Investment Research General Market Conditions March 2011 Economic Fact Book: Spain Spain was hard hit by the financial crisis and the bursting of the housing bubble and now has the EU s highest unemployment rate. Historically Spain has had a high structural unemployment rate, but in 2005 the rate went below the eurozone average for the first time. The decline in unemployment was driven by low interest rates rather than structural reforms. The decline in GDP during the crisis was not strikingly high, but job destruction was severe compared with the rest of EU. The housing market boomed prior to the crisis and credit expanded rapidly. In less than a decade household debt tripled. The Spaniards now refer to this period as cuando pensábamos que éramos ricos when we thought we were rich. But then the housing market bubble punctured. House prices began to decline, demand dropped and as excess supply surged housing starts came to a virtual standstill. It is estimated that about 1.5 million residential units remain unfinished or unsold. The government budget deficit increased sharply to above 10% of GDP in 2009. Government debt is still below the EU average, but is quickly accumulating. Spain has delivered more fiscal tightening in 2010 than promised, but nevertheless government bond spreads have widened during the debt crisis on concerns about the prospects for the housing market and potential losses in the banking sector. The biggest Spanish banks look healthy, but the Cajas (saving banks) have considerable exposure to the real estate market including property developers where the doubtful loans ratio is above 10% and could face substantial losses. Most of the Cajas are participating in mergers aided by the EUR99bn Fund for Orderly Bank Restructuring (FROB). Another challenge is the low productivity growth and high unit labour cost. The inflexible labour market is the first to blame. The labour market is still affected by a high degree of job protection and high dismissal costs, which makes employees reluctant to hire new staff. A large part of the Spanish labour force is specialised in labour intensive sectors e.g. in construction. Many of these jobs were lost during the crisis, which explains why unemployment rose so dramatically compared with the fall in GDP. As a result there has been a considerable improvement in labour productivity during the recession. Outlook for key economic variables Key facts Population: 46m ( 2010). GDP per capita: EUR22,900 (2009) tenth highest in the euro area. Government type: Constitutional monarchy. Bicameral Parliament. King: Juan Carlos I. Majority Coalition led by Partido Socialista Obrero Español (PSOE). Prime Minister: José Luis Rodríguez Zapatero (PSOE). Next elections: April 2012. Central Bank Governor: Miguel Fernández Ordóñez. Economic characteristics Large government deficit, but relatively low public debt. High youth unemployment. Low productivity growth. Housing market burst. Potentially large losses in Cajas (saving banks). Spain GDP (1) CPI (1) Unemployment (2) Govt. Budget (3) Govt. Debt (3) 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 Danske Bank 0.9 1.2 1.4 1.3 21.0 20.5-6.9-5.8 70.0 73.5 IMF 0.7 1.8 1.1 1.3 19.3 18.0 n.a. n.a. 70.2 75.1 OECD 0.9 1.8 0.9 0.3 19.1 17.4-6.3-4.4 n.a. n.a. EU (Commission) 0.7 1.7 1.5 1.4 20.2 19.2-6.4-5.5 69.7 73.0 Sources: OECD, IMF, EU, Danske Markets ETC ETC Senior Economist Frank Øland Hansen +45 4512 8526 franh@danskebank.dk Analyst Anders Møller Jørgensen +45 4512 8498 andjrg@danskebank.dk Assistant Analyst Jonas Jensen +45 4512 8052 jonjens@danskebank.dk Important disclosures and certifications are contained from page 7 of this report.
Key macroeconomic indicators Structural indicators Spain versus the euro area (EMU) When Spain EMU When Spain EMU Sovereign ratings GDP(1) Q4-10 0.2 0.3 GDP per capita (5) 2010 22,946 27,849 S&P Public sector (2) 2010 20.8 50.8 Economic size in EMU (4) 11.9% - Moody's Private cons (2) Q4-10 57.8 58.8 Inflation - HICP (8) Feb-11 3.4 2.4 Fitch AA Aa2 AA+ Investments (2) Q4-10 22.4 18.8 Public budget (2) EC fcst 2011-6.4-4.6 Exports (2) Q4-10 19.0 42.0 Public debt (2) EC fcst 2011 69.7 86.5 Sovereign bond yields C/A (2) - 12M av. Q4-10 -4.5-0.4 Long-term interest rates Jan-11 5.38 4.26 2Y yield (6) 3.32 Unemployment (3) Jan-11 20.4 9.9 Industry sector (2,7) Q4-10 12.3 18.6 10Y yield (6) 5.39 Household loans (2) 2009 86 65 Service sector (2, 7) Q4-10 65.7 n.a. 1: % q/q, 2: Pct of GDP, 3: % of labour force, 4: based on ECB capital key ratios, 5: EUR per capita, 6: %, 3M av, 7: Weighted average of Germany France, Italy and Spain, 8: % y/y Public finances Budget deficit too large With a widening budget gap Sources: Reuters Ecowin and the EU-Commission Spreads have risen due to debt crisis A relatively low but rising debt 2 March 2011
National Account Spanish GDP has been catching up Spain is recovering slowly %-points 4 Output gap 2 0-2 -4-6 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Spain OECD USA Sources: OECD Above average private consumption Investments are still declining Export and trade No prospect of a improving C/A High growth in industrial exports Distribution of export on regions European export is most important EMU Rest of EU China USA Other Monthly Exp., EUR bn 9.2 1.9 0.2 0.5 4.1 Pct of total exp. 57.6 12.2 1.4 3.1 25.7 Pct of GDP 9.5 2.0 0.2 0.5 4.2 Key export countries France Germany Italy Pct of total exp. 19.5 10.3 8.8 Pct of GDP 3.2 1.7 1.4 3 March 2011
Industrial activity indicators Growth in new orders gives hope But no sign of recovery in production Manufacturing capacity poorly utilised Low confidence in construction Leading indicators Manufacturing-PMI on hold And service sector not too optimistic 4 March 2011
Labour market and demographics EUs highest unemployment rate Which benefits productivity Drop in employment flattens out Extremely high youth unemployment Declining population is a challenge Spanish labour is expensive 5 March 2011
Competitiveness indicators Spanish economy fairly competitive Prices grow faster than EMU-average Construction sector Construction important to GDP The house price bubble has burst Households debt tripled in the 00s Housing starts at a standstill 6 March 2011
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