Saturday, February 09,

Spain Edging Past Italy GDP??? Whoa! Let's Reconsider!!!!

The ANNOTICO Report

 

Spain's 10 year Boom, was built almost exclusively on the Housing Market, which like in the US has come to a Screeching Halt.

 

Their Great Leap forward has turned into a Giant Leap into the Great Abyss.

 

There will be 500,000 unsold new homes by the end of March - roughly the number built in an average year.  500,000 more were to be built this year, making the unsold stock worrying. About half the country's estate agents are already out of business,

Spain's Sprint Slows as Bricks and Mortar form Stumbling Blocks

Financial Times

By Leslie Crawford

February 7 2008

Eurostat, the European Union's data compiler, in December published a dry table that revealed a remarkable fact: Spaniards had become richer per head than Italians.

Anyone who knew Spain in the 1970s - when it was a byword for backwardness and governed by an ageing dictator - can only marvel at its political and economic transformation. Along with Ireland, Spain has been one of the unequivocal success stories of the EU, which it joined in 1986. The new member states of central and eastern Europe regard Spain as their role model, for the skill with which it used EU funds to spearhead its development.

But never did Spaniards think they would one day overtake in terms of per capita income one of the founding members of the EU. Josi Luis Rodrmguez Zapatero, the Spanish prime minister who faces a general election next month, boasts that overtaking France and even Germany by that measure is possible within five years.

Mr Zapatero's grandstanding, however, has been obscured by doubts. The end of a 10-year housing boom, coupled with financial turmoil abroad, is leading Spaniards to question the foundations of their leap forward. The Spanish sorpasso  took place just as the country's growth was peaking. Might it prove as fleeting as Italy's famous overtaking of the British economy in the 1980s?

Moreover, its economy is now big enough to affect Europe's performance as a whole. "If residential construction in Spain contracts in 2008 as sharply as it did in the US in 2007, it could shave 0.2 percentage points off eurozone economic growth," Holger Schmieding of Bank of America wrote in the Financial Times last month.

During the peak of the construction frenzy two years ago, economists described the Spanish economy as a "monoculture" of bricks and mortar and worried that there was nothing to take its place if the building boom came to an end. Construction employed 13 per cent of the workforce. The banking system channelled 60 per cent of all credit to housing-related activities.

Spain was building more homes than France, Germany and the Benelux countries combined. It was consuming half of all the cement in the Europe and it was borrowing massively abroad. Economists agreed that Spain's credit-fuelled property boom accounted for most of the country's growth differential with the EU.

The credit squeeze hit Spain at its most vulnerable point in the economic cycle, with an overpriced and oversupplied housing market and families and companies deep in debt. As a result, the country is on the brink of a property slump that will affect employment, consumer confidence, bank earnings and the economy as a whole, according to a number of recently published reports.

IPE, a business school that specialises in urban planning and property, estimates that there will be 500,000 unsold new homes by the end of March - roughly the number built in an average year. Given government forecasts that 500,000 more were to be built this year, the unsold stock is worrying. About half the country's estate agents are already out of business, according to their trade association.

One consequence of the building slowdown is that unemployment has shot above the 2m mark. January's 6 per cent increase in the number of unemployed was the highest monthly rise in 10 years. Immigrants and temporary workers are feeling the brunt of the cuts. The end of the property boom is also worrying for Spanish commercial and savings banks, which have 290bn ($425bn, #217bn) in outstanding loans to property developers and are trying to cut their exposure to the sector.

Not everyone shares the gloom, however. Mr Zapatero is unabashedly confident about his country's economic prospects, on which his re-election prospects also depend.

"I am an optimist," he tells business. . He expects the economy to grow by "at least" 3 per cent in 2008. Mr Zapatero's Socialist party is promising to create 2m jobs over the next four years and to raise minimum pensions and wages. If the economy fails to grow at the predicted rate, Mr Zapatero thinks old-fashioned fiscal stimulation should do the trick. The government has a "comfortable" budget surplus of 2 per cent of GDP, he says, to get things moving.

Another reason for optimism is that Spain's big companies have used the profit windfalls of the past several years to diversify out of Spain. Joaqumn Ayuso, chief executive of Ferrovial, the company that in 2006 bought BAA, the British airports operator, says: "Back in 1992, construction - mainly public works - was 90 per cent of our business and it was all in Spain. Then there was a devaluation and a recession.

"We had four horrible years. I was the director for construction then and I was convinced I would be fired. Those years taught us a lesson: that we couldn't depend on just one country, one business and one client, the government."

Today, 90 per cent of Ferrovial's assets are in the UK, Canada and the US; they include toll roads, airports and baggage handling. Less than 15 per cent of Ferrovial's income comes from construction.

Santander and BBVA, Spain's two big banks, have expanded abroad so that a big part of their business is based in Latin America and the UK, where Santander owns Abbey National. Telefsnica, the former telecommunications monopoly, has also become world-scale.

Diversification means that even if Spain starts to flag, some companies will be able to cushion the blow with income from other parts of the world. Tighter credit conditions, however, will make it much harder for them to continue an acquisition spree that has included investments of more than 60bn in the UK alone.

In this jittery environment, resilience is a big advantage. What frightens some is the hubris that appears to have taken hold of Mr Zapatero and some of the business establishment. Only the government predicts Spain will grow by as much as 3.1 per cent in 2008. The International Monetary Fund estimate is 2.7 per cent. The Organisation for Economic Co-operation and Development forecasts Spain will grow by 2.5 per cent.

"To draw up economic policy on the basis that we are going to grow by 3 per cent this year is unrealistic, even irresponsible. Not to recognise a problem is the first step to not solving it," says Lorenzo Bernaldo de Quirsz, of Freemarket, an economic consultancy in Madrid.

Complacency is also frightening because Spain could easily slip into Italy's "do nothing" malaise. For the moment, Europeans prefer to shop at Zara rather than Benetton. Iberia is a going concern whereas Alitalia is bust. Telefsnica is a big shareholder in Telecom Italia rather than the other way around.

"Spain has undergone such a tremendous transformation in the past two decades. Now it has to take the next step," says Stefan Bergheim, a senior economist at Deutsche Bank. An inflation differential with the EU needs to be tackled. Productivity, which is low, has to be addressed and Spain must move on from bricks and mortar to find a more sustainable route to prosperity.

 

The ANNOTICO Reports Can be Viewed (and are Archived) on:

Italia USA: http://www.ItaliaUSA.com [Formerly Italy at St Louis] (7 years)

Italia Mia: http://www.ItaliaMia.com (3 years)

Annotico Email: annotico@earthlink.net