Unemployment Still Rising

In January, unemployment increased again. Although still depressed, surveys for output and employment show a slight improvement. The pace of activity contraction should slowdown. Spain could even grow again at the end of the year.

In January, unemployment rose by 132,000 persons (+2.7% m/m and +8.3% y/y). The unemployment rate reached 26.0% in Q4 2012. However, the pace of increase has slowed down since November.

The construction sector seems to stabilise as unemployment in this sector grew by only 0.5% m/m. On a year-on-year basis, it recorded its third decline in a row (-4.2% in January).

Rising unemployment weighs on wages. In December, they were down by 6.7% y/y. Combined with high private debt and collapsing real estate prices, households’ disposable income cannot support domestic demand. In addition, the current business climate is not favourable to investment. However, Spanish exports keep increasing, benefiting from competitiveness gains. In Q3 2012, real exports were 12% higher than their pre-crisis record level. Still export-led recovery is less intensive in unskilled jobs, while the bulk of unemployment in Spain comes from the construction sector.

Although PMI indices for output and employment are still very depressed (below the 50-threshold), they have entered an upward trend. This means that the pace of contraction will most likely slowdown in the course of the year, and Spain could even grow again at the end of 2013.

Since the announcement of the OMT programme, Spanish bond yields have declined a lot. From 6.9% on the 24th of July, the 2-year yield now reached 2.5% in January. The simple existence of the OMT has, by itself, reduced the need for Spain to call for EU assistance. Still, if uncertainty has declined, risks remain: much will depend on the ability of the government to meet fiscal targets.

BY Thibault MERCIER

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