In Europe there is hope, as demonstrated by every hope and optimism index over the past two months going vertical. In Europe there is faith, as demonstrated by yesterday's Draghi conference, in which the likelihood of further rate cuts was officially taken off the table (as expected: any further cuts would send rates negative, wreaking even more havoc with money markets). And in Europe, there is reality, as demonstrated by the following chart showing the index of Spanish Industrial Output, which disappointed broadly in November, down 2.3% sequentially and 7.2% Y/Y, sending it to levels not seen since 1993.
In Spain, the seasonally adjusted numbers show industrial production falling by 2.3% mom in November and 7.2% yoy. While the consensus expected a rebound after the sharp drop recorded in September (-2.8% mom) and flat activity in October, this is another sign that the three point VAT increase in September as well as the ongoing budget tightening continue to weigh on domestic demand. The fall takes the level of production back to level not seen since 1993, wiping out the best part of two decades gains in production. On the details, all industrial sectors reported a fall in output. The main sector particularly hit was capital goods (-4.1% on a 3m/3m basis, -12.8% yoy) while consumer goods and intermediate goods output fell by 2.3% on 3m/3m basis.
Assuming an unchanged reading in December from November, industrial output would drop by 2.6% qoq. Although this negative contribution on GDP growth will be partially offset by a positive contribution from net trade, the Spanish economy is set to post a weak GDP print in Q4. Our Q4 GDP forecast remains at -0.5% qoq but risks are clearly tilted to the downside. In a nutshell, the recession remains severe in Spain and unemployment rate is set to carry on rising from already depressed level (26.2% in October).
Tax increase leading to widespread economic contraction and demand collapse? Someone should tell US economists all about this curious phenomenon.