Cinzia Alcidi and Daniel Gros call an 80% decline of construction orders in Spain ‘some’ adjustment… (4 charts)
from Merijn Knibbe
Help. Help! HELP!
According to Cinzia Alcidi and Daniel Gros, on Voxeu
“Spain faces high unemployment and slow growth. This column focuses on an important sources of those problems – its housing market. While some adjustment has occurred since Spain’s housing bubble burst in 2008, house prices and construction need to decrease more to slow Spain’s unsustainable accumulation of foreign debt.”
The authors compare Spain with Ireland where, according to them, adjustment was faster and more ‘succesful’. Are they right that adjustment in Spain was ‘too little to late’? NO. Their idea that Spain only had a ‘bustlet’, especially when compared with Ireland, is ridiculous (see the graphs, all data Eurostat). Yes, prices of new residential buildings declined less as well as less fast than in Ireland – but only because they also increased less as well as less fast as in Ireland. And calling an 80% (EIGHTY PERCENT) decline in orders ‘some adjustment’… be serious. EIGHTY PERCENT! Though production and labor use declined ‘only’ sixty and fifty percent – further decline seems inevitable.
The authors also implicitly state that, as the present 24% unemployment rate in Spain is not enough to lower the wage rate, it has to go up even further… Mind numbing. First, the authors show that they are not aware of ‘downward rigidity of wages’, a very strong empirical fact not only characteristic of modern western labor markets but also of Indian labor markets or historical labor markets in Europe. People, including employers, somehow have difficulties to decrease wages. And Spain does not need lower wages, it needs higher private and public investment in education, technology, training on the job and whatever. And a reduction of the workweek. And five years of 6% real growth. Wages will always be undercut by countries like Romania and Poland and Turkey, which have the ability to devaluate. Only mass emigration and superior products will get Spain out of its present trouble.
Mass emigration? Really? Where to?
I have several critics to Alcidi and Gros paper, and one critic that is extensive to this article. I don’t know which house price indicator is used here and there but there are big differences amosgst different indicators. Then comparing irish and spanish indicators probably made with very different methodologies is pointless. In my opinión de best indicator made in Spain is the ÍMIE made by TINSA (an appraisal company). The “ÍMIE-Capitales y Grandes Ciudades” could somehow compare with S&P Case-Shiller 20 composite.
The main error in Alcidi & Gros is that they talk about “construction” without distinguishing between public construction (mostly infrastructures) which I guess in Spain in relatively much higher than in Ireland for several reasons (geographic, historic…) and private construction, particularly residential construction, which has plummeted during this crisis about 80-90% depending on the region. (If you wish I can provide with data and links in english). That is, by far, the main contributor to rising spanish unemployment.
Since they fail to recognize the larger role of public infrastructure spending in Spain, they also fail to recognize that austerity has reduced such infrastructure spending a lot during the second half of 2011 . So, while they more or less correctly attribute the late rise in unemployment seen in Spainto to “declining construction” they fail to aknowledge that such decline is due to declining public spending. So their bias tries to deny that austerity causes rising unemployment.
Disgusting
I used the Eurostat data for NEW residential buildings. However… from the Dutch data (with which I’m quite familiar) I know that there is a large difference between prices of new buildings including land and costs excluding land. It could well be, considering the difference in price development between Ireland and Spain, that the Irish data include land while the Spanish don’t. This of course influences the comparison – it’s however up to Alcidi and Gros to point such things out.