24/12/2014 – El Confidencial
The growth profile of the Spanish economy is beginning to shift. The construction sector, which collapsed after the bursting of the credit bubble between 2007 and 2008, may soon see some light. That, at least, is what the Bank of Spain estimated in its Economic Bulletin in December, which firmly states that price adjustments will come to an end in 2014.
In the words of the central bank, the indicators relating to investment in construction “point to the culmination of their price adjustment this year, after six years of recession”. During these years, construction has reduced its weight in GDP at just over 50% compared to data from 2006, when the last peak of the series was reached.
As a result, the real estate market will finally see the light again, to the extent that, according to the Bank of Spain, the decline in housing prices “may have hit rock bottom in 2014, after two consecutive quarters of small increases that would have placed their compound annual growth rate (CAGR) in the third quarter at 3%.” This means that the housing prices have fallen no less than 36% from their peak in the third quarter of 2007.
The Central Bank affirms, as a positive factor, that transfers of houses “have tended to stabilize,” according to official statistics, at an average level of around 30,000 transactions per month in the period of January to October, which is slightly higher than in 2013, “but still at very low levels,” according to the bank.
The Bank of Spain, however, does not think the problem is over just yet, and believes the recovery will be weak. “The outlook for this sector shows signs of a very moderate recovery, in which uncertainties remain,” as shown in its quarterly report on the Spanish economy. The sector’s recovery, in any case, is predicted to have been decisively influenced by developments in disposable income of households. And in particular, it is estimated that since the fourth quarter of this year, household spending has grown in terms of consumption, in which quarterly growth rate could be placed at 0.6%, and also in terms of residential investment, in which “a small increase may be seen, after the positive rate that appeared in the third quarter (for the first time since 2007).”
The greater buoyancy of household spending stems from growth in employment, which may have exerted a favorable effect on disposable income and confidence, as well as improved financial conditions. Interest rates on loans for housing purchases fell 29 basis points between June and October (according to the latest available data), up to 3%, while the cost of consumer credit and loans for other purposes remained virtually unchanged at 7.2%.
Nevertheless, the inflation rate is predicted to remain negative in the coming months, which reveals the weakness of this increased consumption. Moreover, the Bank of Spain reveals that forecasts show inflation to be decreasing, estimated both for this entire year (with an estimated decline in the GDP deflator of 0.4%) and for 2015 (with an estimated increase of 0.4%). That is to say that the deflation has begun in the year 2014.
The growth in consumption is partly associated with the fact that credit institutions “have continued to gradually transfer a decrease in its sources of funding to the cost of bank loans to businesses and families.” The Bank of Spain, in particular, noted “some increase” in new credit operations for the private sector, in which the rate of decline in corporate and household debt is diminishing, more sharply in the case of families.” According to the report, “All this helps to stabilize the financial position of firms and households and is favorable for spending and investment decisions within the private sector.”
Other factors that influence the recomposition of disposable income of households have to do with the depreciation of the exchange rate of the euro as well as the current “significantly reduced” oil prices.
Original article: El Confidencial (by Carlos Sánchez)
Translation by: Aura REE