For a short time in October 2008, customers at the Morryssom Bar in the Eixample were treated to a three-course menú del día for just €1. According to The Daily Telegraph, the ‘Credit Crunch Lunch’ offer was owner Pedro Sausor’s novel attempt at helping his faithful customers face the economic crisis which defined 2008, and continues as a dominant theme today.
The low prices at the Morryssom Bar have now returned to normal, but the economic slump that prompted them remains. After 16 years of credit-fuelled economic growth, Spain’s economy is teetering on the brink of recession. House prices, which tripled in the decade to 2007, are now falling. Unemployment is rising at the fastest rate in more than 15 years and banks have virtually ceased all lending. During the second quarter of 2008, Spain’s Gross Domestic Product (GDP) increased just 1.8 percent from the same period a year earlier, the lowest growth rate in more than a decade. The International Monetary Fund forecast that Spanish GDP would grow just 1.4 percent in 2008, followed by a two-percent decline in 2009, meaning Spain will officially be in recession for the first time since 1993.
The Spanish government’s National Institute of Employment revealed in September 2008 that the unemployment rate had reached 11.3 percent, the highest level since 1997. It estimated that Spain will have more than three million people out of work by the middle of this year.
However, despite all the global economic doom and gloom, Barcelona is in a better position than many areas of Spain to handle it. A diversifed local economy, strong tourist industry and relatively less reliance on construction gives the city a better chance than most in Spain of riding out the storm.
“It’s still too early to know how the crisis will really affect the metropolitan area, but Barcelona is less dependent on sectors that are hurting other parts of Spain,” said Rafael Boix, an economist at the Universitat Autònoma de Barcelona. “Decisive factors will be whether the international markets grow for exports, and whether banks will still be willing to support local businesses with credit.”
Thus far, Spain has also been spared the financial collapses that have prompted governments in the US and UK to bail out major banks, largely due to the structure and regulations surrounding banks here. “The financial market here was extremely regulated until the Eighties, and deregulation has been less intense than in the UK or the US,” said Boix. “The Spanish financial system, and especially savings banks (caixes d’estalvis in Catalan, cajas de ahorros in Castilian) and credit lending cooperatives are relatively stable. This is due to the fact that Spanish banks follow a model of ‘universal banking’ so they don’t focus heavily on one particular investment area such as shares, mortgages, small loans, etc.
“The main potential problem of some large Spanish banks could come from investments in Latin America. In addition, the Bank of Spain imposes quite tight regulations on how savings banks can speculate with funds so it’s difficult for them to play with high-risk investments. In summary, your money should be safer here than in a British bank, for example.”
However, this relative stability does not mean that the Spanish government has not had to intervene in the economy. “The government is extremely worried about the lack of liquidity in the national financial markets since it puts pressure on interest rates and reduces the availability of credit for firms to borrow,” said Boix.
As a result, in October, the Spanish government endorsed a plan to acquire up to €30 billion from Spanish banks and up to €100 billion in guarantees. It is hoped this will encourage small to medium-sized enterprises who are dependent on credit for investments. In addition, the government has had to assure depositors in Spain that savings of up to €100,000 will be guaranteed in case of a major bank collapsing.
Tourism is being watched closely and nervously, but according to the Spanish Tourist Board, visitor numbers continued to increase in 2008. Of note were the number of Scandinavian and US tourists, which increased 15 percent and 25 percent respectively. In the industrial sector, it is a quite different story however. Japanese car maker Nissan recently temporarily closed its factory in Barcelona because of poor demand, particularly for vans and 4x4 models. The company blamed the ‘temporary’ action on the crisis, and on new laws penalising higher carbon dioxide emitting cars. Car sales in general in Spain were in free fall, down 32 percent by November compared to 2007, with Ford, General Motors, Seat and Volkswagen all announcing job cuts in 2008.
It is, however, the slump in the construction industry, and the knock-on effect that it is having on the housing market and the wider economy that will affect Barcelona the most. Antonio Argandoña, professor of Economics at Barcelona’s IESE business school, told Metropolitan that the industry, which has been largely responsible for the huge growth in the Spanish gross domestic product over the last decade, is going to stall for the next five to seven years. That, in turn, will spark unemployment and drag down both investment and consumer spending. What’s more, Spain has come to the end of its European Union subsidised boom as the EU shifts attention towards those economies developing in Eastern Europe.
“I think that the Spanish housing sector will suffer a long recession,” said Argandoña. “In 1992, property price growth was negative for more than one year, and also negative in real terms for around five years. I think the present crisis is bigger than the one in 1992 and will be at least as long as that one, if not longer.”
He does not see only gloom and doom, however. There are reasons to be optimistic in Barcelona. “Of course, a diversified economy will suffer less, and this is the case here. The weight of industry and services to companies is high in this city, and this has a far better future than construction or real estate. Catalunya, and Spain, to a certain extent, are relatively competitive in medium to advanced technology industries and, since most of this is exported, the depreciation of the euro could work in this industry’s favour.”
The economic downturn could also work in the favour of some Barcelona-based service industries, especially customer service centres. Barcelona is already a mecca for customer service and project outsourcing due to its large, young, multi-national workforce and relatively low European wages.
“The credit crunch is not necessarily bad news for everyone, and it is generally accepted to be good news for those involved in IT outsourcing,” said Mark Peter, International Service Centre Manager for IT outsourcing company Computacenter in Barcelona. “The various acquisitions and mergers going on, together with the need to reduce costs mean that as an outsourcer, we’ve seen a significant increase in demand from new customers who have not yet started to consolidate their operations, and an increased urgency from those who have already started. For us, this means an even greater demand for the consultants, project managers and technology experts on whom these optimisation and cost reduction projects rely.”
Despite what are obviously difficult economic times, the message seems to be that residents in Barcelona have more reason to be optimistic than most parts of Spain about their economic future, if they can just get through the present.
Some of the key events in Spain and around the world during the current economic crisis:
The sub-prime mortgage crisis in the US causes the Dow Jones to suffer its biggest fall since 2003.
Citigroup, America’s biggest bank, records the worst trimester in its history.
Indymac, the second biggest mortgage bank in the US, moves under federal control.
US investment bank Lehman Brothers files for bankruptcy. Bank of America signs a US$50 billion rescue bid for Merrill Lynch.
Ireland falls into recession, the first in the Eurozone to do so.
Spain’s Santander Bank buys Bradford and Bingley.
The US Federal Reserve, European Central Bank and Bank of England make a collective cut of their interest rates for the first time ever.
The Dow Jones drops nearly 700 points. The FTSE 100 closes with a 381.7-point fall, wiping £89.5 billion off the value of Britain’s biggest companies. It’s the worst fall since 1987.
European officials meet to try and prevent a continent-wide disaster in the banking sector. They agree on a bail-out scheme similar to the US.
Leaders of 20 countries, including Spain, meet in Washington trying to create a common approach to the crisis.
Zapatero announces an e11 billon package to create jobs and help the economy.
Spanish unemployment figures reach over 2,900,000.
The Bank of England reduces interest rates to two percent, the lowest since 1951.