Research Dept. News
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Monthly Report, num 292 - June 2006
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Overall summary - Spain’s economy: high growth has its price
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Doubts persist about future course of German, French and Italian economies, the three «big boys» of Euro Area…
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Growth forecasts for Spain in 2006 are also favourable and run within a narrow margin between 3.1% and 3.3%. Because of its size and strength, Spain’s economy now indeed constitutes a pillar of recovery in the Euro Area. The forecast would be excellent if it were not for the persistence or worsening of foreign and inflationary imbalances.
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…while Spain’s economy runs full-steam-ahead at 3.5% with no substantial changes over last year’s trends.
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As the Bank of Spain had indicated, GDP growth in the first quarter stood at 3.5%, according to the early estimates from the National Institute of Statistics. This rate was the same as that recorded in the second half of last year. Stability is therefore the characteristic note of the figures for national accounting in recent quarters. And not only in terms of growth. What also is a constant is the contribution of national demand to growth (5 percentage points) and that of foreign demand, which draws off 1.5 points from the growth rate of the gross domestic product.
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Household consumption gradually moderating while general government enjoying excellent financial situation.
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By components at a broken down level, what stands out is the strength still being maintained by private consumption which is growing by 4.0%. The biggest drive is coming from services while the part corresponding to durable goods seems to be slackening, as can be seen in the most recent indicators for car sales and retail buying. The slightly downward profile of consumer spending by households is in contrast to the rise in consumption by general government. In this case, the substantial increase in salaries of public servants is not affecting the excellent situation of the public sector accounts. The increase in central government tax collections has made it possible to present a notable increase in the Treasury surplus in the first quarter.
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Investment is also going through a splendid moment. Spending on equipment and machinery grew somewhat less than in previous quarters but it is still at rates of more than 8% in real terms. On the other hand, investment in construction has again gone against forecasts that were betting on a slowdown. In the first quarter of the year, residential building increased its year-to-year growth rate to 7.4% in real terms. In fact, demand for housing continues very strong if we are to judge by the rate at which mortgage loans are being granted. By March, loans by banks and savings banks for home purchase continued to grow at the same rate as at the end of 2005, that is to say, an above 24%. And this despite the fact that interest rates have risen. The Bank of Spain calculates that while last summer credit institutions were lending at an interest rate of 3.2%, in March they raised the rate to 3.7% and the trend is to further increases.
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Far from moderating,home purchase maintains full strength, helped by interest rates still below inflation rate as well as job creation.
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Interest rates with mortgage security still stand below the inflation rate. And employment does not stop rising which also represents a stimulus and support for housing demand. The rate of job creation for some months has been stable at 3.2%, which has meant the creation of 575,000 new full-time jobs in the past year. According to the Labour Force Survey, the number of persons with jobs in the first quarter amounted to 19.4 million, nearly 5% more than one year earlier. Immigrants accounted for a good part of the new jobs created.
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Counteracting good results in growth and employment comes surprisingly rapid worsening of foreign deficit and persistence of higher inflation than among neighbouring countries.
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The excellent results in terms of growth and employment have their negative side. Or, rather, two negative sides, namely foreign deficit and inflation. In the first quarter of 2006, exports of goods showed very favourable results seeing that they rose by 12.7% at constant prices. However, the poor situation in exports of services (affected by the drop in inflows from tourism) and the renewed drive in imports resulted in a rapid worsening of the foreign balance for goods and services. If we add to this the negative trend in other operations with abroad, the result is a current account deficit equivalent to 10.6%. This is an all-time high and may be affected by seasonal factors but it is troubling if we take into account that in 2005 there was a deficit of only 7.4% of the GDP.
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With regard to inflation, in recent months the GDP deflator has stood close to 4.5%, a very high level indeed. The level of unit labour costs, which are a significant indicator of competitiveness in terms of abroad, growth stood at 2.3% in the first quarter, a rate in contrast with the lower growth for the Euro Area as a whole at 1.2%. Inflation and the foreign deficit, in fact, are two imbalances that partly arise from the sharp drive in domestic demand but not for that reason are they any less troubling because of their potentially adverse effect on the present favourable economic situation.
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