Sun shines on long term Spanish outlook says Argonaut’s Barry Norris

Barry Norris, partner Argonaut Capital Partners and manager of the Ignis Argonaut European Alpha fund says that once the hangover from Spain’s property bubble is over, the prospects for its economy are good.

Last week it was confirmed that Spain had returned to recession, joining Italy, Ireland, Belgium, Portugal, Slovenia and the UK amongst European countries in a “double dip” economic contraction (Greece is excluded from the list as its economy has yet to come out of its first recession). Only the IMF programme countries (Greece, Portugal, Ireland) will likely post worse growth than Spain during 2012, whilst Spain’s unemployment rate – though inflated by generous welfare benefits and a black economy – at 24.4% is the highest in the Euro-zone.

Spain is often referred to as “the Florida of Europe” with its sunny climate attracting millions of northern European visitors, second home owners and retirees. Like Florida, Spain has historically – before the Euro came into existence – experienced boom and bust real estate cycles, (in 1979, 1991, and) most recently in 2007. Between 1998 and 2007, the Spanish population increased from 40 to 50 million; new housing starts increased from 300k to 750k per annum, average house prices doubled and Spain created half of all jobs in the EU (with its unemployment rate falling from 18% to 8%).

With Spanish export activity surprisingly robust, much of today’s economic woes relate to the hangover from this property boom, with construction activity having fallen from a peak of 12.5% to 6.5% of GDP today. Since 2007 house prices have fallen by 27% on average according to the government: 10 to 30% in Madrid or Barcelona but 50 to 70% on the Mediterranean coast where most of the development over the last decade took place.

There are now 5.6m unemployed in Spain. Whilst it is often pointed out that Spanish unemployment amongst 18 to 24 year olds is a staggering 48% at 900k, it is a less well known fact that there are 1.3m foreign workers unemployed (most of who were previously in construction related jobs) or that there are 1.3m unemployed in the populous sunshine region of Andalusia alone. Spain’s economic problems are more regional and industry specific than commonly acknowledged.

This can also be seen in the banking sector. Out of €1,763bn of domestic Spanish loans, it is the €423bn of developer and construction loans which are most problematic, where 21% are currently categorised as non-performing. The same ratio for the €650bn of residential mortgages is just 2.8% (helped also by the mortgage interest costs having halved since 2008). The market shares of the savings banks or Cajas were higher in the coastal areas where much of the risky lending took place. It is amongst these banks that concerns over solvency are most acute.

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