News, December 2008

News Theme: The Economy

For the past few years Spain has been hitting headlines for above average growth and very high house price inflation. It appears 'the end is nigh' for the Spanish economic miracle. World economic woes are certainly affecting Spain. On 18th April the cabinet approved a fiscal stimulus of 10 (US) billion Euros this year and another 8 billion in 2009. We offer our view.

Growth has been high in Spain ever since General Franco allowed economic development in the 1960s. In particular, joining the EU was a major boost for the country, with structural funds in particular allowing infrastructure to be brought up to -and in some cases overtake- that available in other EU lands. A later baby boom in Spain meant that there was a plentiful supply of strong young workers until the millennium and since then a major influx of immigrants kept the workforce vigorous. The combination of growing disposable incomes and a growing population has meant that construction has been a major force in overall growth for decades and in addition recent low interest rates, due to Euro membership, meant house prices could rise at apparently no extra cost to those buyers taking large mortgages.

In the 1970s Spanish families reckoned they ate 40% of their (single) income. Today the average younger family spends 80% on the mortgage, with two salaries needed to start balancing the books. The overall figure is 47%. Price warning shots had been made long before the US crisis, but economists claimed 'Spain is different', 'this time is different', etc.. Happily, perhaps in the long term, Spain is not now so different! Even with a still growing population, the number of people with no home, but a disposable income has fallen to almost zero, leaving tens of thousands of new flats, not to mention older housing on offer, with no one to buy.

The last time a crisis of this kind occurred, in the early 1990s, prices did not fall, but simply stagnated for 4 years. This time may be the same, but an IMF report suggests real prices should fall by up to 20%, or at least 4 years of stagnation. Various think tanks have suggested up to a million will lose their jobs. Half of these will be directly in construction. Many, in fact, are already collecting unemployment pay.

The new government, on 18th April 2008 announced a major economic package to jump start a recovery later in the year. Totalling 10,000 million Euros this year and a further 8,000 million next, the headline items are 400€ tax back later in the year, cancellation of wealth tax and free renegotiation of mortgages to extend terms and lower monthly repayments. Other items include more finance for mortgaging subsidised housing for the low paid, additional public works to take on construction workers, tax incentives for rehabilitation of older buildings and fast track VAT returns to companies, as well as more staff in unemployment offices. To help the package, non-residents are invited to invest tax free in government bonds.

The government confirmed these measures during July and in addition, as the recession was already claiming many jobs, announced a one-off package for unemployed immigrants who might wish to return home rather than stay on - BBC report; BBC video report. The Social Security will run at a loss this year for the first time since the turn of the century.

For some really gloomy detail about the construction crisis and its effect on the Spanish and indeed Euro area economy, read The Economist's reports:
The pain in Spain, published 22nd April.
Or one from 17th April.
Counting the Costa, 24th April.
SPECIAL REPORT, 6th November '08 (not that we agree with all they have to say!)

<http://www.economist.com/daily/news/displaystory.cfm?story_id=12831372&fsrc=nwl| 18th December> report on financial stimulus measures.

Why is the Spanish banking system healthier than most at present?

In the 1980s all was not well with the banking system. José María Ruiz Mateos was a wine trader who set up a holding company, Rumasa, including a number of banks, failing to do full audits on the banks and refusing to permit inspection by the Bank of Spain. The state took over the firm in 1983 and sold off the constituent parts, giving rise to all sorts of conspiracy theories, etc.. The Economy Minister at that time, Miguel Boyer, claims the take-over was to prevent a banking crisis of the sort now being experienced world-wide. The cost to the state was over 3.3 billion Euros.

Then, on Christmas Eve, 1993, Mario Conde, president of Banesto, was deposed by the Bank of Spain, due to an accountancy hole of 450 billion pesetas. This was the last straw, ensuring that from that time on the Bank of Spain has required all banks to hold large sums of money set aside for the rainy day.. which has now come. On the other hand, the unquoted Cajas, or regional government owned Savings Banks, are the prime source of mortgage finance in Spain and the Valencian CAM is particularly exposed to unfinished seaside blocks of flats, waiting on the next influx of ex-pats. The following article may help: Financial Times recommends Spanish Lessons! 1st October '08 And compare with Potential problems at Savings Banks on Oct 5th.

How will the downturn affect the Evangelicals? Firstly, many of those with the most tenuous jobs are Evangelicals and Muslims. Latin American, West African or Romanian Evangelicals and North African Muslims are employed widely in construction and many of the Spanish speaking women also work in services, such as waiters and chamber maids. The churches, some of which are completely Romanian, Latin or Nigerian, for example, will be especially hard hit as members lose their jobs. Some, indeed, are among the so-called 'paperless' people, with no ID card, social security or other safety net. They will be hit from the day they are out. Others will have time to recover on unemployment pay. But the income of the churches may also decline.

In addition, although perhaps of another grade of concern, the high Euro is hitting not only the support of Anglo-Saxon christian workers in Spain, whose home churches may be facing similar concerns. Also the new wave of Latin missionaries to Spain is finding their support is worth less every month.

For more information on immigration, see the News Theme on this topic.

For the 'raw figures', see our Statistics page.