The good news: Spanish Q1 GDP printed -0.3% on expectations of a -0.4% Q/Q decline. Unfortunately this is hardly encouraging for the nearly 25% of the labor force which is unemployed, and for consumers whose purchasing habits imploded following record plunges in retail sales as observed last week. The bad news: Spain now joins at least 10 other Western countries which have (re) entered a recession. Per DB: "Spain will today likely join a growing list of Western Developed world countries in recession. Last week the UK was added to a recession roll call that includes Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia. Debt ladened countries with interest rates close to zero have limited flexibility to fight the business cycle and this impotency will continue for many years." Alas, the abovementioned good news won't last: from Evelyn Hermman, economist at BNP - "The Pace of Spain’s economic contraction may increase in coming quarters as austerity measures bite more sharply." Of course, it is the "good news" that sets the pace each and every day, as the bad news is merely a further catalyst to buy, buy, buy as the ECB will allegedly have no choice but to do just that when the time comes. And something quite surprising from DB's morning comment: "If it were us in charge we would allow more defaults which would speed up the cleansing out of the system thus encouraging a more efficient resource allocation in the economy at an earlier stage." Wait, this is Deustche Bank, with assets which are nearly on par with German GDP, saying this? Wow...
The sorry state of affairs visually:
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More from DB:
More important than today's GDP number will be Spain and Italy’s PMI manufacturing number this Wednesday. These are also likely to be soft given the aggregate flash PMIs from last week. So expect the growth vs austerity debate that has started to simmer to build further. For all our talk about kicking the can down the road in Europe over the last couple of years, its really the US that are can kicking. By keeping Government spending high they are keeping the recessionary forces at bay for now but building up more debt for the future. Its high risk but at least gives them a chance that everything will magically turn out right. Europe is arguably doing the right thing in forcing reforms across the board but its in danger of cutting back too quickly which may actually be counter-productive in the short-term. From the starting point the West had after the financial crisis there is no easy way out. If it were us in charge we would allow more defaults which would speed up the cleansing out of the system thus encouraging a more efficient resource allocation in the economy at an earlier stage. However this could result in a major short-term growth shock which no politician could tolerate. So with our politician's hat on the best strategy seems to be steady but committed structural reforms, gradual austerity but with a free flowing unconditional central bank. Europe isn't there yet and is unlikely to get there in a hurry.
And for central bank watchers:
Whilst on the subject on central banks, the ECB’s policy meeting and Draghi’s press conference performance this Thursday will be important as will another Spanish bond auction on the same day. Auctions themselves are rarely the problem but the price action prior and post event tell us a lot about real demand. For the record we also have French auctions on Monday and Thursday, and a Portuguese one on Wednesday. We will also likely hear more from the rating agencies this week with Moody’s delayed rating actions on European banks. Spanish and Italian banks will be the priority here.
However now that Euroarea April consumer prices declined from 2.7% to 2.6% (despite coming in hotter than expected 2.5%), this may throw a wrench in MS expectations that the ECB will cut rates from 1.00% to 0.75% soon to quite soon.