Retail Sales Fall Hard in Spain

Austerity has not made life easy in Spain and its goals for deficit reduction seem to be a moving target that is moving ever farther away. However, Prime Minister Rajoy is dedicated to hitting his targets and at the same time he has been pursuing an aggressive campaign to backstop a still struggling banking sector. Banks have been forced to raise their reserves several times and the new weekend plan to backstop Bankia is yet another attempt by Spain to solve its problems on its own.

While laudable, it is not clear that such a goal is within Spain’s grasp.

The drop in retail sales a nominal decline of 9.8% in April (y-o-y) is the largest decline posted in the history of Spain’s retail sales series. The decline has progressed from a 9% annual rate over 12-months and 6-months to a 17.8% rate of decline over three months and a pace of decline that is at a -28.8% annual rate in Q2 over Q1 with one month’s data in for Q2. The growth rates of real retail sales are simply astonishingly weak and getting worse. The more that retail sales and GDP decline the more that tax revenues will miss their target and the harder it will be for Spain to hit is agreed deficit target of 5.3% for its debt to GDP ratio (down sharply from 8.9% last year). How Spain will hit such a target is beyond me. But at least Spain is still trying and no just going through the motions. But at this point it might not make any difference.

Spain’s own national debt is distressed. Its banks are stressed and its local regions are impacted with too much debt and some of them are distressed too; some are having a hard time funding their own needs.

Spain’s woes come from a property market boom and bust. This is particularly difficult to fix especially since it was not just a boom that came in the context of the economic cycle and the expansion of other sectors, but property was the boom that buoyed the entire economy. When the real estate market has overbuilt it can a long time for an economy to grow back into the property market excesses. This is not a case where simple depreciation of the currency will do the job, although a drop out of the Euro-Area would improve Spanish competitiveness which is lagging and would probably draw funds into Spain to bolster property market made cheaper to foreigners once the new peseta fell in value.

But that is not Spain’s plan. And as the world’s 12th largest economy maybe that is a good thing since Spain leaving the Zone would have huge ripple effects; tsunami effects.

But as much as the political effort is being expended to try to reach the agreed-to targets, it is also pretty clear that Spain fights a losing battle here. The domestic debt problems are simply overwhelming at all levels. The Federal sector is not strong enough to help the regions. The latest plan to bolster Spanish banks employs government bonds to backstop newly troubled Bankia has obvious risks. It is doubling down on a bet already gone bad. Bankia was supposed to be the solution to a group of cajas gone bad. But now the property market woes are making it clear that re-bundling a bad set of banks really does not solve the problem. Does backstopping them with tainted national debt instruments really add much comfort to the situation?

In Spain we see a proud and determined people who are trying hard to do what is right but with resources that are just insufficient for the task. It is unclear when or how this comes apart, but like Greece, and yet for its own and different reasons, Spain is destined for more trouble.

One of the big differences between Spain and Greece is has been the willingness of the people and their political leaders to shoulder their burden and to try to succeed. But Spain seems to be outmatched. Spain needs more help, as it is too resource-limited to save itself. It is not clear how it will play out but there will be more bad times ahead despite its attempt to be independent and to be responsible. It’s all coming too late and at a very bad time for the business cycle. Spain is a much bigger problem than Greece and also has a problem that will be more difficult to fix.