EYE ON EUROPE: THE PAIN IN SPAIN

According to data released today by the NSI, Spain’s Industrial Production fell by a record 19.6% year-over-year in December (seasonally adjusted), following a 15.3% contraction in production at Spanish factories, refineries and mines in November.

The production breakout for December was: Durable consumer goods -31.40%, Non-durable consumer goods -7.30%, Consumer Goods (aggregate) -10.80%, Capital goods -33.60%, Intermediate Goods -33.60%, Energy -3.40%

On 1/23 we wrote an article entitled “Spanish Nightmare” in which we reported on Spain’s Q4 unemployment number of 13.9% and rehearsed the implications of the government’s expected 16% unemployment for 2009, which some view as conservative, including a think tank at Spain’s ESADE business school which has projected 20%. As we noted in that post as well, the rising unemployment falls disproportionately upon the youngest components of the working population.

One of the prime drivers of employment over the boom period (and, by extension, one of the prime drivers of immigration) was the residential construction sector. Now many of the people employed in construction during the boom are literally out on the streets. The real estate collapse is costing more than jobs, however: according to data from the Bank of Spain, real-estate and building companies, which make up almost half of domestic corporate borrowing, now owe Spain’s banks some €315 billion and €156 Billion respectively. A separate report shows that the number of Spanish companies starting bankruptcy proceedings in Q4 rose to 960 from 260 a year earlier. Unlike their European neighbors who engaged in trading exotic derivatives linked to US sub-prime mortgages, the Spanish bankers were able to create toxic credit waste without any outside help.

The Eurozone “imbalances” among countries are now clearly showing face. We’ve written on the divergence of bond yields in the Euro area in the past to highlight this issue, now with the European Commission officially projecting Spain’s economy to continue to contract this year and next the cat is largely out of the bag.

Eurozone Q4 GDP will be announced on Feb 13, with consensus expectations currently hovering at -5%. We will continue to follow the diverging rates of economic contraction between EU components as countries like Spain face more profound obstacles to recovery and present a challenge to EU unity.

Matthew Hedrick
Analyst

Andrew Barber
Director

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