Spanish Retail Slump Keeps Growth Hope Pinned on Exports
Spanish officials predicting an end in the next quarter to the worst recession in the country’s democratic history are pinning that hope on its export recovery as a consumer slump shows little sign of abating.
With record unemployment weighing on domestic demand, supermarket chain Eroski sought to kickstart sales last week by cutting prices of 2,000 branded products from olive oil to diapers in more than a third of its 1,500 stores. Such tactics show the pain retailers are willing to endure to revive spending in an economic downturn that started in 2008.
Economy Minister Luis de Guindos last week forecast the economy to resume expansion in the three months starting July 1. Reports this week may underline how dependent that view is on exports, with economists predicting retail sales data to show a 35th month of annual declines in May, and current account statistics which may confirm a boom in overseas sales.
“Exports are vital to generate growth in the short term and make the Spanish economy less dependent on domestic demand and real estate in the longer term,” said Miguel Cardoso Lecourtois, chief economist for Spain at Banco Bilbao Vizcaya Argentaria SA (BBVA) in Madrid. “The best we can expect from domestic demand is that it stops eroding growth next year as neither the job market nor the public sector are in a position to help spending.”
European stocks rallied from a six-month low and U.S. equity-index futures gained before reports that may add to evidence of America’s economic recovery. Bonds rose and metals rebounded. The Stoxx Europe 600 Index climbed 1.3 percent to 279.28 at 2:10 p.m. in Paris, while Standard & Poor’s 500 Index futures added 0.8 percent.
Spanish exports rose to a record last year, while the country in March posted its first trade surplus since at least 1971. April’s current account data will be released on June 28.
On the domestic front, consumers are eating into savings as unemployment rises. Households’ income from wages fell 8.5 percent in the fourth quarter of 2012 from a year earlier after a labor-rules overhaul helped companies to cut payrolls. Producer prices jumped in May on energy, rising 0.8 percent from a year ago after a drop of 0.6 percent in April, Spain’s National Statistics Institute said today. Inflation will quicken to 2 percent in June, according to the median of 13 estimates in a Bloomberg News survey.
The economy is also under pressure from public-spending cuts as the government tries to narrow the European Union’s widest budget deficit.
“Unemployment hasn’t peaked and spending cuts and higher taxes will continue to have a deep negative impact on consumption,” said Christian Schulz, an economist at Berenberg Bank in London. “For the recession to end, an investment rebound must join export growth.”
Spanish stores are resorting to permanent discounts as consumers pull back on spending. In March, El Corte Ingles SA, Europe’s largest department-store chain, added a 5 percent reduction on daily consumption goods to the 20 percent markdown introduced last year.
Eroski, the chain based in Ellorrio, northern Spain, says offers unveiled at the onset of the crisis in 2008 aren’t enough anymore. “Disposable income has been hit and we need to respond to consumers’ greater sensitivity to prices,” said Oskar Gonzalez Uriarte, a spokesman for Eroski, said in an interview.
Inditex SA (ITX), the world’s biggest clothing retailer, this month reported quarterly income growth that was the slowest in four years. The Spanish owner of the Zara chain still said profit margins should stabilize for the rest of the year after narrowing in the quarter through March.
The Washington-based International Monetary Fund called this month for “significant further wage moderation” in Spain as part of a program to increase hiring. Unemployment is at a record 27 percent, more than twice the euro-region average.
“Domestic demand will remain constrained in Spain for an indefinite future,” James Daniel, the head of the IMF’s Spain mission, told reporters in Madrid last week. “The question is to make what demand there is as growth friendly and as job-friendly as possible.”
The fund also said Prime Minister Mariano Rajoy should steer clear of budget cuts that may curb growth, recommending a broader base for indirect taxes to collect more revenue without increasing rates.
At the end of the week, Spain will publish the central government’s budget balance for the five months through May, which will highlight the challenge facing Rajoy. While EU finance ministers have relaxed the nation’s deficit target for 2013, overspending in the first four months of the year amounted to about 2.2 percent of output.
The yield on Spain’s 10-year benchmark bonds was at 5.08 percent at 2:13 p.m. in Madrid. It rose above 5 percent yesterday for the first time since April. Euro-area bonds fell after the 27 European Union’s finance ministers last week failed to agree on assigning losses at failing banks in the context of the European banking union. That still compares with a euro-era high of 7.75 percent in July 2012.
“It is fundamental to transmit the message that the banking union will comply with its calendar,” Spain’s Economy Minister Luis de Guindos said today in Madrid. Guindos said he is “convinced” European Finance Ministers can iron out “technical details” at a meeting tomorrow prior to EU leaders’ summit in Brussels this week.
Public debt rose 19 percent in the first quarter from a year earlier, amounting to 88.2 percent of gross domestic product. The European Commission forecasts it will exceed the euro-area average for the first time in the currency’s history in 2014 year after last year’s bank bailout.
Elsewhere today, Hong Kong exports in May fell 1 percent from a year ago, compared with a median estimate of a 3.4 percent gain in a survey of 11 economists. In France, business confidence rose in June, climbing to 93 from 92. The U.S. will publish data on durable-goods orders, home prices and new-home sales.
The Bank of Spain last week said the banking crisis isn’t over even as lenders can manage with the 41 billion euros ($54 billion) they’ve received.
Bad loans amounted to 10.9 percent of the total in April and lending is falling at an annual rate of more than 12 percent. Rajoy has called on the European Central Bank to unveil plans to boost credit for small- and medium-sized enterprises, while the Bank of Spain has suggested using European funds to share lending risks.
“The Spanish economy is among the largest in the euro region,” said BBVA’s Cardoso. “Its recovery is necessary to contribute to growth as well as improve prospects for unemployment in the whole of Europe.”
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