Spain Learnt the Hard Way in the Recession…Now it Could Be Our Turn

If Australia entered into a recession tomorrow, what would you do? Would you sell in case prices collapsed? Or would you try to ride the crisis out?

There is a reason why I ask this. Let me explain.

In 2008 the property bubble collapsed here in Spain. I wrote about this, and the similarities between Spain’s 2008 property market and our current property market, here.

In case you missed it, Spain experienced a property boom between 2002 and 2007. The country saw property values rise six times higher than the average salary during that time.

Getting credit was easy. Easy credit coupled with high immigration combined to inflate property values.

The aftermath of the bubble was…well, brutal.

Are you prepared for an Aussie housing collapse? Find out before it’s too late.

The Aftermath of the Bubble

Credit tightened and unemployment soared. High unemployment meant that salaries dropped and consumption slowed.

Many businesses failed…and, with the credit slowdown, only a handful could access loans to start up new businesses.

While things are somewhat better now, things are nowhere near as good as they were back in 2007.

Here, in southern Spain, summer is pretty much over now.

The tourists are back in their home countries, the kids back in school.

After the hot and frenzied month of August — a time when the population almost triples — September is a welcome respite. The weather cools down and things quieten.

September’s historically an uphill economic battle, so people are slowly getting back to work to deal their recent summer vacations and back to school expenses. And, once that´s done and dusted, Christmas is right around the corner.

For business owners on the other hand, September is high time to take stock of how summer has been. It is also the last chance to get some cashflow before winter hits.

You see, winters can be a long affair here. 

And tourism is down this year.

Brexit has meant that less British nationals are travelling to the Southern country. Plus Spain is competing against cheaper destinations like Turkey and Tunisia.

Tourism is big business in Spain, it accounts for about 16% of the country´s GDP.

With tourism slowing, we could be in for a harsh winter.

The fact that we have been suffering from the aftermath of the crisis for 10 years means that some businesses have gotten into a lot of debt waiting for the economy to boom again. You could argue that some have held on for too long.

What businesses will survive the winter? And, which ones will be gone by summer?

In the last 10 years, I have seen many businesses fail, some are still holding on, but just a handful thriving.

The thing is, much like waiting for a booming market to crash, timing the end of a crisis is also impossible.

You see, back in 2008, many thought the slowdown was only temporary, a short blip in a rising economy. After years of euphoria, nobody realised the hang-over would be this bad, nor that it would last this long.

At first, the expectation was that the crisis would only last a year…so people held on, waiting for things to pick up. Yet 2009 came and went without much change.

‘Experts’ then predicted the crisis would last three years. But things only got worse.

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Unemployment Soared

Struggling businesses closed in masses all over Spain. According to the Spanish newspaper 20 Minutos (20 Minutes), by 2011, 500,000 companies had shut their doors.

In 2013, unemployment soared to over 25%, and youth unemployment to 55%. In 2013, unemployment soared to over 25%, and youth unemployment to 55%. No work and no help from the banks meant no money, no consumption and more business closures.

Three years turned into five…seven…10.

As I say, things have gotten slightly better since, but they are still much worse than 2007.

While official unemployment has dropped to 15%, I suspect the actual number is much higher.  Many have given up looking for jobs, are underemployed or have left the country all together.

Costs of living have increased, and salaries have decreased since.

In Australia, we have had a record 27 years of uninterrupted growth, but they have come at a price.

Asset prices have been running wild. Household debt is at a record highs.

Interest rates have remained low for a long time, but now interest rates around the world are starting to increase, which could make debt more expensive.

There are increasing questions of how long we can sustain this record growth. But to me, more importantly than the question of when a crisis could hit, is how long and how severe it will be.

My point is, predicting how long a crisis will last is an impossible feat. As impossible as predicting when the bust will come.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent thinks the next big crisis is at our door step and Australia could be facing an economic winter. If you want to learn more about Harry’s worrying forecasts, click here.


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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