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Spain and the EU Economic Pain - Global Economics Weekly

Spain and the EU Economic Pain

Global Economics Weekly Brief

The European Central Bank’s (ECB) liquidity operation may have rescued the financial system but it cannot rescue the economy! Following a quiet Q1 the Eurozone is back in choppy waters and Spain is at the centre of the storm. This time concerns are as much about economic growth as they are about debt. Spain’s domestic demand is very weak and austerity will make it worse.

The economy will need to rely more on exports, and it’s not alone in this. Here the news is good and bad. China’s economy is relying more on domestic demand, which should be more supportive of global growth, especially for those countries that actually export to China (the UK could do better in this regard). In contrast, Germany’s continued reliance on exports is failing to offer succour to its weaker neighbours. Add lower expected global trade growth to the mix, and Eurozone tensions are likely to remain high for some time. What is the future of the Euro now?

Spain continues to feel the economic pain (big time). Markets have become sceptical over the ability of the Spanish Government to reduce its budget deficit from 8.5% of GDP in 2011 to 5.3% this year. Even if these cuts are successful, Spain’s national debt is projected to rise 11% this year to almost 80% of GDP. Austerity comes against the backdrop of an unemployment rate of 23% (youth unemployment is close to 50%) and a very stressed property market. The head of the Spanish central bank has warned that the country’s banks may need more capital if the recession deepens (the banks definitely will). Political leaders have been quick to deny that Spain will need a bailout and the ECB has hinted that it could re-launch its bond buying programme to cool Spanish bond markets. Denial means the country will need big help!

UK trade balance heads the wrong way. The UK's deficit on trade in goods and services grew by almost £1bn in February, to £3.4bn, as exports of goods to non-EU countries struggled. On a more positive note, despite Eurozone problems, exports to EU countries grew by close to 2%m/m. But this is unlikely to continue if the Eurozone crisis deepens. Overall, these figures will not come as great news for those backing the export sector to lead the UK's economic recovery. Nor will the fact that the value of goods we have shipped overseas has barely moved over the past three months. More exports are needed now and continually.

China’s economy slowed in Q1 – to (only!) 8.1%y/y. To put this in context, the UK grew by 0.7% y/y in Q4 2012. However, the figures are low by China’s standards. Indeed 8.1%y/y is the lowest rate of growth in almost three years. But at the same time it is not something to be worried about. Although growth rates similar to the 14.2% seen in 2007 are now a thing of the past in China, its economy is almost 50% larger than it was in 2007, with average living standards having also risen around 50%. And the economy enjoyed a big dose of credit in March with bank lending in Q1 as a whole being the highest in two years. This lending will keep investment, which comprises almost 50% of the economy, humming along nicely and significantly eases fears of a hard-landing for China. It’s just what the global economy needs.

China contributes to global rebalancing. China is also making a contribution to the global economy through other means. The size of its current account surplus, or the extent to which exports exceed imports, has been falling in recent years. This is good news. China’s large surpluses are blamed for widening global imbalances (rising US current account deficits mirroring Chinese surpluses) that in turn contributed to the financial crisis. However, China has been sucking in more exports. Its current account surplus fell to around 3% of GDP in 2011 after peaking at 10% in 2007. And trade balance data for the year so far suggests 2012 will see another small current account surplus. Another culprit of global imbalances is Germany. Although its surplus has fallen from around 7.5% to 5%, it needs to do more. If Germany was to emulate China, this may raise the exports of peripheral European economies. This would boost the chances that these struggling economies can grow their way out of debt.

WTO forecasts slower growth in world trade. Germany may be forced into stimulating domestic demand as a means of driving GDP growth if new predictions for trade growth are to be believed. The World Trade Organisation (WTO) estimates world trade will grow by just 3.7% in 2012. This is slower than the 5.0% growth rate in 2011 and well below the long term average of 5.5% seen over the last 20 years. The slowdown is attributed to a loss of momentum in the global economy resulting from the Eurozone debt crisis. Developing countries will drive trade growth, with their exports forecast to grow by 5.6%, compared to just 2.0% for developed economies. Watch this space!"

The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland followed by France who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? What future as the Euro? Watch this space!

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More Economics and Business Inspiration:
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by Colin Thompson ISBN: 978-1-84549-289-2

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Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

Spain and the EU Economic Pain

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