Research Dept. News
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Monthly Report, num 299 - February 2007
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Spain: overall analysis - Foreign sector
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Balance of payments: further widening of current account deficit
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Current account deficit looks like ending 2006 at 9% of GDP due to continuous widening of trade deficit.
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In cumulative balance for the year, the run-away current account deficit rose to 72.52 billion euros in October, that is, a level 32% higher than in the same period in 2005. What was the main cause? The usual factor in recent times was at play, namely the widening of the trade deficit that in the first ten months of 2006 was already 66.92 billion euros (19% more than in the same period the year before). The last straw was the drop in the services surplus and the increase in the incomes deficit.
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This meant a further increase in the growth rate of the current account imbalance. As pointed out in the Organization for Economic Cooperation and Development’s recent annual report on Spain, while the funding of this deficit is not at threat due to fact that the country belongs to the single currency area, it is indeed indicative of the current pressures on Spain’s economy. According to the OECD’s own estimates, 2006 will have closed with a current account deficit equivalent to 9% of the gross domestic product.
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Net inflows of portfolio investment come close to 172 billion euros in first 10 months of 2006.
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Key interest is thus focused on the trend in the trade deficit while its correction depends on easing or not easing the imbalance in the balance of payments. The annual trend as of November confirms the following model. The higher growth of imports (14% higher than one year ago) is more than compensated by the increase in exports which were up by 11% year-to-year. The combination of the drive in domestic demand and problems of foreign competitiveness (which prevent Spanish exporters from taking full advantage of the recovery of European markets) is an excessive hurdle in the way of correcting the negative trade balance.
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With regard to the services balance, this has grown worse largely due to the lower contribution from tourism. As of October, the tourism heading was down by close to 4% year-to-year. The incomes balance recorded a deficit of 17.84 billion euros (20% higher than in the first ten months of 2005). On the other hand, the widening of the deficit in the transfers balance was marginally less compared with the situation one month earlier.
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Finally, the performance of the financial balance continues to be dominated by the notable surplus in portfolio investment which reached a cumulative figure of 171.97 billion euros as of October, a figure in contrast to the surplus of 56.63 billion euros recorded in the period January-October 2005. On the other hand, net outflows for direct investment were nearly four times higher than the positive figure one year earlier which stood at 39.64 billion euros.
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