Export outlook: Spain’s financial woes hurting British exports
Why the Eurozone’s fourth largest economy is inextricably linked to the UK’s export-led recovery
Once again, all eyes are on Europe. Greece is once again dominating headlines, but Spain, the Eurozone’s fourth largest economy has a huge impact on the UK and events unfolding are leaving UK businesses wondering what might happen to their export income.
The UK’s eighth largest export market is Spain, with exports worth £8bn in 2011. This equates to more British exports than those that went to China and India combined.
Spain is in economic trouble – that is unquestionable. Like the UK, it is technically in recession. However, the Spanish story goes deeper. Unemployment is at 24.4%, GDP is shrinking fast, public consumption is contracting, output is falling and King Juan Carlos is in political hot water for attending a flamboyant elephant hunt in Botswana.
All of this, (okay, perhaps not King Juan Carlos) has pushed Spanish borrowing costs into dangerous territory. 10 year Spanish bond yields are now trading above 6% on. This is hugely significant as 6% is the yield level that triggered massive bailouts for both Ireland and Greece.
But why is Spanish economic woe such an issue for the rest of Europe? Spain’s government debt as a percentage of GDP has been low by European standards. But it has also been growing fast. Spanish banks have loaned close to …15bn to ‘doubtful debtors’. This equates to 13% of GDP, enough to send Spain’s debt to GDP ratio soaring higher.
This week we have seen the part nationalisation of Bankia, Spain’s third largest bank, in an attempt to soften the blow of all this bad debt. Ultimately though the money will still need to come from somewhere and debt will rise.
The Spanish marketplace is of particular interest to UK exporters. However, Spanish imports have fallen considerably since 2010 as a result of worsening economic conditions. As more and more Spanish businesses struggle, demand for overseas goods is depleted.
This in itself is concerning enough for UK exporters. However, the potential impact that a Spanish collapse would have on the Euro is even more alarming.
The Euro is currently trading at three and a half year lows against the Pound. This is largely a result of the Spanish threat. Should bond yields continue to rise and a bailout become necessary – the Euro would find itself in even hotter water.
This would mean that British goods became even more expensive to Spanish and other European consumers alike. This would drive down demand and seriously hamper Britain’s export-led recovery. New export orders for the UK last month were very concerning. The last thing that British business needs is for this to worsen.
Spain is working hard to implement austerity measures that have been – shall we say – suggested by the wider European financial community. The question is; is austerity the answer? If not, how can Spain get out of the trouble it is in?
The outcome is still uncertain. One thing is for sure though, if Spain goes pop then – for the time being at least – so does Britain’s export-led recovery.
Torrie Callander is a corporate dealer, and Dan Harden is a senior commercial dealer, both at Global Reach Partners