Three external tailwinds turn into headwinds for Spain’s economy - with impeccable timing, all at the same time.
The Spanish economy has been growing at a fair clip since emerging from the deepest depths of recession at the tail-end of 2013. But the good times could soon be over, as the external economic environment becomes a lot less amenable to its needs, writes Don Quijones from Wolf Street.
As the Spanish daily El Mundo recently pointed out, the three main external tail-winds that helped sustain the recovery — the rise of geopolitical risks affecting rival tourist destinations, the ECB’s expansionary monetary policy, and super-low oil prices — are beginning to change direction. And potentially all at the same time.
1. Peak Tourism.
Judging by the explosion of tourism phobia in the last two or three years, Spain’s tourist industry has probably already reached the limits of its growth. Visitor numbers have experienced year-on-year growth for eight consecutive years. The total number of tourists reached 81.8 million last year, almost 30 million more than in 2010.
In large part the boom is a result of the surge in geopolitical risks affecting rival tourist destinations like Turkey, Egypt, Tunisia and, in smaller measure, France, which helped boost the number of foreign visitors to Spain in 2016 to a historic record of 75.3 million people — an 11.8% increase on 2015 — before setting another record in 2017. According to research by UBS, more than half of the growth of Spain’s tourist industry can be attributed to the collapse of tourism in places like Tunisia, Turkey, and Egypt.
Now, there are signs that those markets are beginning to bounce back. A few weeks ago the executive vice-president of industry lobbying group Exceltur, José Luis Zoreda, warned of a notable recovery in demand for these rival countries, in particular Turkey and Egypt. And that can only be bad news for Spanish tourism, which is estimated to have provided as much as 0.4 percentage points to GDP growth in recent years.
If numbers from the last quarter are any indication, a slowdown may have already begun. Dwindling tourist numbers will have knock-on effects on Spain’s recovering (but still-fragile) property market, resulting in lower demand for tourist rental properties and lower overall prices. While that may be welcomed by long-time residents who have been priced out of their local city centers and barrios, it’s not good news for the banks still trying to offload billions of euros of impaired real estate assets, or for the global funds that have piled into Spain’s property market in recent years.
The last few weeks have already seen a number of minor warning signs that the mood in the market could be turning, including:
An 84% collapse in the profits of Hispania, Spain’s biggest real estate investment trust (REIT, or Socimi as they’re called in Spain). In the absence of retail demand for property — most young Spaniards don’t have the funds or job security to buy property — REITs have been a prime source of demand;
Last week’s decision by real estate investment management fund Azora to suspend its long-awaited IPO. This came on the heels of the collapse, in April, of Blackrock’s bid to acquire Hispania, whose funds are managed by Azora.
The resurrection of the 100% mortgage, a high-risk loan instrument that notoriously helped fuel Spain’s madcap property boom. Now, it should probably be taken as a sign of desperation on the part of Spanish lenders.
2. The end of dirt-cheap debt.
Another factor that was essential in Spain’s economic recovery was the overt — and at times covert — support of the European Central Bank (ECB). Draghi’s infamous “whatever it takes” speech, in 2012, was enough to stave off imminent financial collapse for both Italy and Spain. After that, the combination of low-to-zero-to-negative interest rates and the ECB’s ever-expanding asset buying programs enabled countries like Spain, Italy and Portugal — as well as some of their biggest companies — to finance their spending at absurdly low cost.
At the end of last month, Spain’s 10-year risk premium — the differential between the 10-year yield on its government bonds and Germany’s government bonds — reached a multi-year low of 67 basis points. In 2012, when it seemed that Spain’s banking system was on the verge of collapse, the risk premium was almost ten times that amount. The current super-low risk premium is the result of the ECB’s bond buying program. But this program is likely to end this year.
When the ECB ends its binge-buying of sovereign and corporate bonds and begins increasing interest rates, Spain will have to pay a lot more to service its towering pile of public debt, which in 2017 was the equivalent of 98.3% of GDP. And just like that, what was once a massive tailwind (as well as godsend) for the Spanish economy suddenly becomes a gale-force headwind.
3. The surging price of oil.
In less than a year, the price of a barrel of Brent has risen by more than $30. For a country like Spain, which produces no oil or gas of its own, this trend is not its friend. It will exert upward pressure on its import bill as well as filter into broader inflation, in turn stripping Spanish consumers of purchasing power. The Ministry of Economy acknowledged in its latest budget plan that a resurgence in the price of Brent to $73 dollars — it’s currently trading above $79 — could shave up to 0.7% off GDP this year.
Just on their own, each of these evolving trends — in particular, the end of the ECB’s monetary support and the resulting higher borrowing costs — is enough to cause problems for Spain’s economy. But with impeccable timing, they’re now lined up to occur simultaneously, and they have the potential to bring the good times — which have been good to some, not so good to many others — to a shuddering halt.
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