If you’ve been tempted to buy a little place in Andalucia for your retirement, stay tempted a little longer because prices have further to fall. That’s the advice that property professionals are dispensing to Britons who dream of swapping the daily nine-to-five for the sun, sea and swimming-pool lifestyle.

But sadly, that encouraging piece of news for property buyers is also a sign of something troubling that looms for the rest of the Spanish economy. The days are gone when buying Spanish equities could be seen as a no-brainer. These days, it seems, a pattern of slowing growth, falling demand and a weakening euro have left a lot of question marks over the future prospects for the whole Spanish scene.

No escape from the crisis

Now let us state the obvious. It is hard to be definite about anything at the moment. With the world’s markets still struggling to cope with the worst crisis since the 1980s – perhaps even the 1930s – all bets about geographical growth hotspots are pretty much off. It does seem that Spain’s chances of a quick rebound are not as likely as some people might have you believe.

There was a time, and a very good time it was too, when Spain had all the advantages that Italy would have liked to enjoy but somehow couldn’t. A favourable climate, political stability, plentiful land and low wages gave the country a big edge over high-cost producers like Germany, Sweden or even Italy, all of which started to export production facilities to Spain.

In addition, a big wave of privatisations in the 1980s had opened up an enthusiastic investment culture among ordinary citizens who needed no encouragement to get on board the equity train. Add to that a financial system that had been granted a transitional exemption from some of the stricter EU rules that were driving up costs elsewhere, and you had a recipe for success.

Iberian success story

No wonder, then, that for most of the last 20 years Spanish companies have been everywhere. In Europe, South America and, most recently, in North America, Spain has been moving aggressively into energy, construction, banking and telecommunications businesses. Spanish companies like Telefonica and Grupo Frerovial bought up Britain’s 02 mobile phone operator and UK airport operator BAA.

On the banking front, Banco Santander, Spain’s biggest bank, bought up Abbey a few years ago, and it has just completed its purchase of Alliance & Leicester. You’ll also find that your local friendly branch of the near-defunct Bradford & Bingley sports a Santander logo – giving the Spanish bank a total of 1,286 branches in the UK, and a reach of 24 million customers with savings worth £116 billion.

Indeed, even the weakest Spanish banks have been showing a clean pair of heels to the likes of Lloyds and Barclays this year. Banco Santander sacrificed only 19 per cent of its share price valuation during the first nine months of 2008, and BBV Argentaria only 25 per cent, during a period when Lloyds TSB and Royal Bank of Scotland both lost 50 per cent.

Problems in construction

And there’s one very simple reason for that. Spanish banks don’t have sub-prime debts weighing them down – or not many, anyway. Under Spanish capital adequacy rules, the banks have to put up a huge amount of collateral with the central bank before they’re allowed to lend to borrowers with less-than-perfect credit records. Hardly any of them ever thought it was worthwhile, which is why they have got off so lightly through the credit crunch.

But that doesn’t mean the banks aren’t in danger of a different kind. You will probably have heard that the Spanish property market has already seen price falls of 30 per cent and more in many parts of the country. You might also know that construction work normally accounts for nearly a quarter of the overall value added growth in Spain’s national economy.

From this, you will deduce that Spain’s output is heading for a big decline. House sales were down, in volume terms, by 30 per cent in the year to August, and there are 800,000 unsold dwellings clogging up the system.

So don’t be too misled by unemployment figures which suggest that joblessness has fallen from 22 per cent ten years ago to just 11.5 per cent now. Part of that reduction has been due to a much tougher work regime that forces recalcitrant workers to settle for rock-bottom wages. But another part has been down to the construction sector, which used to employ one worker in six. If we now tell you that the roll call of unemployed building workers in fact rose by 71 per cent in the year to August, you can probably come to your own conclusions about how fast this situation is changing, and where it’s likely to lead.

Less industry, more inflation

Then there is the problem of Spain’s falling industrial output. The country’s production of industrial goods fell by three per cent in the year to August – almost twice as fast as the eurozone average. That wouldn’t be so bad if it were simply that disconsolate home-owners aren’t buying so many leather sofas. The truth, however, is that exports of all sorts are falling off as the markets for its cement, its industrial machinery and its Volkswagen cars contract.

Would it worry you very much if we told you that Spain’s foreign trade in the year to July was in deficit to the tune of US$154 billion? And that, after allowing for capital movements, the current account balance was $165 billion in the red? That’s a whopping ten per cent of Spain’s annual GDP – twice as bad as the US, and three times as bad as Britain.

Finally, there is the inflation problem. With prices currently going up by a projected five per cent this year, compared with only 2.2 per cent in 2007, the last thing Spain needs is a lending regime that relaxes borrowing rates instead of toughening them. But that’s what the European Central Bank seems to have in store for the whole euro club at present. Like Ireland, Spain is caught awkwardly in the middle between big countries that need a cheaper currency and smaller ones that are fighting inflation.

Whither the stock market?

And so to the stock market. What can we say? Well, firstly, that it has been suffering about as much as any other major European market this year. In the first 41 weeks of 2008 the Madrid SE index lost 40 per cent of its value (roughly 32 per cent in sterling terms – see chart below), which was a bit less than the eurozone average but about the same as the FTSE.

Secondly, that it’s not that cheap even now: the average price/earnings ratio among Madrid-listed companies was about eight at the depths of the mid-October slump – about the same as the FTSE. And its dividend yield of 5.1 per cent was actually a bit less than the FTSE, which was yielding 5.8 per cent at the time.

Is this rather high price sustainable, given that so much of the economy is heading downward? At present it is hard to say. The Spanish system has always been attractive to foreign shareholders, but its appeal to US investors has been taking a battering since the dollar started to soar in mid-September and the credit crunch took its latest turn.

The repatriation of dollar investments, especially by American hedge funds who are desperate to realise cash from their assets, is going to dominate the situation for some time to come. And if lower bank rates send the euro down against the pound, then that’s yet another reason for postponing that villa purchase for a bit longer. What is the point of overpaying now for assets that are likely to get cheaper?