Risk of deceleration in Spain?
Risk of deceleration in Spain?

The Spanish economy has been growing at a rate of more than 3% since 2015, although risks are beginning to appear that could truncate the good performance of the Spanish economy and begin a slowdown in the coming months.

In the following lines we will see some indicators ahead of the economic cycle that show us some weakening in economic growth. In this case, the change of the Government by the motion of censorship is not valued in the deterioration , that is to say, the data refer until the month of May, so it can not be attributed to the new Government that began its first steps in June and his government action.

The Composite Leading Indicator marks a slowdown in growth in Spain

Among the leading indicators, the Composite Leading Indicator (CLI) stands out. The composite principal indicator system was developed for the first time in the eighties by the OECD, and is designed to give early signs of turning points in economic activity.

This indicator integrates different weighted indicators that are a representative sample of the Spanish economy. And in the case of Spain, the CLI considers the following indicators to form it:

  • Manufacturing: Capacity utilization rate.
  • Construction – Employment: future trend.
  • IPC Services less housing.
  • Stock prices: IGBM general index.
  • Registration of cars.
  • Consumer: Trust indicator

If a turning point occurs in the CLI, it usually indicates a turning point in the business cycle in 6-9 months. However, delivery times are sometimes outside this range and the turning points are not always correctly identified. The CLI for Spain has indicated perfectly, with its inflection points, the acceleration and deceleration of economic activity.

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In the following graph we can observe the evolution of the CLI of Spain. Between the months of September 2017 and January 2018, the CLI was at level 100, which implies being in the long-term average. However, since then, the CLI has been deteriorating in the following months, marking a turning point that we will see if it has a future impact on economic activity.

If we analyze the evolution of Spanish GDP, the growth compared to the same quarter of the previous year is 3%, with a rate one tenth lower compared to the previous quarter due to a lower contribution of domestic demand and higher than external demand

Oil peaks do not benefit Spain

Among the different weaknesses of Spain we can find the evolution of the price of oil. The quotation has risen 70% in the last 12 months, from 45 dollars for the Brent barrel in June 2017 to about 80 dollars in May of this year. Thus, after three years of low prices, crude oil has returned to levels not seen since the end of 2014.

At the beginning of 2018, the oil market was in a situation in which supply persistently surpassed demand and, in this way, an important cushion of oil reserves had accumulated. Even so, the price of Brent had recovered from the declines of 2014 and 2015, and had stabilized at around 55 dollars a barrel.

However, as of June 2017, oil prices started a strong upward trend, driven by both supply and demand. On the supply side, the agreement to reduce production among OPEC members and their allies managed to contain, and even reduce, the world’s oil supply. In addition, the cuts in crude production exceeded what was agreed.

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Given this moderation in supply, it was thought that the United States production. it would reactivate strongly and contain the price of Brent between 50 and 60 dollars. However, in recent quarters the US oil infrastructure has been limited by bottlenecks and has not been able to compensate for OPEC cuts.

The containment of supply has been accompanied, on the demand side, by a vigorous advance in the world economy , which has exceeded expectations and forced a significant increase in growth forecasts.

Spain is a country that has a high energy dependence, so low oil prices translate into a favorable wind for the Spanish economy, and the rise in the prices of this raw material makes the business sector less competitive due to the higher cost of the energy in its cost structure .

The Spanish PMI reflects its worst data in the last 17 months

Another point to consider is the PMI (Purchasing Managers Index) indicator data, which basically measures purchasing expectations of purchasing managers through a survey. The respondents are asked to indicate if the trading conditions for a series of variables have improved, worsened or remained the same compared to the previous month, as well as to provide the reasons for any change.

The latest composite PMI data does not invite optimism. The activity of the Spanish private sector in June is growing at the worst pace in the last 17 months, which stood at 54.8 points and is the only one of the large economies of the Eurozone where companies put a brake on its expansion.

The weakness of the Spanish PMI contrasts with the three most important economies of the Eurozone that improve on their previous readings. New orders increased at a faster pace, with accelerations in Germany, France, Italy and Ireland thanks to a slight improvement in demand.

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From the point of view of the sectors, the PMI of the Spanish services sector fell in June to 55.4 points from the 56.4 in May, which implies an extension to 56 consecutive months of growth in activity. However, the PMI data for the manufacturing sector recorded its worst reading in the last ten months, reaching 53.4 points.

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