Is Spain experiencing ‘good’ deflation?

Spain’s domestic economy is booming, or so the story goes, and in no small part this boom comes thanks to the arrival of what is being termed the “good kind of deflation”, the sort everyone would like to have, a world where prices fall, real incomes rise, jobs are created, and everyone gets to live happily ever after. Let’s not worry that in the process the boom is steadily transforming an export-led recovery into a domestic consumption – or import-driven – one.

“Deflation is like cholesterol”, Economy Minister Luis De Guindos told CNBC at the WEF in Davos, “There are two kinds… The bad one and the good one. In Spain, you know, we have the good kind,” So appealing was the story he told, I’m surprised many of those in his audience didn’t immediately get on a plane to visit the country to try to discover what the secret was. After all, sounds like the next best thing to a free lunch. Wouldn’t anyone want some of that?

Or again, we have Bloomberg’s Maria Tadeo, who temptingly informed her readers last week that “Madrid is ready to party again”. “A strengthening economy and a pickup in consumer spending,” she said, “are energizing nightlife in the Spanish capital after a perfect storm of record unemployment, tax increases and a smoking ban put more than 400 venues out of business since 2008.”

“Madrid is a great place to be,” said Javier Bordas, owner of Opium, which he plans to open seven days a week. “You’ve got the football players, celebrities, and people love to party. We’re optimistic.”

It makes you wonder why on earth support for the radical Podemos party is surging at the polls. Surely, there must be a catch here somewhere?

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Author: Edward Hugh is a macro economist, who specializes in growth and productivity theory, demographic processes and their impact on macro performance, and the underlying dynamics of migration flows.

Image: People walk past the Bank of Spain in central Madrid. REUTERS/Sergio Perez