MacroScope

Spain ascendant?

By Mike Peacock
January 16, 2014

Spain appears to be on the road to recovery, if you can call it that with around a quarter of the workforce without a job.

The government says growth hit 0.3 percent in the final quarter of the year, the second quarterly expansion in a row, and may upgrade its forecast for 0.7 percent growth in 2014.

Its borrowing costs have tumbled to four-year lows in a new year bond rally and today Madrid will try to cash in by selling up to 5.5 billion euros of bonds following an above-target sale last week.

Traders expect the sale to go smoothly after Italy sold more than 8 billion euros of bonds on Monday, with funding costs over three years falling to a euro lifetime low.

What is more, French supermarket group Carrefour says sales in Spain returned to growth in the fourth quarter for the first time since 2008.

But all is not well in the regions. Catalonia’s parliament is expected overwhelmingly to agree to send a bill to Madrid seeking a green light for a November referendum on breaking away from Spain. The national parliament will equally decisively vote it down.

Prime Minister Mariano Rajoy says a referendum would be unconstitutional and has vowed to block it. If he does, early elections may be called which could cement separatists in power in one of Spain’s wealthiest regions which accounts for a fifth of its economic output. So the problem will not have gone away although it could possibly be made to do so if some more autonomy was on offer.

European Commission President Jose Manuel Barroso is in Spain to receive an award at a ceremony to be attended by Rajoy and Portuguese premier Pedro Passos Coelho. That could be an early opportunity to respond to the Catalans’ demands.

Britain’s RICS housing survey, out overnight, showed expectations of future house prices rises rose to the strongest level in 14 years last month although headline prices actually slipped a little.

Bank of England Governor Mark Carney predicted yesterday that prices were likely to keep rising robustly until the middle of next year as part of a broader upturn in housing market activity. He again played down fears of a bubble but said his main concern was that lenders ensure borrowers had enough income to service their loans when interest rates rose.

It’s far too early for the Bank of England to shift tack yet although the economy is now growing strongly and there are genuine questions about the housing market overheating. A rate rise this year looks increasingly possible.

Retailers’ Christmas trading statements are also flooding in, showing some positive results from the likes of Dixons, Primark and Ocado.

The Turkish lira has hit a new record low in early trade after Prime Minister Tayyip Erdogan ordered his ambassadors to redouble efforts in “telling the truth” to allies that a graft investigation was a treacherous plot to sabotage Turkey’s international standing. Today’s move probably has more to with strong U.S. data pushing the dollar higher.

Before the annual Davos shindig next week, the World Economic Forum issues its annual global risks report. Last year “Davos Man” continued to worry about the damage the euro zone could wreak although the crisis had clearly passed its peak and extreme weather shot up the worry list.

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