Tuesday, March 12, 2013

Good signs from Spain but full recovery is some time away

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.

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