Thursday, June 30, 2011

Retail Sales and Fiscal Policy in Europe

In May retail sales in Spain fell 6.6% over the year and on a working-day adjusted basis. Retail sales in Spain haven't posted positive annual gains since June 2010. In its own right, this is horrendous.

Marshall Auerback is concerned, as he highlighted in an E-mail exchange:
These declines in retail sales in Spain have been accompanied by double digit declines in credit to households and significant declines in real estate collateral. Spanish home prices fell another 1.8% in the second quarter.

Finally the Spanish central bank has conceded that private consumption for the second quarter in Spain has been “rather weak”. Right now, with the celebration over the Greek parliament kicking the can down the road, signs of economic deterioration in the rest of Europe and especially in Spain do not matter. Someday they will.
My response to this was 'yes, we know that domestic demand it just horrendous'. But there's more: look at this data in a panel and note the deleterious nature of fiscal austerity amid the strong desire to save on the part of Spanish households. Marshall's right, this is 'economic deterioration', plain and simple.

(click to enlarge)
The chart illustrates the path of seasonally-adjusted real retail sales. The Italian and Spanish data are constructed as follows. Spanish real retail sales are released on a working-day but non-seasonally basis. I adjust the data for seasonal factors using the Census X12 ARMA method in Eviews. The Italian retail sales data are converted into a real series using the harmonised CPI, as released by Istat. The German and US data are available directly.

There's not a lot to explain here. As proxied by retail sales, the Spanish domestic consumer is imploding. Fiscal policy is driving retail sales through the ground, literally, amid a high household desire to save (recovering/deleveraging following a collapse in credit markets). The X12 adjustment may have issues - but there's no sampling error that can discredit this clear trend downward.

Spanning the previous six months, real retail sales in Italy and Spain - those countries actively engaged in fiscal tightening - dropped 2.0% and 3.3%, respectively, on a seasonally and working-day adjusted basis. In the US, where the government has yet to succumb, seasonally-adjusted real retail sales are up 0.9% over the same period.

Spanish consumers are essentially being squeezed by fiscal austerity. Notice that real retail sales in Spain appeared to stabilize spanning late 2009 through May 2010. The next leg down perfectly correlates with the outset of austerity in Europe.

The austerity will end eventually the easy way (as the German domestic economy is allowed to expand and inflation overshoot) or the hard way (missing deficit targets and being forced to choose between further deflationary austerity or leaving the Euro area). Randy Wray tells us the outcome.

Rebecca Wilder

1 comment:

  1. Like the last - Wray's take on what will happen 


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