In October Spanish authorities reported a 0.1% decrease in the general level of prices which has suggested a repeat of a Japanese style stagnation. With the ECB cutting rates to 0.25% earlier this month to avoid such an issue it could be too little too late. Also with rates as low as they are they are starting to run out of ammunition to stimulate the economy. With little support in the eurozone area for quantitative easing or fiscal stimulus one wonders how they avoid the slide in prices.
The US Fed has used three rounds of quantitative easing to avoid a deflationary environment and Fed Chairman Ben Bernanke alluded to this in 2002 when he said:
“Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending – namely, recession, rising unemployment, and financial stress,”
Speaking before the Global Financial Crisis Bernanke debated the idea of QE as a potential solution after the lowering of interest rates. But the biggest worry for low inflation countires in the eurozone is deflationary expectations as cosumers delay purchases which ultimate reduces demand.
The level of unemployment in Spain has reached worringly high levels with over 25% of the labour force out of work. More of a concern is the 57% of the labour force under 25 without a job. However with these levels, especially amongst the youth, one would think that social unrest, crime rates etc would be widespread in the country. There is a belief that the hidden economy (working in cash jobs and also claiming benefit) hides the real figure and, like in Ireland, the labour force is contracting as those without job prospects stay on in education or emigrate.
However in Spain the education system doesn’t do any favours for those students that fail exams when they are 16 – if you fail you are out the school system. This is all very well if there are jobs/trades available for those without qualifications. In 1984 the late Margaret Thatcher said “Young people ought not to be idle. It is very bad for them”. Those that start their careers on the dole are more likely to have lower wages and more spells of joblessness later in life, because they lose out on the chance to acquire skills and self confidence later in their formative years. It is estimated that there are over 310m young people (16-25) that are looking for work. One of the main issues to be addressed is the mismatch between education and the labour market or commonly referred to as structural unemployment.
To reduce the level of unemployment in Spain the economy’s net job growth needs GDP of 1% or more but the Spanish government doesn’t forsee that until 2016.
From the Wall Street Journal Graphics page. Unemployment in the EU hits record highs – joblessness in the 17-nation currency area rose to 12.2 percent in April. Reuters stated that the greatest menace to the unity of the euro zone is now social breakdown from the crisis, rather than market-driven factors. What is of significant concern is that 5.6m young are without employment although it is getting desperate for Spain and Greece.
If you look at the labour market in Spain you would think that it resembles the German economy 10 years ago when Gerhard Schroder was its leader. Schroder was responsible for labour reforms that ignited the German economy into one of the strongest in Europe.
Spain is relaxing labour laws and cutting public spending and there are some positive signs here in that labour unit costs are falling as result of greater productivity. However German’s vocational education sector was a significant factor in its improved performance as the education and training system is more job orientated. Furthermore, with austerity measures in place and more to follow – pressure from the EU to introduce yet another sales-tax rise – Spain will find it hard to generate any sort of growth. But if it does grow will it generate any reduction in unemployment? Because of labour reforms some economists now believe that only 1.5% growth is required to bring about net job creation rather than 2.5% as previous.
The drought in Spain this summer has had a significant impact on the Olive oil market worldwide. Approximately 50% of world production comes from the World Cup and European Champions but The Economist estimate that the lack of rain might cause a drop in global production of around 20% – supply curve to the left. In 2011 the market was awash with around 3 million tonnes of olive oil. Because of this prices hit nine year lows – July 2012 $2,745 but over the last few months they have risen approximately 40% – $3,787 a tonne. Stocks are being put onto the market from last year’s crop (supply curve to the right) have helped to keep the price below $4,000 a tonne – a bit like a buffer stock system. See graph below
Olive Oil – US$ per Tonne
High prices have helped some other economies that border the Mediterranean Sea like Italy and Greece as they are the next biggest producers of olive oil and between them provide 20% of the world market.
Demand on the increase
Demand for olive oil has increased as it becomes more fashionable – maybe from all those cooking shows that they have on TV these days. Germany are using 5 x more olive oil and the British x 10. Demand in the US has been growing 6% for the last 20 years.
With increasing debt, out of control unemployment and a general strike Spain has some serious economic problems. However, before the financial crisis of 2008 Spain was seen as a prudent member of the Eurozone with GDP debt being half that of Germany at 36%, and a well regulated financial sector. But since the aftermath of the financial crisis it has been all downhill for the Spanish economy with unemployment now at 24% and public debt at 66%.
Causes of the downturn
Like most economies before the financial crisis Spain had access to cheap credit. This was especially prevalent since entering the Eurozone interest rates, which were set by the European Central Bank ECB) in Frankfurt fell from 12.75% in 1995 to 3% in 2005.
Spain’s banks and households realising that they had massive debts whose collateral was overpriced housing. Property values have fallen 27% and the building of new home is down 80% and given the size of the construction sector mentioned above this has some major implications for the Spanish fundamentals.
The Spanish economy is in serious trouble. With unemployment at 24% and the subsequent fall in consumer spending can it get much worse? Well, rating agency Standard & Poors have proceeded to downgrade Spain to BBB+ rating, which means “adequate payment capacity” and is only a few notches above a junk rating.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.
With 24% unemployment and approximately 50% of those under 25 without a job, can it get much worse for the Spanish economy. Well it just has – Standard & Poors have downgraded Spain by two levels to BBB+ from A, with a negative outlook and this has “direct negative rating implications”. However the latest trend is for public-sector workers to lose their jobs with 32,000 government employees being made redundant in the first quarter of this year. When they lose their jobs they receive unemployment benefit for up to two years. When that runs out, the central government has been giving for the past several years a monthly subsidy of €400 ($530) to people who still haven’t found jobs. Most laid-off workers cut down on consumption, so they aren’t spending on goods and services to help stimulate the economy or fill tax coffers. But the dilemma is if they don’t bring in austerity measures they won’t get bailed out by their European colleagues – balanced budget v growth in the economy.