With impeccable timing, all at the same time.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The Spanish economy has been growing at a fair clip since emerging from the deepest depths of recession at the tail-end of 2013. But the good times could soon be over, as the external economic environment becomes a lot less amenable to its needs. As the Spanish daily El Mundo recently pointed out, the three main external tail-winds that helped sustain the recovery — the rise of geopolitical risks affecting rival tourist destinations, the ECB’s expansionary monetary policy, and super-low oil prices — are beginning to change direction. And potentially all at the same time.
1. Peak Tourism.
Judging by the explosion of tourism phobia in the last two or three years, Spain’s tourist industry has probably already reached the limits of its growth. Visitor numbers have experienced year-on-year growth for eight consecutive years. The total number of tourists reached 81.8 million last year, almost 30 million more than in 2010.
In large part the boom is a result of the surge in geopolitical risks affecting rival tourist destinations like Turkey, Egypt, Tunisia and, in smaller measure, France, which helped boost the number of foreign visitors to Spain in 2016 to a historic record of 75.3 million people — an 11.8% increase on 2015 — before setting another record in 2017. According to research by UBS, more than half of the growth of Spain’s tourist industry can be attributed to the collapse of tourism in places like Tunisia, Turkey, and Egypt.
Now, there are signs that those markets are beginning to bounce back. A few weeks ago the executive vice-president of industry lobbying group Exceltur, José Luis Zoreda, warned of a notable recovery in demand for these rival countries, in particular Turkey and Egypt. And that can only be bad news for Spanish tourism, which is estimated to have provided as much as 0.4 percentage points to GDP growth in recent years.
If numbers from the last quarter are any indication, a slowdown may have already begun. Dwindling tourist numbers will have knock-on effects on Spain’s recovering (but still-fragile) property market, resulting in lower demand for tourist rental properties and lower overall prices. While that may be welcomed by long-time residents who have been priced out of their local city centers and barrios, it’s not good news for the banks still trying to offload billions of euros of impaired real estate assets, or for the global funds that have piled into Spain’s property market in recent years.
The last few weeks have already seen a number of minor warning signs that the mood in the market could be turning, including:
- An 84% collapse in the profits of Hispania, Spain’s biggest real estate investment trust (REIT, or Socimi as they’re called in Spain). In the absence of retail demand for property — most young Spaniards don’t have the funds or job security to buy property — REITs have been a prime source of demand;
- Last week’s decision by real estate investment management fund Azora to suspend its long-awaited IPO. This came on the heels of the collapse, in April, of Blackstone’s bid to acquire Hispania, whose funds are managed by Azora.
- The resurrection of the 100% mortgage, a high-risk loan instrument that notoriously helped fuel Spain’s madcap property boom. Now, it should probably be taken as a sign of desperation on the part of Spanish lenders.
2. The end of dirt-cheap debt.
Another factor that was essential in Spain’s economic recovery was the overt — and at times covert — support of the European Central Bank (ECB). Draghi’s infamous “whatever it takes” speech, in 2012, was enough to stave off imminent financial collapse for both Italy and Spain. After that, the combination of low-to-zero-to-negative interest rates and the ECB’s ever-expanding asset buying programs enabled countries like Spain, Italy and Portugal — as well as some of their biggest companies — to finance their spending at absurdly low cost.
At the end of last month, Spain’s 10-year risk premium — the differential between the 10-year yield on its government bonds and Germany’s government bonds — reached a multi-year low of 67 basis points. In 2012, when it seemed that Spain’s banking system was on the verge of collapse, the risk premium was almost ten times that amount. The current super-low risk premium is the result of the ECB’s bond buying program. But this program is likely to end this year.
When the ECB ends its binge-buying of sovereign and corporate bonds and begins increasing interest rates, Spain will have to pay a lot more to service its towering pile of public debt, which in 2017 was the equivalent of 98.3% of GDP. And just like that, what was once a massive tailwind (as well as godsend) for the Spanish economy suddenly becomes a gale-force headwind.
3. The surging price of oil.
In less than a year, the price of a barrel of Brent has risen by more than $30. For a country like Spain, which produces no oil or gas of its own, this trend is not its friend. It will exert upward pressure on its import bill as well as filter into broader inflation, in turn stripping Spanish consumers of purchasing power. The Ministry of Economy acknowledged in its latest budget plan that a resurgence in the price of Brent to $73 dollars — it’s currently trading above $79 — could shave up to 0.7% off GDP this year.
Just on their own, each of these evolving trends — in particular, the end of the ECB’s monetary support and the resulting higher borrowing costs — is enough to cause problems for Spain’s economy. But with impeccable timing, they’re now lined up to occur simultaneously, and they have the potential to bring the good times — which have been good to some, not so good to many others — to a shuddering halt. By Don Quijones.
The trend in its European markets is not Airbnb’s friend. Read… Airbnb Turns to Brussels for Help as Anti-Tourist Backlash Intensifies in Europe
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Almost the exact same things is happening in Italy, huge debt, decrease in tourism, the same kind of weak as glass banks, rising fuel costs and so on. At this point I would flip a coint to decide who will crash first, because they are quite tied up…
Nobody goes to Italy anymore, it’s too crowded.
Don’t forget the exposure of major Spanish corporations and banks to for example Mexico and other interesting countries. Some of these Spanish entities have grown quite dependent on the profits generated overseas and now those markets are facing quite some turmoil on their own with the prospect of failing profits for the Spanish companies operating over there.
Hi DQ, great article. Are the Spanish banks now in a better position to withstand another recession? Different scenario now from 2008 with a lot of banks merged into the bigger banks.
Personally I believe the seriousness of the tourism bubble in Europe, especially in countries like Italy and Spain, has been much undervalued.
Besides the huge social tensions it causes (residents rightly feel they are being sacrificed for a fistful of dollars), we are now discovering that, horror and shock, mass tourism is not such big dollars as touted by the sycophantic press. In short growing numbers of tourists do not translate in proportionally bigger profits, even when costs such as cleaning up their bodily fluids from the streets are passed on to the ever suffering taxpayer.
These social tensions will blow up, especially if elected officials keep on doing absolutely nothing about it. What the citizens of Florence, Barcelona, Palma and Venice have to suffer through is truly astonishing.
Which leads me to another, more controversial topic: part of the reason places like Barcelona are so popular is because of the non-enforcement of ordnances.
I’ve seen plenty of 14-15 year old, usually from Northern European countries, getting blind drunk. In their own countries the bartender or shop assistant would tell them to beat it the moment they cannot produce a valid ID. Why? Because it would be on their heads if caught. If these teens wanted to get drunk at home they’d have to pay somebody else to buy them a crate of beer and find a place where not to get caught.
The same laws, often with stiffer penalties, exist in Greece, Italy and Spain but enforcement is spotty to say the least.
As with things such as RV parking, don’t think this happens by chance.
Finally there are the big enablers of mass tourism: low-cost airlines.
Forget the big names such as Ryanair, Easy and Wizz or the subsidiaries such as JOON (Air France) and Eurowings (Lufthansa). Most of them are mini-Tesla’s: cash burning machines able to fund their operations thanks to the desperate demand for any tangible form of yield.
See how Norwegian has been able to order 110 Boeing 737 MAX-8. These babies cost US $117 million a piece (official 2018 Boeing pricing), excluding support, and Norwegian has had not just numerous close calls with the law (see their cavalier attitude towards work permits for their Thai cabin crews) but has been singled out more than once as a company “with very shaky financial foundations”.
There are dozens of Norwegian’s scattered throughout Europe, often flying 737 Classic’s, all trying to get a piece of action in carrying tourists from Northern Europe to Spain, Greece and other popular destinations.
With raising interest rates the herd is bound to be thinned.
Fuel costs will most likely add some extra pressure as these companies try to outbid each other and the big fish in the pond, thus flying at cost or at loss just to stay in business and hope for a reprieve that won’t come.
Welcome to normalization.
You’re spot on about the quality of tourism generally vacationing in Spain. Costa Del Sol, Canary Islands, Costa Brava, host some real cesspits where drinking and debauchery rule. How local people live in those places, I don’t know.
I love Spain as a country to visit but I avoid visiting places like Benidorm or Santa Ponsa. I prefer to stay in mainland Spain and I tend to drive to places like Salamanca, Segovia, Palermo, San Sebastian etc. There are literally thousands of places across Spain where sustainable tourism without the scummy behaviour is flourishing.
Spain, like a lot of other countries, has never actually recovered from the fall out from the 2008 crisis. Like my own country Ireland, the day of reckoning is not far away.
By all means crack down on drunks of any nationality.
By all means restrict the number of cruise ships, raise dock fees etc. etc.
That is called ‘tuning’ tourism.
But the fact is that tourism is 10.3 percent of the Greek economy. There are no other jobs for those people. Cut tourism in half and the economy collapses. (By local standards: by our standards it’s already collapsed)
This rant, which is ostensibly on behalf of the ‘little guy’ is actually on behalf of the privileged, property owning class in Barcelona etc.
Ask the owners and employees of the largely family- owned tavernas etc, how they feel. Unlike North America, the hospitality industry is not dominated by chains.
Or ask the working poor of Egypt how they fared during the collapse of tourism, now slowly returning ( you can’t move the Pyramids)
In some cases it will have been a death sentence…there is no Medicare.
They buried kids because there were no tourists.
When you read someone espousing their ideals, especially someone who by being able to comment is probably not worried about their next meal, ask yourself: who pays for this ideal?
Excellent article. than you…
Tourism … first you have to get there, then you have to put up with the tourists, then you have to get home … in between you miss your stuff.
It’s an old-age symptom.
Google Earth Virtual Reality, along with my memories of the airports, airplane rides (six foot three) and thieving car rental companies is good enough for me now that arthritis has set in.