
20
25% y/y % y/yExport growth
Mean
Source: Reuters EcoWin
GDP and fiscal consolidation
Real GDP Growth, % y/y
-4 -3 -2 -1 0 1 2 3 4 5Increaseingovernmentsurplus
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
+ 2 standarddeviations
Expected GDP growth andfiscal consolidation in 2013
%-point
2012
Source: Reuters EcoWin, Danske Bank
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Research
Housing market downturn
At the same time, we expect house prices to continue to slide in Spain, which will
dampen domestic demand further. Declining house prices are a drag on private
consumption not only because it reduces wealth, but also because uncertainty about the
extent of future house price declines causes substantial precautionary savings. Spain hasseen a housing bubble comparable with that of Ireland, but for now the decline in official
house prices has been much more modest. We would not be surprised to see another 20%
decline in Spanish house prices over a 3-4 year period. This may amount to an additional
drag of about 1% in annual GDP growth (assuming that the elasticity of GDP to house
prices is 0.2). All in all, we expect these two headwinds to drag growth down by around
3.7%.
On top of this, the Spanish banks are expected to continue to deleverage. Spanish banks
have a lot of bad assets on their books and we expect credit conditions to remain tight. An
ongoing credit contraction is an important headwind too, although difficult to quantify.
With all these headwinds we really have a hard time seeing how Spain can return to
positive growth by mid next year. It is pretty much the same as saying that Spain would
be able to grow at least 4-5% next year in the absence of headwinds. We do not think so.
Unemployment likely to continue to rise
Even if the Spanish government manages to deliver the -0.5% growth anticipated for next
year, it is unlikely that it will succeed in reducing the unemployment rate by 0.3%-points
as foreseen. The historical relationship between GDP and unemployment suggests that
with a 0.5% contraction in GDP the unemployment rate should rise 2.6 %-points. The
governments expectation is four standard deviations away from this. On top of this, we
would argue that growth is much more likely to be -1.5% or less, which suggests an
increase in the unemployment rate of 4.0% or more. We agree that the impact on the
unemployment rate is probably lower at the end of a recession than at the beginning.
Taking this into account we would still expect the unemployment rate to increase at least
1.5%-point next year. The governments expectations of a 0.3%-point decline in the
unemployment rate are just wishful thinking.
Complacency is a risk
It is of course worrying that economic growth might be worse than one could wish for.
But it is even more worrying, in our view, that large parts of official Spain appear
complacent. The new government has delivered important reforms during the past 11months, but we think it is too early to believe that the work done is sufficient. If the
Spanish government does not continue its reform efforts constantly, its problems could
grow much bigger.
We expect that Spain will eventually have to ask the ESM for a precautionary credit line,
which will pave the way for the ECB to start buying Spanish government bonds. The
Spanish government would be well advised to adjust its fiscal targets for 2013 before
asking for help. The ECB will, in our view, not refrain from buying Spanish government
bonds when it becomes clear that Spain is likely to miss its 2013 targets, but fiscal targets
and consolidation efforts will then have to be renegotiated. In such a negotiation process
the European partners might demand additional reforms.
Spanish house price bubble
00 01 02 03 04 05 06 07 08 09 10 11
75
100
125
150
175
200
225
250
75
100
125
150
175
200
225
250
Spain
Index, 2000=100
Eurozone Ireland
Ireland,discontinued
Index, 2000=100
Source: Reuters EcoWin
Wishful thinking
Real GDP Growth, % y/y
-5 -4 -3 -2 -1 0 1 2 3 4 5 6unemploymen
t,%-pointchange,y
/y
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
+ 2 standarddeviations
Expected GDP growthand unemployment
Source: Reuters EcoWin, Danske Bank
ECB has helped
Jan
12
Mar May Jul Sep
1
2
3
4
5
6
7
1
2
3
4
5
6
7%, 2-year government bond yields
Spain
Italy
Source: Reuters EcoWin
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Research
Disclosure
This research report has been prepared by Danske Research, a division of Danske Bank A/S (Danske Bank).
The author of this research report is Frank land Hansen, Senior Economist.
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