Research Dept. News
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Monthly Report, num 284 - October 2005
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Economic situation - Spain’s economy
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Spain’s economy: growth continuing
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Drive in domestic demand in Spain’s economy shows no decrease with growth for 2005 apparently assured at rates close to 3.5%.
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The good state of the Spanish stock market is in line with the trend in economic activity indicators. In the IMF report mentioned earlier, Spain is one of the few developed countries for which growth forecasts have been raised compared with previous forecasts in April, along with Canada. Consumption and capital equipment investment remain very strong with respective growth of 5% and 10% in the second quarter of 2005, according to the National Institute of Statistics. Construction is also showing strong with a rise of a 5.7%. In the macroeconomic table, we see only one negative note in the poor growth of industry (0.7%) brought about by direct competition from the emerging countries, whereas Spain’s traditional markets in continental Europe remain slack.
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On the other hand, foreign deficit even goes above that for United States measured as percentage of gross domestic product.
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As a result, growth of Spain’s economy in 2005 may be considered assured at rates close to 3.5% for the year as a whole. Not everything, however, looks so good. It is also clear that the deficit in the balance of payments will reach an all-time high even going above that for the United States as a percentage of the gross domestic product. The sharp drive in domestic demand in terms of imports, combined with the lack of strength in Spain’s export markets and the poor competitive situation of foreign sales constitutes one of the weakest elements in the economy.
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Prices remain contained despite rise in oil prices but energy dependence of Spain’s economy raises risk of high inflation in present context.
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On the other hand, the sharp drive in domestic demand has not so far shifted to consumer prices. The all-time high levels for petrol and diesel fuel have not spread to other goods and services. Transportation companies, bus operators and taxi drivers have been greatly concerned about the increase in fuel costs which affect them directly but, for the moment, the non-energy component in the consumer price index has tended to drop.
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Will this continue much longer? Probably not. Spain’s economy is one excessively dependent on oil and is not very efficient in energy terms. In recent years there has been a lack of measures necessary to reduce this dependence and Spain has followed a path opposite to other developed countries. The most recent figures from the International Energy Agency show that energy consumption per production unit in Spain in 2003 was nothing less than above that for the United States. In a stage of high energy prices, the penalty for this could be increased inflation risk.
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Another way to deal with the foreign imbalance and prevent inflationary risk would be to somewhat halt the drive in domestic demand through tax policy (we no longer have monetary or exchange rate policy available). This is not going to happen. The Budget for 2006, presented by Minister of Economy Pedro Solbes at the end of September, is an expansionist one. It is true that it shows a slight surplus but spending by the central government will go well above nominal growth of the gross domestic product while revenues are to grow through the expected increase in economic activity and increases in Social Security contributions and some taxes. There remain structural reforms, many of which have already been set out in the package presented in February. It would be desirable to see their application speeded up in order to maintain the current economic drive, putting its weaker points in better shape before these take us to an undesirable «rough landing».
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