Spain and its economy looks set for stagflation

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by Shaun Richards

The economy is Spain is one that is in the spotlight for various reasons. Back in the day it was part of the Euro area crisis although after that it put in a strong performance. Also whilst being part of the Euro area it tends to behave in something of the manner of the UK economy. Plus there is the fact that one of the industries most affected by Covid-19,which is tourism is a major industry for Spain. On the latter subject El Pais has been very upbeat this morning.

The crisis that has gripped Spain’s tourism industry as a result of the coronavirus pandemic appears to have come to an end. For more than a year, the sector – which is one of Spain’s main economic drivers – has been struggling to survive, with the number of tourists visiting the country at a record low. But this summer is on track to exceed the industry’s expectations – a feat made possible thanks to the large number of domestic tourists. Indeed, more national visitors traveled across Spain this year than in 2019, the year before the pandemic hit the country.

So the staycation theme is in play here and has given the economy a much needed boost. However if we look at the figures below that fades a biy as those occupancy rates may be internationally good but must be much lower than what is normal for the summer season.

Ramón Aragonés, the managing director of NH Hotel Group, agrees, explaining the season has been particularly positive for sites in the north of Spain and along the coast. “The behavior in Spain has been better than the average of our hotels on a global level, with average occupancy close to 55% in July and 60% in August.”

That is reinforced by the official data for foreign tourists.

Total expenditure made by international tourists visiting Spain in July reached 5,231 million euros, representing an increase of 112.8% as compared to the same month of 2020.

Much better on an annual basis but still less than half of the 11,942 million Euros of 2019. Looking at the comparisons things are improving but there is quite a way to go as you can see. The numbers for foreign visitors are similar.

Spain received in July the visit of 4.4 million international tourists, 78.3% more than in the same
month of 2020.

As opposed to 9.673 million in July 2019. More came from the UK that you might think with all the warning systems and expensive tests ( 555,183) as I guess some were so keen for a break they accepted them. Looking ahead there is more hope for the industry from the success of the vaccine scheme with 70% of the population now having 2 doses. The catch is the rise in cases in Israel which was a leader of the pack for the vaccine campaign.

The Economy

The latest official figures were rather subdued.

The monthly variation of the seasonally and calendar adjusted general Retail Trade Index (RTI) at constant prices between the months of July and June, stood at 0.1%. This rate was the same as the previous month.

So growth but the smallest possible amount which fades when we look at the annual picture.

In July, the General Retail Trade Index, once adjusted for seasonal and calendar effects, registered a variation of 0.1% as compared with the same month of the previous year. This rate was 1.1 points lower than the one registered in June.

All measures right now are influenced by what has happened so let us also note the index at 104.4 or 4.4% growth since 2015. As it is seasonally adjusted presumably allowing for a tourism season of the past we can consider it to be a bit higher than that in reality.

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If we look at the production figures then they were something of a disappointment.

After adjusting for seasonal and calendar effects, the monthly variation of the Industrial Production Index (IPI) between June and May stood at -1.0%. This rate is 2.5 points lower than that observed in May.

I doubt many of you will be surprised to read that a major brake on these numbers is the vehicle sector which had a 7.5% decline on the month. The microchip supply issue is ongoing as this from Autonews shows.

The company plans to halt production at its plant in Palencia, where it builds the Kadjar SUV and Megane compact car, for as many as 61 days and at its factory in Valladolid, where it makes the Captur SUV, for up to 40 days, a spokeswoman for Renault Spain said on Tuesday.

The engine plant in Valladolid could cease producing for as many as 17 days over the period.

This brings me to a theme we have followed over time where european vehicle production has headed south so to the benefit of Spain (and Portugal). The risk looking ahead is that it keeps doing so and increases output in North Africa which will not be helped by the electricity prices I will come to in a moment. Also in an echo of the UK pharmaceutical production swung lower making me wonder again if its production cycle does not fit with monthly data?


Let me start with the electricity issue and this is from Javier Blas of Bloomberg yesterday.

Sky-high electricity prices are now a top political issue in Spain (front page story in main newspapers). And it’s going to get worse: Sep. 2 prices have settled at a fresh all-time high of €140 per MWh (to put that into perspective, that’s more than double the 10-year average).

That is an issue for industrial production looking ahead as we wonder what has happened to all those people who have kept telling us how cheap “green” power is? Plus as the same source points out it is not just electricity although this is further up the price chain.

I know it sounds rather repetitive, but here we go again: European natural gas prices are hitting this morning a fresh all time high (both UK NBP and Dutch TTF). And it’s still summer.

If we switch to the overall data then things are in tune with what we looked at yesterday albeit stronger.

In August, the estimated annual variation rate of the IPCA stood at 3.3%, four tenths more than the one registered in the previous month. For its part, the estimated monthly variation of the HICP is 0.4%.

Unfortunately the flash number does not give us a breakdown for the energy effect let alone electricity.

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The house price issue is rather confused with some reporting rises and others falls which does not help much! We know that volumes have picked up so we will have to wait and see. Perhaps it is a case of once bitten twice shy from the past boom and bust.


We seem to be seeing a swing lower in growth with a rise in inflation. The second quarter was positive in both absolute and relative to expectations as the Bank of Spain predicted 2.2%.

Spanish GDP registers a 2.8% variation in the second quarter of 2021 compared to the previous quarter in terms of volume.

But there are now clear brakes on the economy from vehicle production. Frankly with the news on that front I find it hard to take this from the Markit PMI seriously.

A further improvement in demand supported strong growth Source: IHS Markit.
in new orders and production during August, with Spanish
manufacturers posting a near-record rise in output.

I think we have a similar situation to the Irish pharmaceutical cliff of a few years back where a company replies lower but is a large producer with a substantial fall. Added to this is the theme of slowing elsewhere we keep finding.

Switching to inflation then there is a genuine issue here as this from a Bank of Spain working paper shows.

Between December 2020 and June 2021, wholesale electricity market prices almost doubled in Spain. According to our estimates, a substantial portion of the observed increase – around 20% – would be due to the rise in CO2 prices in the European ETS, which directly impacts the cost of generating electricity through fossil fuel technologies. Nevertheless, most of the increase – approximately half – would be attributable to the rise in
natural gas prices, one of the inputs in combined cycle plants.

The fact they published a working paper is revealing in itself but since it was published the issue has continued to heat up.

So Stagflation is again the theme.

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