Research Dept. News
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Monthly Report, num 285 - November 2005
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Economic situation - Inflation also a problem in Spain
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Alarm in Spain as inflation also shows considerable rise in September because of oil prices.
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Spain also has had its own inflationary scare. The consumer price index (CPI) showed a sharp increase in September which put the year-to-year rate at 3.7%, the highest figure since 2003. The cause of this was the fuel and fuel-oils group which together brought a rise of 22% so far this year. Also contributing to the monthly figure was the performance in some fresh foods and the government decision to raise taxes on alcoholic beverages and tobacco, a measure aimed at obtaining funds to finance the deficit generated by public health.
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This is not merely a temporary situation. Inflation is turning into a headache coming on top of the anxiety caused by the unstoppable foreign deficit. The Ministry of Economy openly admits that the year will end with a CPI very close to 4%, twice the official objective. The blame lies with the per barrel price of oil. If we remove the increase in fuels from the index, we may consider that inflation is holding at a more or less stable rate. In October, the price of crude oil tended to moderate which raises a ray of hope. The Ministry of Industry has requested the oil companies to narrow their business margins and to encourage the use of renewable energy.
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The government, however, has little margin for manoeuvre. In October, the situation in the energy market made it necessary to authorize an increase in gas tariffs of 6% for domestic consumers and 18% for industry. Bottled gas also rose in October for the third time this year. On the other hand, the drought is slowing production of power at hydro-electrical stations and it is necessary to burn more oil to produce the same power levels so that government is studying the matter of raising electrical tariffs for the first time in nine years.
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Higher than expected CPI means automatic rise in pensions and wage increases due to step-up clauses.
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All of this is contributing to increase fears that the rise in energy costs will spread to other prices in the economy. Wage-indexing mechanisms which exist in Spain’s economy are still very strong. The excess in the CPI will automatically bring about a complementary increase in government pensions with a cost estimated at more than one billion euros. In addditon, most collective bargaining agreements contain automatic step-up clauses covering the situation where inflation goes above the official objective so that the effect of oil prices on wages is inevitable.
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Truck-driver strike spreads fuel increase to other goods and services.
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The increase in fuel costs has brought about protests by certain groups which feel directly affected. For some days in October, truck-drivers coming under the largest operator group in the sector stopped their trucks thus having a notable effect on supply to factories and retail outlets. The stoppage was called off following agreements between the truck-drivers and the government, which involved a slight reduction in fuel taxes paid by the sector, as well as other advantages, and agreements between truck-drivers and loader organizations who accepted a rise of 14% in rates. The example spread further afield. Fishermen began a strike aimed at lowering the cost of diesel fuel while members of some farm organizations also carried out demonstrations.
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Negative real interest rates brings continuation of spending spree.
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Higher inflation means lower consumer purchasing power. However, if consumers manage to recover lost purchasing power through the indexing clauses mentioned above, spending pressure could increase the risk of inflation. Furthermore, if monetary conditions do not compensate these pressures through, for example, an increase in interest rates, the situation becomes more complicated. At this time, yields on Spanish government bonds of whatever term stand below the 3.7% inflation rate. Only 30-year bonds are showing a yield of 3.75% in the secondary market. With negative real interest rates, companies and households continue to borrow at very high levels. And they continue to spend. There is no halt to consumption. It seems that the increase in fuel prices is being ignored by car owners given that car sales are moving ahead firmly beating all-time highs.
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National Reform Programme suitable instrument over medium term but fails to solve more immediate problems.
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If we are to go by the 2006 central government budget now under discussion in parliament, government measures will not contribute to cooling off consumer spending or investment. However, at least we should point out the presentation of the National Reform Programme which perhaps has not received the attention it deserves. This is a move which comes under the so-called Lisbon Agenda, a plan for European Union measures aimed at ensuring that the EU does not fall behind the more dynamic world economies. The Programme sets out a broad range of measures to improve income, productive capacity and efficiency. This is surely the way to remedy existing imbalances over the medium and long term. Over the short term, however, it will be necessary for all those involved in the economy to be aware of the times in which they are living so that small individual gains today do not mean widespread losses tomorrow.
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