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arket recovery to what extent is spain s housing market really going to recover is the external correction complete or is there more to do spain s population and especially it s working age population is in decline what are the economic implications of this and what is the long run growth outlook for spain the cost of paying pensioners continues to grow more rapidly than income from contributors does spain need another pension reform spain s economy will grow comparatively quickly in 2015 but the ecb is buying spain government bonds ecb interest rates are near zero and the country is running the largest fiscal deficit in the eu what would spanish growth look like without the deficit and with a normalisation of interest rates spain s sovereign debt is about to pass the 100 of gdp level will the next government be able to stabilise the debt or will it continue to grow spain s recovery at present is largely a services and domestic consumption based one industry and capital expenditure continue to lag behind is this profile sustainable in the longer term the sections on deflation population ageing and the pensions crisis are summaries of the following earlier posts spain s good deflation why is spain s population loss an economic problem spain fuelling today s retail sales by spending tomorrow s pensions spain s recovery is real the most striking and obvious thing about the spanish recovery is the way in which real inflation adjusted gdp growth rates have steadily accelerated the country s economy with a quarterly increase of 0 8 had one of the fastest growing euro area economies in the first three months of 2015 the annual rate accelerated to 2 5 while full year 2014 growth rate as compared to 2013 when it shrank by 1 2 was 1 4 these are good results but it is worth bearing in mind that everything is relative and that there is still a long hard road to travel gdp levels still remain around 4 5 below the pre crisis level and while the possibly optimistic bank of spain forecasts are for robust growth in the near future 2 8 in 2015 and 2 7 in 2016 even their achievement will mean the pre crisis level will not be attained before 2017 which gives a very concrete and precise meaning to the term lost decade the real debate is about the following decade whether or not that one will be lost too as deflation and secular stagnation steadily take hold in the context of an ageing and declining population see the latest imf report on this and larry summers on secular stagnation here is spain not at risk of becoming japan 2 0 certainly there are many in spain who would deny that possibility among them economy minister luis de guindos who recently told the wall street journal that he expected growth of between 2 5 and 3 for the next two to three years with the trend simply continuing thereafter bank of spain governor luis maria linde would be another he recently told bloomberg reporters that negative interest rates would be a temporary phenomenon which would disappear as the recovery tales hold and that it was much easier to assert there was no deflation risk in spain than it had been some months earlier when he was also saying there was no risk such assertions are hard to either agree with or dispute since no one really knows the future words are easy while economic models simply mindlessly churn out predictions based on past performance the only thing we can be sure at this point is that the future will look less like the past than it ever did so forecasts based on old data have less validity than ever at the same time simple economic theory suggests that as work forces decline economic growth rates will do too still were the most optimistic forecasts to be confirmed the resulting growth rates over a sustained period would clearly turn the country into the euro area s most efficient and fastest growing economy and it is hard to see where the basis for such confidence comes from when spain s economy grew at rates of 3 or more a decade or so ago it was on the back of excessive and unsustainable debt increases and that isn t going to happen again even were it desirable spain s economy may well grow by more than 2 5 this year although with deflation nominal gdp will grow by less but failing something unexpected like grexit it is hard to imagine a more positive growth environment as for when we get to 2016 as they say it depends employment growth is strong as unemployment falls the second area where it is possible to see a strong positive side to spain s recent performance is on the employment front according to the latest labour force survey spain created 434 000 jobs in 2014 to put some flesh on these numbers it should be said that many of the new jobs are part time 40 of new indefinite contracts are p t while many others are temporary and not well paid the economy is increasingly becoming a low value added services one lead by tourism but still spain s economy is once more creating employment and that is good news a similar picture emerges when it comes to unemployment which is now steadily falling back with the seasonally adjusted rate falling to 23 2 in february and the positive news continued in march registered signings fell by 7 17 year on year a similar picture emerges from the data for affiliations to the country s national insurance system which were up 416 000 or 2 3 in 2014 in fact as can be seen in the following chart showing numbers of social insurance affiliates the rate of job creation continues to accelerate and this better employment situation is also confirmed by the fact that the economically active population rose in the last three months of 2014 although it was down over the previous december by 44 000 the participation rate rose from 58 03 in q3 to 58 24 during the last quarter naturally putting all this in perspective the number of unemployed almost 5 5 million remains unacceptably high and the increase in employment needs to be seen in the context of more than 3 million jobs having been lost since the start of the crisis but still things are manifestly improving consumer confidence hits a record high in march household consumption driving recovery as employment has risen and real inflation adjusted wages and pensions have increased since consumer prices have fallen spending has naturally rebounded indeed we seem to be in the midst of a mini consumption boom driven by what is perceived as a short term reduction in prices which look to many shoppers like very welcome discount offers according to the national statisics office retail sales rose in price adjusted terms by 1 in 2014 as compared with 2013 i stress price adjusted since with consumer falling an annual 1 1 in december and 0 2 across the year the actually increase in cash in the till was less perhaps such an increase is not a game changer but after a 30 drop any improvement is welcome however 2015 sales did not start on such a strong footing with retail sales falling for a second month in feb they were down 0 7 vs jan when down 0 4 vs dec still due to the strong autumn surge they were still up 2 6 y o y household consumption which includes a broader range of spending than retail sales including the government subsidized car sales had a very strong 2014 and was up 3 9 it is not clear that this pace can be repeated in 2015 especially if inflation starts to rebound following the euro devaluation construction activity growing again construction activity has also been rising output was up 14 4 year on year in january quite what is driving this isn t clear since with a large stock of unsold houses the demand for more at this point see below must be limited but surely there is activity involved in completing unfinished buildings of which there are more than a few again this is in theory election year so infrastructure spending is probably increasing well again peak to trough was something like 60 so the rebound could have been anticipated ibex on a roll the financial sector has been one of the principal beneficiaries of the spanish recovery thanks largely to the hard work of mario draghi at the ecb many will remember the immortal words of the late emilio botín es un momento fantástico para españa llega dinero de todas partes this is a fantastic moment for spain it is literally raining money from all corners of the globe october 2013 as a result the ibex had a very good 12 months from july 2013 to july 2014 up maybe 35 but in the second half of last year struggled to stay over the 10 000 level qe from the ecb will likely be a positive for the index in 2015 negative bond yields arrive the draghi qe effect has long been making itself felt right across the euro periphery and spain s bond yields are now constantly breaking historic lows the 10 year yield has more than halved over the the last 12 months and is now at 1 39 and falling naturally these lower yields will make government interest payments lower and indeed due to seigniorage repayment will even become zero on those bonds purchased as part of the ecb programme this benefits everyone but beyond this the ibex boom and the increase in bond values which accompanies the drop in yields has made a lot of money for some people even though these people are a small minority of the spanish population indeed they have often been external investors this means on the one hand that the spanish net external debt has risen while on the other those who have suffered most during the crisis feel even more aggrieved that they have been left out of this particular party the podemos effect it s possible every time mariano rajoy opens his mouth to declare victory he probably only ends up alienating yet another group of people who feel they are missing out on the good times certainly this is what the government opinion surveys suggest in march 41 8 of those asked thought the economic situation was bad and 33 8 thought it very bad while only 1 8 replied it was good and 21 6 passable so i think it is reasonable to say that ordinary spanish citizens do not buy the very bullish arguments being offered by the government at this point and this is also being reflected in the opinion polls as most political observers note economic recovery should help the pp but first the pp have to convince a skeptical populous that this recovery is real and that talk about it is not simply another attempt to lead them up the garden path now for the glass half empty part how good is spain s deflation in my opinion deflation is one of the serious problems potentially clouding the economic outlook in spain as i explain in my spain s good deflation post since i have gone through all the arguments in great detail there i won t repeat myself here i would just note that the argument that spain is simply suffering the impact of a negative oil price shock doesn t hold up since as the chart below suggests once you strip out tax impacts and energy spain has been flirting with deflation since the start of 2012 it is also clear that there is no short term purchase postponement effect in fact we can see evidence across countries that as prices fall people buy more this is largely because they do not expect deflation and simply take advantage of what they see as temporary sales offers and discounts to buy as very low to negative inflation extends across time the risk is that people come to expect constant and renewed discounts forcing prices even further down this is the short term self reinforcing component it is also the case that up to now prices have fallen but wages and pensions have not been reduced proportionally if and when this starts happening the impact on consumer confidence may be the opposite of the one we are now seeing in general as long as incomes don t fall the growing debt burden problem isn t operative since debt to income levels don t change it s only as incomes fall and over extended periods of time that this impact starts to make its presence felt is there a recovery in the housing market spanish housing offers us a clear example of something whose price has fallen considerably around 40 since the 2007 peak and whose price continues to fall in the 3 to 5 per annum range yet far from this fall in prices having stimulated demand we are witnessing the opposite effect demand has collapsed and is not recovering significantly see my piece from april 2014 firmly anchored expectations no postponement of purchases the number of new house purchased in december was just over 7 000 that was the lowest monthly level in more than a decade true the number of second hand houses is rising but even the combined total is far from showing a sharp rebound perhaps the most worrying thing about the fact that second hand purchases are improving while new ones aren t is that part of the explanation for this is that properties become reclassified as used 2 years after completion so some of the second hand houses are in fact new but this makes the situation with new houses deeply preoccupying since there are nearly half a million unsold housing units still classified as new see this article on the spanish property website idealista which means they have by and large been built within the last two years according to the construction manufacturers association cepco the number of new housing units which had been neither sold nor let at the end of 2014 stood at 439 617 the housing market is obviously stabilizing but that is not the same thing as returning to real growth especially as far as house prices are concerned there are two reasons for thinking that the recovery will be very weak the first of these is the growing custom among young people to rent rather than buy but the second is even more important spain s population especially in the 25 40 age group is falling and each generation is now smaller than the previous one from an export lead to an imports driven recovery exports went through a soft spot in the middle of 2014 but recovered towards the end of the year price deflated goods exports were up 4 7 in the year to december in comparison with the same period in the previous year deflation in spain export prices were down an annual 1 1 over the same period and the weakening euro are obviously helping tourism is also doing well and income from this activity rose by about 3 4 in the year to january when compared with the previous 12 months nonetheless it is no longer true to speak of spain s recovery as export driven since the growth in domestic consumption has lead to a surge in imports and the goods trade balance has weakened accordingly meaning that when it comes to gdp levels net trade is now a negative factor see below this issue will come back to haunt us since with the population falling the government reducing the fiscal deficit and the private sector not increasing its appetite for credit domestic demand cannot continue to drive the economy indefinitely external balances worsening while external demand had been making a positive contribution to spanish econom...