DESPUÉS DEL CRASH DE LA CONSTRUCCIÓN ¿QUÉ NOS QUEDA?

FINANCIAL TIMES
Spain 2008
After the bust, a time for adjustment
By Leslie Crawford

Published: June 11 2008 05:26 | Last updated: June 11 2008 05:26
Fuente en Financial Times

It is hard to bid farewell to an era, particularly when it has been as dynamic and prosperous as the one drawing to a close in Spain.

The country’s 10-year construction boom is over. It has ended with a crash, rather than a soft landing, because the international capital that funded the house-building spree dried up with the sub-prime mortgage crisis in the US.

A backlog of 1m unsold homes, according to research conducted by the University of Barcelona, will take about two years to clear if, and that is a big if, financial conditions ease up. House sales and mortgage lending are down 40 per cent from a year ago.

Investment in residential housing accounted for 9 per cent of gross domestic product – a much higher proportion than in other parts of Europe – so the knock-on effects of the real estate crash have been severe.

Economic growth slowed to 0.3 per cent in the first quarter of 2008, compared with an average quarterly growth rate of 0.9 per cent in 2007. Consumer spending – another driver of the economy – also weakened, as inflation and higher mortgage bills eroded disposable income.

The intensity of the adjustment has been breathtaking. Spain has gone from being one of the power­houses of Europe to being one of its weakest performers. Two years ago, Spain was creating about one-third of new jobs in Europe. This year, unemployment is rising faster than anywhere else in the EU.

Dominic Bryant, an economist at BNP Paribas, sees the collapse of residential investment lasting several years. “Spain will be flirting with recession during 2008 and 2009,” he predicts.

Funcas – the Spanish savings banks’ foundation – forecasts economic growth of 1.6 per cent in 2008 and 0.4 per cent in 2009.

“The sharp halt in consumption, paralysis in the real estate market, and the international financial crisis mean the rapid decline in economic conditions seen in the first quarter of 2008 will be accentuated in the second quarter,” the foundation says.

It expects unemployment to rise from 9 per cent at present – about 2.3m people – to 12 per cent by 2009.

While some economists – particularly outside Spain – have gone very negative on the country’s prospects, others prefer to see the glass as half full.

Federico Prades, economic adviser to the Association of Spanish Banks, says the current economic slowdown was “inevitable, predictable and desirable”.

“Inevitable,” he explains, “because the growth cycle was in its 14th year and showing signs of exhaustion. Predictable, because of the imbalances in the economy, including a yawning current account deficit of €100bn ($156bn), or 10 per cent of GDP. And desirable, because the end of the construction boom will give way to more sustainable, balanced economic growth.”

Mr Prades believes there are several reasons to feel optimistic about Spain in the medium and longer term. First, public finances and corporate balance sheets are healthy, and therefore in a strong position to withstand external shocks – including record oil prices and the international credit crunch.

Second, much external borrowing has gone to modernise the manufacturing base. Third, the banking system is healthy, thanks to the regulatory prudence of the Bank of Spain, which forbade financial groups to invest in special purpose vehicles unless they were properly capitalised and held on the balance sheet.

Mr Prades hopes a short, sharp shock will allow a stronger, more balanced economy to emerge. A smaller construction sector, lower credit growth and – perhaps – a smaller current account deficit (although that will depend on the price of oil) will all be healthy developments, rather than cause for alarm, he says.

One of the striking things about the current downturn is that it has not been accompanied by bank failures. Another aspect that will stand Spain in good stead is the internationalisation of its economy.

Spain’s top 35 listed companies earned almost half their income abroad last year, according to the Madrid stock exchange.

Mid-sized companies, many family-owned, have also become proficient niche exporters.

The Basque country has developed a successful cluster of high-technology companies that supply the renewable energy industry. Catalonia is trying to create a similar cluster in biotechnology. Valencia has transformed its port into one of the busiest in the Mediterranean, while Zaragoza, which is hosting Expo 2008, the world fair, has promoted itself as a logistics hub on the back of its car manufacturing industry.

These sectors have thrived in spite of – rather than because of – the construction boom, as it took courage to invest in risky manufacturing or exporting ventures when there was easy money to be made in bricks and mortar. These are also the sectors that must thrive if Spain is to return to the 3 to 4 per cent growth rates it enjoyed during the past 10 years.

Spanish businessmen and academics are now calling on the government to bite the bullet on structural reforms.

“Trade unions shouled be persuaded that more flexibility on pay and productivity will help save jobs,” says Jordi Canals, dean of the IESE business school in Barcelona.

“Spain needs to adjust to the end of the boom cycle in two ways: the government has to make public spending more efficient and businesses must be allowed to adjust to the downturn with measures to improve their productivity, which means that wage indexation will have to go,” Mr Canals explains.

“If we cannot do these two things, then I am afraid we will enter the same groove as Italy or France, with years of low growth and falling competitiveness ahead of us,” he says.

The sudden reversal of Spain’s economic fortunes presents an enormous challenge to the Socialist government of José Luis Rodríguez Zapatero, 47, which was re-elected for another four-year term in March.

Mr Zapatero’s problem is how to manage the expectations his government helped create when the economy was booming. During the election campaign this year, for example, Mr Zapatero promised 2m new jobs in the next four years. That target looks difficult to achieve.

The Socialist party also promised to retrain unemployed construction workers, but now that 300,000 of them have lost their jobs, the labour ministry has withdrawn the retraining pledge.

During the years of economic bonanza, the prime minister led Spaniards to believe that Nordic standards of living and social justice were within their reach.

On Mr Zapatero’s watch, a law was approved to raise state benefits for families who look after elderly or handicapped relatives at home. Mothers were showered with “baby cheques” for each newborn infant. Wife beating became a criminal offence, and – during his inauguration speech in April – Mr Zapatero pledged to take his battle against discrimination further by legislating in favour of equal pay for equal work for women.

Mr Zapatero clearly wants to put Spain at the vanguard of social change in Europe.

Too often, however, his bold initiatives have stumbled on poor implementation. Despite the law against wife-beating, domestic violence is on the increase because judges and police do not enforce restrain­ing orders consistently, feminist organisations say.

A 19th century judiciary, in particular, remains a huge drag on society and the economy. The administration of justice in Spain has not entered the computer era: any civil complaint or criminal lawsuit involves mountains of paper files.

Judges clock off at 2pm, and it can take years before cases are heard in court.

A recent strike by court clerks has increased the backlog of unheard cases to 130,000, according to trade unions, and to 50,000 according to the government.

So Mr Zapatero and his finance minister, Pedro Solbes, have their work cut out. It will be far more heavy-going than their first four years, but ultimately, more rewarding, if they manage to put Spain on a more sustainable path of development.
Copyright The Financial Times Limited 2008.