Confidence Trick: Spanish consumers

Who are the least pessimistic consumers in Europe? There are no prizes for guessing that the Germans are the most optimistic, but there is a prize for guessing that they are followed in the pessimism/optimism stakes by the Spanish.

The Germany-based market research organisation GfK issues regular surveys of consumer confidence across Europe, and its latest report suggests that, though Spanish consumers have certain reservations, they are far less anxious than their counterparts in countries such as Italy, France and the UK.

Set against the background of the economic woes afflicting Spain, the finding is little short of staggering. It may reflect a confidence "bounce" on the back of the Partido Popular's election victory in November, but even this might be questionable, given that the Rajoy government has done nothing to hint that there will be growth and has done everything to set out a plan for austerity with a Merkozy seal of approval.

The Germans have praised the government for the intent it has shown in introducing labour reforms, so in this respect Rajoy might be moving Spain away from the abyss. The latest Greek bail-out (assuming it does happen) also removes a short-term prospect of the markets finding the next candidate to take down, one of which remains Spain. There is some stability, albeit shaky, and it is this perception of stability that the consumers in the GfK survey seem to be responding to.

It is difficult, however, to be optimistic in believing that the more optimistic consumers of Spain are experiencing anything other than a transitory and passing state of euphoria. Either this or they are seriously deluding themselves. Or they, the participants in the survey, represent a particular group of society and one from the wealthier and more industrialised parts of Spain.

The painful truth is that there is an awful lot more pain to be endured, and for the foreseeable future. The survey participants are realistic enough to express the reservation that they don't anticipate a return to something like growth for a further three years, but there are plenty of commentators and analysts who would question whether even this is likely.

The government's priority of deficit reduction, together with a lack of finance either from governmental sources or the banking sector, creates a double whammy of economic stasis. The only good news is that if there genuinely is as much optimism among Spain's consumers as the GfK survey suggests, then this could drive some growth. Otherwise, Spain would have to look to exports as a means of economic take-off (which includes tourism).

Denied the conventional tool of increasing competitiveness through currency devaluation, the other option to assist exports is to opt for an internal devaluation, which means a reduction in labour costs. Force this policy and all hell could break out, and an export-driven recovery wouldn't necessarily work anyway; there are, after all, many other European countries with considerably lower levels of confidence than Spain is meant to have.

An internal devaluation would be in line with arguments that Spain's labour costs are simply too high, but there would doubtless be many an employee, who might actually be grateful to be an employee, who would argue otherwise. If an export-led recovery failed, where would that leave the country? Without any domestic consumption to initiate growth because everyone has had their wages cut or is on the dole.

The government's labour reforms do actually offer the possibility of internal devaluation, as companies would be enabled to reduce salaries during periods of downturn. And what is the current situation if not a downturn? It is small wonder that the unions are threatening a general strike.

As far as tourism as an element of economic recovery is concerned, the GfK survey has found that the British are way up the list of those with a tendency to seek savings of whatever sort. And this doesn't represent particularly good news for Mallorcan tourism businesses, already reeling from several years of lower spend. Nor does a previous GfK survey which suggests that the traditional fortnight holiday is itself being cut more and more - to ten or seven days.

While tourism as export will continue to be a means of economic salvation, it will also continue to mean tourism that places the lion's share of its money into hands that aren't necessarily Spanish and that whatever is left over is spent only sparingly and handed over to staff with long faces who have found that their wages have been cut.

Spanish consumers may be more optimistic than those in other countries, but you do have to ask - who are they?


Any comments to andrew@thealcudiaguide.com please.

Hot Air: Electricity prices and government policy

The cost of electricity is to rise again. From 1 January it will increase by 9.8%, the largest single hike for 28 years. Since 2006, while cost of living has risen by 12%, the cost of electricity, including the January increase, will have gone up by over 40%.

The increase is due to a raising of the tariff set by central government. It will apply to the majority of consumers who are on the so-called "tarifa de último recurso". The increase has not surprisingly been condemned by consumer organisations and opposition politicians alike. The Partido Popular reckons that the hike will make the price of electricity in Spain one of the highest in Europe. It would be more accurate to say that the price is beginning to reach parity with that in other countries; it will still be cheaper than in the UK, Italy, France or Germany.

The reason for the increase lies primarily with a rise in the cost of electricity futures. These were determined a couple of weeks ago, but the news about the passing on of charges to consumers was largely ignored. A cynical view that has been expressed is that the Spanish Government's declaration of a "state of alert" to do with further possible action by air-traffic controllers was a way of burying the bad news.

The increase is, though, hard to reconcile for different reasons. One is that the government wishes to cut consumers' power bills by 2013 by attacking the tariff deficit between what energy companies charge and the revenue they receive from government. Among other things, this will lead to a reduction in revenue by photovoltaic plants (solar energy) by around 30% over the next three years. This is a blow to the renewables energy industry and is a further issue that is hard to reconcile, as it goes against the government's own policies of clean energy and energy efficiency.

The latter, energy efficiency, is something else that is hard to reconcile, particularly in Mallorca. Consumption of electricity, for heating, is disproportionately high, owing to the inadequacy of much housing stock. Governmental talk of energy efficiency has not been matched by a drive to assist with measures that could significantly reduce consumption.

There is then the effect on the wider economy, and this is something else that is hard to reconcile. The increase can be viewed as being pretty much equivalent to a tax increase. Coming on top of the rise in IVA and the austerity measures, the electricity price rise is likely to make still-born the possibility of economic growth. While the hope is that tourism will steer the Balearics into more benign economic waters in 2011, it will, in all likelihood, disguise the situation in the domestic market as a whole.

The fragility of confidence is reflected in the figures for spending in the Balearics over the Christmas period - down by around 14% per person and 25% per family. This is a substantially greater decline than had been anticipated. The level of Christmas spending may be a special case, but if it is taken as a barometer of activity, then the economic outlook is far gloomier than had been feared. Put 10% on electricity bills, and that outlook just got gloomier still. There has to be a fear that Mallorca and Spain are heading backwards into further recession.

The announcement of the price rise comes at the same time as it has also been announced that a pipeline to bring natural gas to Alcúdia is being planned to come on-stream in 2012. Good news perhaps for the hard-pressed consumer, except that gas is also rising in price, while what the pipeline will mean in the short-term isn't clear, other than possibly supplying the power station, assuming it can be converted from its reliance on coal.

As part of a wider strategy for energy, the arrival of natural gas can only be a positive, but it is a rare positive amidst an energy policy that the Partido Popular is probably right in criticising for its errors. The hot air (and hot air that is about to cool off in many a household) that comes from government regarding energy has been exposed as being this alone. One wonders if the idea of keeping bar and restaurant doors closed in order to seal in set temperatures will be revisited. Heaven help the poor bar-owner if, on top of the smoking ban and, yes, his own increased energy costs, he is forced to install automatic doors that will maintain a summertime temperature of air-conditioned 26 degrees.

This setting of optimum temperatures is, however, an example of a failure to educate as to how different settings can increase or reduce consumption. The whole notion of energy efficiency is not being well handled, and while it isn't necessarily a political maker or breaker, price increases could well be. Zapatero's fate, if it hadn't already been, may well have been settled by the economics of energy.


Any comments to andrew@thealcudiaguide.com please.