More Signs of Spanish Recovery

It is very easy to establish that Europe’s economy is stuck in a state of deep, solid stagnation. As I have explained recently, you have to look carefully to find any exceptions to that rule. However, those exceptions exist in the form of Greece and Spain. So far neither country has reached a state of real recovery – so far their economies have elevated themselves out of the deepest part of a depression, but their economies have so far only risen to the same state of stagnation that has slowly but steadily spread to the entire continent.

That is not to say Spain and Greece can’t do better. They can. To find out more about their economies I decided to review the value-added side of their economies. For those of you who are not macroeconomic nerds, there are three ways to calculate GDP: the income approach, the expenditure approach and the value added approach. The third is the least commonly used one, mostly because it does not say very much about the two major forms of activity in an economy such as the European: private consumption and government spending. However, value added can tell us a great deal about what industries are flourishing and which ones are doing poorly.

The following four industries represent almost 40 percent of the Greek economy:

VA Greece

Correction: the industry labeled “Tourism etc” should really be “Wholesale trade, tourism etc”.

This is unfortunately not the image of an economy in steady recovery. Manufacturing, which is only responsible for nine percent of the added value in the Greek economy, is definitely in a state of stagnation; if all the talk about an exports renaissance in Europe were true, Greek manufacturing would be surging.

Instead, it is “Wholesale trade, tourism, etc” that is on a clear trajectory to recovery.  Producing 22 percent of the value added, this industry is labor intensive and close to consumers. The sustained improvement in activity is encouraging and has a potential for spreading its upturn to other sectors. First and foremost, it could mean that the young in Greece, whose chances of finding a job – any job – is the worst in the industrialized world, might regain some sort of faith in the future. That would be good for the long-term stability of both the economy and the Greek democracy.

That said, the figure of the Greek economy also shows that the other major industries are still in decline – or at least were in decline through the second quarter of this year. Greece needs a lot more to regain some of its status as an industrialized economy with a future.

Things look a bit different in Spain:

VA Spain

Together, these four industries are responsible for 46 percent of the total value produced in the Spanish economy. The three recovering industries represent 38 percent of total value added, a share big enough to positively affect the rest of the economy.

Adding to the cautious optimism about the Spanish economy is the fact that the growth rate of value added in two of the three recovering industries is actually accelerating. Manufacturing saw accelerating growth in five consecutive quarters:

2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Professional -1.61% -0.80% 0.23% 1.97% 1.49% 2.23%
Wholesale, Tourism etc -2.45% -0.64% 1.07% 1.35% 1.69% 2.83%
Manufacturing -3.33% -0.71% -0.08% 0.76% 1.83% 1.29%
Construction -7.89% -8.46% -7.68% -6.87% -7.71% -3.15%

It deserves to be repeated that in total, the Spanish economy is still very much in recession mode. Austerity is still a real fiscal-policy threat, and the declining euro-zone interest rates pose a threat in terms of renewed financial speculation. However, the sectorial recovery has enough momentum that if it is allowed to continue, it will give the Spanish economy a reasonable shield against moderate negative shocks.

That said, should austerity again come to define fiscal policy at the levels it saw in 2012, there is a substantial risk that the recovering industries will fall back into recession mode. They will then pull the entire economy back down into the hole of depression.

Bottom line: Greece is far from out of its depression, farther than a cursory analysis would show. Spain on the other hand is worth watching closely.