This past Friday with King Juan Carlos, the Spanish economy seems to have faltered again and this has occurred several times in recent months. There are already some who are speaking of reforms, hoping this slip will not be transformed into a fall, one that will leave more than a bruise.

What is happening with the Spanish economy?

The Spanish economy is facing several negative situations at the same time. One of them is linked to what it is happening with the value of the euro. The appreciation of the euro is playing a very dirty trick on Spain. Spain’s current account reached record deficit levels the first quarter of this year, constituting nothing less than 12.1% of the GNP.

How has this happened? The main blow to the Spanish’s current account was the significant deterioration of the trade balance. The level of imports has grown to a rate of 10.5% year-on-year, which represents a rate of growth of more than double that of the level of exports, which has only grown at the rate of 5.1%.

However, one of the factors explaining the increase in the level of imports is the increase in the price of the energy. These higher energy costs generated a rise of inflationary pressures. In fact, the preliminary economic data shows that in the month of May, inflation was sitting at 4.7%, its highest level in more than eleven years.

This situation, created by major inflationary pressures, is occurring in the context of economic deceleration (a situation many are already calling “recession”). In the case of the real estate market, Spain was one of the countries affected the worst in continental Europe. The data shows that in March there was a 38% drop in mortgages over that of March of 2007. The sale of houses also fell a dramatic 38.55%. In April, a large deceleration in construction was observed (as well as a slowing down of other economic activity). This lack of new construction has tested the rest of Spain’s economy by, in effect, spilling over into the rest of its activities.

So it is in this context of frustration, confronting Spaniards, that they find themselves not speaking of “consumer confidence” but rather what I would call the “distrust of consumers”. And this level of “confidence by Spanish consumers” hit its lowest level in fourteen years this April.

What will the Spanish government do in the face of this situation?

For Rodrigo Rato, the former Managing Director of the International Monetary Fund, it is in his expert opinion that Spain is facing a situation requiring that it consider the possibility of undertaking its first program of structural reforms since the country entered the Eurozone. It is these measures that are going to need to be more than Spain would ordinarily have considered since joining that union.

It is true that Spain has had past success with the implementation of reforms, especially when the various sectors of the Spanish economy agreed to the necessity of those measures. According to Rato, Spain also enjoys many benefits of membership in the Eurozone such as: “the advantage of stability, without currency exchange or monetary policies”. In his opinion, situations like the present one adequately demonstrate that the Spanish economy will be difficult to control without the enactment of some sort of monetary policy.

Rato goes on to note that one thing is certain: the government of Spain must react to the current situation quickly before time runs out. Spain must accept the fact that it must effectuate urgent changes, and now. Ex-president Felipe Gonzalez has already predicted there could be a serious energy crisis facing Spain by 2012. As one can see, the situation is complex.

Beyond all the debate that is generated by this situation confronting Spain, we will have to hope that within a month the Cabinet will approve a package of measures that will devise to stabilize the economy. Some of the things that they are contemplating are tax reductions for industry and the elimination of many administrative regulations to increase openness in the marketplace.

The Spanish government promises an ambitious package… Will its aims be realized? We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: The economic figures in Spain have deteriorated. Rato proposes reforms, and hopes that the government approves a package of economic measures soon. Send your comments to me at: paola@latinforme.com

The Reuters/University of Michigan preliminary index of consumer sentiment dropped to 59.5 in May from 62.6 in April. The index is at its lowest level since June 1980. Consumer confidence was at 85.6 as recently as 2007.

“The consumer is getting extremely grumpy,” Brian Bethune, director of financial economics at Global Insight Inc., who had forecast a decline in the confidence index to 59.6, told Bloomberg News. “The economy is flirting with a recession. The only thing keeping it out is this huge amount of pump-priming going on,” including aggressive interest-rate reductions by the U.S. Federal Reserve, the government’s stimulus package and deep discounting by retailers.

Lower-income households are feeling the rising prices at the pump and grocery store most acutely, the survey showed, as such households were the main cause for the index’s fourth consecutive monthly decline.

The confidence index was well below economists’ median expectation of a reading of 62.0, according to a Reuters poll, the news service reported.

“Consumer confidence continued to slip in early May due to surging food and fuel prices,” the Surveys of Consumers statement said according to Reuters. “Record numbers of consumers viewed the economy in recession and saw little hope of recovery anytime soon.”

Consumer spending provides the bulk of U.S. gross domestic product, but a deteriorating housing market coupled with high food and fuel costs are eating away at household discretionary income.

The $117 billion in tax-rebate checks mailed to consumers as part of the Bush administration’s stimulus plan should lead to a rebound in spending in the third quarter, followed by a deceleration by year-end, a Bloomberg poll showed.

Source: Consumer Sentiment at Lowest Level Since Stagflation Era

Silver took its lumps into the first hour of the New York morning session, then traded sideways for the balance of the day, closing at $16.56, down 43 cents. Overnight, silver is trending lower.
(Click here for charts)

A gloomy day for precious metals investors ahead of today’s interest rate announcement by the Federal Reserve, with gold down 2.3 and silver 2.5%.

The usual suspects lined up against gold, with the dollar firming and oil sliding in price, but that probably doesn’t explain the broad-based selloff. The selling resembled March’s washout of weak hands.

But there could be another factor in play. The market is behaving as if the Fed announcement will be gold-negative no matter what. This could indicate a belief that the Fed will stand pat, rather than lower rates yet again.

Or it could signal that the market believes that, if indeed another quarter point is lopped off, that will be the last such cut. Fundamentally, it makes little difference whether interest rates remain steady or drop a little more. In both cases, increased inflation is baked in the cake. Gold cannot long remain depressed.

Jim Sinclair, writing on jsmineset.com, has nailed it, in our opinion, saying that, “The following is what has pressured gold and caused short covering in the dollar/euro: Media has convinced the public that the Fed will go hawkish, first by decelerating the drop in interest rates. The deceleration has been attributed to the Fed having done the right thing.

“Media has convinced the public that the ECB will reduce interest rates now faster than the Fed, thereby boosting the dollar versus the euro. Although the business statistics are negative, the media has held out the carrot that it takes six months for the Fed’s action to materialize in the economy so all will be well in six to nine months.

“The idea that the credit crisis is over is the message that firming financials are communicating as media supports that position. Media has declared gold as DEAD.”

Most of that, Sinclair says, “is raving BS,” and we agree.