The Spanish Disaster

ALrite… some staggering facts :   Spain has a budget surplus…one of the highest in the world in absolute terms… This means a solid financial position…moreover absolute dept is also low… It has a quite negative Balance of trade (one of the highest in absolute terms)… This trade deficit is partially compensated with tourism… in fact tourism is at the same time one cause for this trade deficit…consider this : in Spain 50 million tourists must be provided with goods in addition to the 45 millions inhabitants…This results in a negative, but less, balance of payments…mainly due to acquisition of production factors due to the growth and improvements in the relatively low productivity…as compared to other European nations…

Now Consider this : The economies of Italy, Germany and Portugal has had the weakest growth in recent years…and that might just become the biggest problem in the future for Spain… India, on paper, shows tremendous growth… but I think we owe the Chinese (a faster growin economy) for the acceleration as well as Pakistan(a stagnated poor rot) for slowin us down… Although Spain have in recent years had the fourth highest growth rate among the old 15 EU countries, after Ireland, Luxembourg and Greece. But looking beyond headline GDP numbers and you see great imbalances in the Spanish economy.

As late as in 1998… Spain actually had a small current account surplus… but now they have the largest deficit relative to GDP of all major economies…including Uncle Sam… Labour costs have increased by as much as in say Italy… and household debt has increased from 50% of disposable income in 1996 to 100% today… And Spain’s economy is all the more dangerously dependent on the construction sector… with residential investments making up an incredible 17% of GDP… more than double the level in Bush’s own country…

The low interest rates are of course a result of Spain’s entry into the Euro-zone… where interest rates are set at very low levels reflecting the weak economies of Germany and Italy… But clearly, the current low levels are certainly not sustainable… A 8.9% money supply growth rate and 11.4% private sector credit growth is simply not sustainable for an economic area whose structural growth rate is as weak as that of the Euro-zone…

Meanwhile, the continued ageing of Northern Europe means that the number of old age retirees wishing to settle in Spain’s warmer climate will in fact likely increase… not decrease. All of which implies that demand for housing will remain strong in Spain…

I believe the worst factor is unskilled migration… because they cannot be easily reallocated to other business when building goes down… a problem exactly similar to the city of Mumbai except that Mumbai has got more  population to bear with too…

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