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Economic activity
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Spain stands in leading group of world economies
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Spain holds ninth world place in size of economy measured at current exchange rates and eleventh place in purchasing power parity...
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Recent years of economic globalization have been characterized by the rise of the emerging economies, some of which have moved into top spots in the world economy classified by size. What is Spain’s position in this situation? The World Bank, in collaboration with other international bodies recently updated its classification which makes possible a homogeneous analysis. Using figures for 2005, Spain occupied ninth place n gross domestic product (GDP) t current exchange rates, only slightly behind Canada.
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The best way to compare the size of different economies is by parity of purchasing power, that is to say, adjusting the GDP according to relative price levels. In fact, comparison of GDP using exchange rates normally undervalues the size of developing economies whose price levels tend to be much lower than those of the advanced countries.
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From this point of view, Spain’s economy held eleventh place in GDP by parity of purchasing power in 2005. Three emerging giants, India, Russia and Brazil, with a much greater population moved ahead. On the other hand, using this measurement, Spain was ahead of Canada.
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...although it drops to number 25 in per capita GDP in purchasing power parity.
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But how does this work out in terms of per capita GDP, a measurement that comes closer to the well-being of the citizen. In this case, Spain’s position is not as favourable seeing that it occupies 25th place measured by parity of purchasing power. The top spots are held by relatively small countries such as Luxembourg, Qatar, Norway, Brunei and Kuwait and, as may be noted, most of these are oil-rich. Nevertheless, United States holds sixth place while Ireland comes in eighth spot.
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Nevertheless, using latest Eurostat figures for 2006, Spain was ahead of Italy in per capita GDP by parity of purchasing power. According to World Bank figures for 2005, Spain had come closer to Italy thanks to the drive in its economy, reaching 27,270 dollars as against Italy’s 27,750. As a result, in 2006 Spain held 12th place in GDP in parity of purchasing power in the European Union, being 5% above the average for the 27 member states.
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2007: a good balance but showing signs of a slowdown
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Construction and spending on consumer durables losing drive.
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At the end of 2007, the economy was showing a notably good level. Electricity consumption, for example, adjusted for number of working days and temperature, was up 4.5% in the fourth quarter compared with the same period the year before, as against a year-on-year rate of 3.8% in the final quarter of 2006. Nevertheless, we note trends to reduced economic drive. The main drops in this respect show up in construction, which has enjoyed a number of years of extraordinary expansion due to housing, as well as in buying of consumer durables.
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Car sales down and drop in consumer confidence...
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On the demand side, consumption is showing signs of a slowdown. For example, car sales are weak. In the fourth quarter of 2007 they were up 1.3% compared with the same period the year before, a half-point less than one year earlier. Furthermore, in December figures were affected by higher registrations of top-level models due to the fact that taxes on such vehicles were to be raised as of January. In any case, car sales in 2007 were down 1.2% compared with the year before, a little more than in 2006. On the other hand, helped by the appreciation of the euro, imports of consumer goods were strong with a year-on-year increase of 9.2% in October.
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On the other hand, we note a progressive worsening of consumer confidence. The index published by the European Commission in December dropped to its lowest level since 1994, although it is still far from the record in 1992. No doubt, the rise in prices of fuels, food and the increase in interest rates in recent months has had an unfavourable impact. The crisis in the financial markets must also have had a negative effect.
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...but level of investment in capital goods holding high.
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On the other hand, investment in capital goods is holding at a high level. Registration of commercial vehicles in the fourth quarter, for example, rose by 5.2% compared with the same period in 2006 as against a drop in the fourth quarter of 2006. Construction investment continued to advance but at a substantially lower rate. Activity in public works was notably strong as a result of tenders accepted. Nevertheless, judging by an early indicator of construction investment, cement consumption, is it possible there will be a sharper slowdown in coming months.
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Passenger car production up 5.6% in 2007 thanks to exports.
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Industrial growth has weakened to some extent, adversely affected by the strength of the single European currency and cost increases, both in labour and raw materials. In any case, car production in 2007 was up 5.6% thanks to exports, which compares favourably with the slight drop the year before. With regard to short-term prospects, the confidence indicator for the sector has worsened slightly in recent months but still is holding at a level above the historical average. Another early indicator, industrial orders received in October and November increased above the average for the first 11 months of the year, which provides some cause for optimism regarding this sector.
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Residential construction is undergoing a process of adjustment as a result of lower demand for housing. This shows up in a drop in the number of home sales compared with 2006. Housing prices have also reflected lower demand and have continued to ease to the point where they showed an annual increase of 4.8% in the final quarter of 2007, the lowest increase in the past 10 years and only a half-point above the inflation rate. This process of adjustment to lower demand is reflected in the sharp drop in the number of approvals for new housing construction although this was partly due to the effect of anticipating the coming into force of a new building code. In this context, the government has approved measures to foster home rental and aid the real estate sector.
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Sustained growth in services.
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In turn, services are showing more sustained growth. In the January-November period, the volume of business in the sector rose by 6.9% compared with the same months in 2006. The branches to show most strength were company services, such as research and security services, legal and economic advice, personnel selection and job placement and advertising. Information technology also was very dynamic, especially computer services. Distribution, especially wholesale trade, also showed a good level. Transportation also moved ahead notably, especially by air.
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On the other hand, tourism showed lower drive. The balance for the season ended with a new record in the number of foreign tourists although growth was modest at 1.7% as against 4.1% the year before. Overnight hotel-stays were up 2.1% in 2007, substantially below the increase of 8.7% the year before. Foreign tourists were up more than Spanish tourists at 2.5% as against 1.6%.
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2007 ends with signs of a slowdown.
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To sum up, from the point of view of economic activity, the year-end will show a good growth figure, close to 3.8%, substantially above that for the Euro Area as a whole. Nevertheless, the more unfavourable foreign environment beginning to show up for 2008 will likely sharpen the present tendency to a slowdown.
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Spain’s energy dependence
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Easing in intensity of energy consumption per GDP unit since 2005
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One of the factors behind the development of the Western economies in recent decades has been the easy and relatively cheap access to energy. The increase in consumption is an outward sign of this prosperity and one of its clearest exponents is the number of cars on the road. In 1980, there were somewhat less than 7 million cars whereas today this figure has more than tripled. But energy keeps becoming more expensive, environmental concerns arising from the use of certain fuels are growing and suppliers are often located in politically unsettled geographical areas, all of which brings about instability and uncertainty. Growing sensitivity about the effects of energy use has prompted many people to ask if energy will be able to keep exercising the same role in future decades as it has up to now. This box does not pretend to answer such a complex question but simply to show that in the case of Spain’s economy, as is happening generally in the developed economies, the negative effects of energy use seem to be somewhat less important and that it is possible to improve energy efficiency.
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Spain is a country that depends on imported energy. Most of what is consumed must be imported from far-off countries. In 2006, the degree of energy self-sufficiency failed to reach 20%, whereas in 1986 it came to 37%, according to figures supplied by the Ministry of Industry, Trade and Tourism. Logically, the importation of energy raw materials harms Spain’s foreign trade balance that already is showing a deficit. The energy imbalance makes up a third of the total trade deficit that in the third quarter of 2007 was more than 9.4% of gross domestic product (GDP). If we look for the main culprits, the leading role is reserved for oil which, whether because of consumer demand or price increases, alone represents a quarter of the total trade deficit.
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Spain starts out clearly at a disadvantage but this could improve somewhat or even considerably. To begin with, the supposed geo-strategic weakness brought about by dependence on abroad is not really so great given that the diversity of supplier countries has increased. In 1995, according to the Ministry of Industry, Trade and Tourism, imported oil coming from Saudi Arabia, Iran, Libya and Nigeria was more than half the monetary value of total oil imports, whereas in the first ten months of 2007 it barely went above a quarter. In the same period, that part of energy imports coming from the Middle East dropped from 22.6% to 15.8% of the total. In addition, the share represented by gas from Algeria in 2001 reached a relative high of 17.0% of total energy imports only to drop to 10.3% in 2007. The increase in the segment involving Russian oil (from 7.5% to 16.8%), in terms of diversification, avoided more risks than it provided.
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Another problem area is the rise in prices of hydrocarbons which has a direct effect on inflation. In five years, «black gold» has increased its price in dollars by four. Its effect on inflation is evident. Nevertheless, the beast is somewhat less fierce than it may seem. The effect of energy prices on consumer price indices that exclude energy is less than in previous periods. According to Blanchard and Galí,(1) the causes lie in the lower weight of oil consumption in the economy, in less rigidity in wages and in the monetary policies of those central banks that are more committed to controlling inflation.
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Under the heading of the trade balance things do not look so good but we should not exaggerate. In spite of the drastic increase in energy prices in the past five years, the energy deficit has scarcely increased its share of the total deficit. In spite of the increased number of drivers and cars, the fact is that the last rise in oil prices was borne better than that in 1999-2000. Between the end of 2003 and the end of 2006, black gold rose by 105%. In spite of this, whereas at the end of 2000 total energy imports represented 3.8% of GDP, in 2007 their relative importance had barely increased to 4.0%.
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Finally, we may ask if Spain is making proper use of the energy it consumes. The starting point is regular with an economy that, for every euro of GDP, it spends along the same lines as its European partners but with the difference that up until 2005 this figure was moving upward. There is also the matter of fuel consumption for transport to be dealt with. In this sphere, according to figures from the International Energy Agency, consumption per unit of GDP in 2005 was 28.7% higher than the average for the European countries in the Organization for Economic Cooperation and Development, a difference that was moving up. On the other hand, industry, that often seems like the main culprit of energy waste, has substantially moderated its contribution to total final energy consumption.
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Since 2005, we note some moderation in energy intensity, that is to say, in final energy consumption per unit of GDP. There is still no conclusive evidence that there has been a structural change in this direction of if this is a shift in the economy toward sectors that are less energy intensive. A continuation of this process will depend on being able to consolidate the savings in oil and on whether there is a continuation of the downward trend in other energy sources that began in 2005. The hunger for energy is high and growing, especially when we look at the growth of consumption per person. Some progress has been made in saving energy but there still remains a long road ahead.
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Labour market
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Job creation down in 2007
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Year-end record in total number of persons registered with Social Security.
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Those persons registered with Social Security at the end of 2007 came to a total of 19,195,755, the highest figure ever recorded at any year-end. This figure meant a year-on-year increase of 2.3%, a rate 1.1 points lower than that reported in 2006. This drop in job creation is in line with the change in the economic cycle that took place in 2007. If we examine the trend in the total number of those registered with Social Security we note that in the first half of 2007 there was a continuation of the drop in the employment growth rate while in the second half-year this stabilized at a rate slightly above 2%.
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Foreign workers now make up more than 10% of all registrations.
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The increase in registrations during the year amounted to 425,496 persons, the lowest in absolute terms since 2003. Of this number, 268,364 were Spaniards, some 63.1% of the total. Foreign worker registrations were up 8.6% as against 8.0% reported at the end of 2006. As a result, the share of the total held by foreign workers continued to increase going to 10.3% in December.
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Registration of females hits high share of 42%.
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Women continued to move ahead in the labour market. Females registered were up 3.9%, three times the increase rate for males (1.1%). Their share thus marked up a new record of 42.35% as against 36.1% some 10 years ago.
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Services account for 93% of new jobs and nearly half represented by social services.
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The sector creating most employment was services which made up 92.7% of net new registrations. The total number of those registered in services moved up by 3.1%. Nearly half of all new registrations involved social services (203,364 persons), an increase of 19.3%. Other branches to show notable increases were education, hotel and restaurant trade, transport and company services (which include temporary employment companies).
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Industry also showed a considerable increase in employment at 2.3%. The most dynamic manufacturing branches in this respect were food, machinery and equipment, motor vehicles, transportation equipment and medical/surgery goods. The private sector continued to drop in number of those registered with Social Security going down 1.3%, although this was less than in 2006 when it was down by 2.8%.
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Construction was another matter and, after reporting sharp growth in employment all decade, showed a drop in registrations with Social Security of 0.6% in 2007. In fact, the drop in the general scheme was 3.5% but this was partly compensated by a rise of 7.0% in self-employed persons in the sector. This also reflects the slowdown in construction.
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The sustained increase in registrations with Social Security made it possible to boost revenues from contributions by 6.9% in the first 11 months of the year compared with the same period the year before. Up to November, cumulative revenues rose by 8.4% compared with a rise of 7.1% in spending. As a result, at the end of that month Social Security showed a cumulative surplus of 18.60 billion euros. Nevertheless, this positive balance was down in December because of the payment resulting from the inflation adjustment in pensions and the extra pay going to public servants.
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On the other hand, growth of employment in 2007 was very uneven in the autonomous communities, ranging from 5.6% annual in Castile-La Mancha to 0.9% in the Canary Islands. Well above the average came Aragon, Extremadura and Navarre. Right at the end of the line were Valencian Community, Murcia and Andalusia.
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Increase in registered unemployment
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Loss of registrations in construction following years of sharp growth.
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The number of unemployed registered at government employment services was up by 106,674 in 2007 so that last year ended with a figure of 2,129,547. This figure meant an annual increase of 5.3%, the highest in the past five years. As a result, the past year saw a break in the downward trend in registered unemployment enjoyed in recent years. In fact, if we look at the trend, we note an increase in registered unemployment over the last months.
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The increase in registered unemployment in 2007 was largely attributable to the slowdown in job creation in services and the loss of employment in construction. As a result, the number of registered unemployed in services rose by 59,381 with 47,096 in construction. Nevertheless, in relative terms, the increase in unemployment was higher in construction at 19.9% as against 4.9% in services. Unemployment was also up notably in agriculture at 11.9%. In industry, on the other hand, there was a modest drop of 0.8% in unemployment. The reduction in unemployment of those seeking their first job was greater at 2.3%.
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Decrease in registered unemployment among young women.
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In line with the current trend in employment, the number of males registered as unemployed was up much more than that for females, showing 10.1% as against 2.1%. By age, unemployment was up by 6.1% among those over 25 while it was down for younger people. Young women unemployed showed a drop of 6.3%.
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By nationality, we note that foreign workers showed a higher number of registered unemployed at 24.6%. Notable among this group was the increase of 53.5% in unemployment in construction. On the other hand, those in this situation but seeking their first job showed a drop of 1.4%.
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In the autonomous communities, the trend in unemployment was very uneven. In Murcia, Canary Islands and Valencian Community there were two-digit annual increases. At the other end of the scale stood Galicia, Asturias and the Basque Country. These northern communities reported decreases in the number of registered unemployed.
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In addition, the government employment service estimates how employable are those persons registered. According to these estimates, at the end of 2007 some 36.1% of registered unemployed had an average employability level, those with low employability level made up 30.6%, some 17.2% held a high level while 16.1% stood at a very low level. This degree of employability tends to drop with age. Among those over 45, only 9.4% had a high level of employability.
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Slight increase in hiring contracts in 2007.
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In addition, total hiring contracts in 2007 rose to 18,622,108, an all-time record. This figure represents an increase of 0.5% compared with the year before. Of the total, 2,220,384 were hired under permanent contracts, this also being an all-time record, with a rise of 1.9% compared with 2006.
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Prices
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Inflation goes above 4%
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2007 CPI goes up 1.6 points more than in 2006.
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The balance for inflation in 2007 was not favourable due to the sharp rise in prices as of the summer. The annual change rate in the consumer price index (CPI) rose to 4.2% in December, 1.6 points more than in 2006 marking up the highest year-end figure since 1995. The cause mainly lay in the increase in prices for oil and food in international raw materials markets. Nevertheless, the average annual change in the CPI turned out to be 2.8%, the lowest rate in the past eight years. This difference was due to the peculiar profile of the year-on-year CPI rate over the course of the year which up to August was running between 2% and 2.5% only to climb to the rate mentioned above in the final months of the year.
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The discrepancy between the annual average and the December rate is of some importance. The December rate is used for indexing economic figures as significant as Social Security pensions (in this case the November rate is used), wages, rentals and other private contracts so that it has a direct effect on public spending, labour costs for companies and payments for many individuals. On the other hand, the annual average rate more accurately shows inflation for the whole period of the year, although despite this it is not used as the reference figure. As a result, in this case the December figure would give a much more inflationary note than 2007 was in reality. The difference between one and the other rate came to 1.4 percentage points, the biggest divergence since 1984 when the annual average was 11.3% and the December rate stood at 9.0%. In any case, we should point out that the difference between one rate and the other tends to be compensated over time.
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Figure for December strikes much more inflationary note than 2007 as whole turned out.
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Fuels played a decisive role in the December result contributing nearly half of the monthly increase. The price of petrol and diesel-fuel continued to rise at service stations reflecting the rise in oil prices in world markets which again marked up a new record in December. Fuels and oils where thus one of the components of the CPI to show a higher increase in 2007 with an annual rise of 16.2%.
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Sharp increases in milk, bread and chicken while oil and potatoes down.
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Still higher was the annual change in milk (up 31.7%) although its inflationary impact is less due to its lower weighting in the shopping basket. Nevertheless, the contribution of processed foods as a whole was important going from inflation of 2.2% at the end of 2006 to 7.4% in December 2007. Another notable rise came in bread which rose by 14.4% in the course of last year. But not all the news for consumers is bad. The price of cooking oil was down by 10.4% in 2007 and potatoes dropped by 4.8%.
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Annual inflation on non-energy industrial goods drops to only 0.3% partly thanks to appreciation of euro.
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Other good news was that annual inflation on industrial goods was down from 1.2% in December 2006 to a mere 0.3% one year later. Sharp competition in these goods in international markets and appreciation of the euro contributed to this good result. The trend in services prices was not as favourable with annual inflation moving up one decimal to 3.8%. The fact that services are more sheltered from competition contributes to a continuation of inflation at a higher level in this activity. Notable in this sphere was the annual increase of 4.9% in hotels, cafés and restaurants.
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Inflation persists in services, a sector more sheltered from competition.
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The spread in annual inflation rates by autonomous community was similar to the year before, with a swing running between 3.0% recorded in Ceuta and 4.7% in Murcia. Apart from this, another seven autonomous communities showed inflation rates higher than the average, namely Castile-La Mancha, Castile-Leon, Cantabria, Aragon, Valencian Community, Catalonia and Canary Islands.
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The year-on-year inflation rate harmonized with the European Union ended 2007 at 4.3%, 1.6 points more than at the end of 2006. The inflation differential with the Euro Area stood at 1.2 points, 0.4 points more than 12 months earlier. This increase may partly be explained by the higher weighting of fuels and food in Spain’s CPI and because the lower weighting of certain indirect taxes in Spain causes greater sensitivity of final sale price to increases in prices at origin.
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Inflation likely to drop in 2008 but not in next few months.
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What are the prospects on inflation opening up for 2008? Lower demand pressure should produce a gradual drop in background pressures. Over coming months, however, there will likely be some increases arising from inflationary pressures on food. Nor is the increase in regulated prices in January likely to decrease inflation.
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Biofuels: at what price?
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Boost in biofuels putting pressure on food prices
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In the past year, food prices have soared all over the world. According to figures from the National Institute of Statistics, in 2007 they rose by 6.6% in Spain, well above the 3.2% increase in 2006. The food products to rise the most were milk (31.0%), bread (14.4%), poultry (10.2%), mutton (9.9%) and eggs (9.6%). It is not surprising that, in this context, the increase in food prices is widely discussed. This is so much so that a new term has been coined to define inflation of food products: «agflation». What lies behind this phenomenon? The two main causes are the growth of the emerging countries, mainly China (see box «China eating up the world») and the increased production of biofuels.
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No doubt, the production of biofuels has grown spectacularly in recent years. In the case of biogasoline, mainly bioethanol, production has doubled in the past two years. A good part of this production is taking place in the United States and Brazil. World production of biodiesel, concentrated in the European Union, has grown even more although from a much lower level. The boost in biofuels is due to two factors – the high price of oil and the fight against climate change. The increase in oil prices from less than 30 dollars a barrel in 2000 to an average of 70 dollars in 2007 and more than 90 dollars in recent weeks has made production of fuel from biomass an economically paying proposition, or almost so. Estimates based on average prices in 2006 and the first half of 2007, when oil was around 65 dollars a barrel, indicated that production of a litre of ethanol based on corn cost 40 cents whereas production of a litre of gasoline from oil cost only 6 cents less (see above Table). In addition, as part of the fight against climate change, there are many more public subsidies favouring the production of «green fuels» and this has helped reduce effective production cost.
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The basic ingredients of the two most common biofuels (ethanol and biodiesel) are raw materials from the food sector. In the case of ethanol, it is corn and sugars while, for biodiesel it is colza-seed, soya and sunflower-seed. Because of this, the production of biofuels has added to the heavy demand pressure on these raw materials and has directly affected their prices (see Graphs below). Indirectly, the prices of other crops have also been under pressure. On the one hand, this is because producers have increased the area of crops for growing raw materials for fuel production at the expense of other crops thus reducing their supply. On the demand side, consumers have responded to price increases by replacing some foods with others (rice instead of corn, for example) which tends to shift price rises from one product to another. A third means of passing through price increases is in the cost of prepared animal foods and other staples for livestock and farm animals. This increases the price of meat and eggs, for example, although no one has dared to work out the exact size of this effect because of its complexity.
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Nevertheless, is it logical to attribute all «agflation» to the production of biofuels? Probably not. Other factors, such as the sharp growth in demand for agricultural products in the large emerging economies, must be taken into account. It should not be forgotten that the contraction of the emerging economies in the second half of the Nineties following the Asian crisis was the main culprit in the drop in prices of raw materials during that period. To some extent it is logical that in recent years, due to their increased growth, they have exercised upward pressure on raw materials prices, both agricultural and non-agricultural. In fact, what we have seen is a general increase in the prices of raw materials, even higher in non-agricultural products such as metals, which are not used in producing biofuels.
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Looking forward, we may expect that supply will react to high prices although this response could take time. On the one hand, it is likely that land under cultivation will increase, especially if the restraints on agricultural exports from developing countries to more advanced economies are lessened. The reduction of customs duties would also help to move agricultural production for biofuels to those areas where it is less costly. For example, it is much cheaper to produce ethanol from Brazilian sugar cane than from US corn but the United States imposes high customs duties on cane imports. In addition, the development of technology that does not use food raw materials for producing biofuels and uses instead cellulose or jatropha (a type of non-edible oily pine-nut) also raises the possibility of putting a halt to «agflation».
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To sum up, it would seem that it is not entirely by chance that a litre of milk and a litre of gasoline both cost more than a euro. Let us hope that technological innovation lends a hand and helps put an end to «agflation». This would be a blessing, especially for the poorer countries where families spend more than 60% of their household budget on food.
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Prices
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Rise in wholesale prices
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Year-on-year inflation in industrial prices marks up highest level since 1985 in December 2007.
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The year-on-year inflation rate for industrial prices ended 2007 at 5.9%, the highest level since 1985. Nevertheless, the average annual inflation rate was 3.3%, some 2 points below the figure for the year before. This difference may be explained by the profile of the year-on-year rate during the year. It dropped from 3.6% in December 2006 to 2.3% in July due to the performance in oil prices. Later on, the increase in those prices, along with the rise in other raw materials brought about a bump in industrial prices so that the change rate ended up 2.3 points above the end of 2006.
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In spite of the strengthening of the euro, import prices also showed a rise, although this was somewhat lower. This was caused mainly by energy products for which prices rose by 22.9% in November compared with 12 months earlier. On the other hand, year-on-year inflation on intermediate goods had been reduced to 0.8% from the 8.8% shown one year earlier.
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Sharp rise in livestock prices.
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Farm prices obtained by producers also showed a sharp rise. Those to rise most were livestock prices (milk, etc.), with a year-on-year increase of 34.5% in October. On the other hand, market livestock prices dropped by 2.5% although the drop tended to be set back.
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Foreign sector
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Trade deficit increasing at slower rate
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Trade deficit growing at rate of 7% due to energy balance.
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In the period January-November 2007, the trade deficit was 89.12 billion euros. This means that, following the rise in August, in cumulative terms for January-November, the trade deficit grew by 7.0% year-on-year as against 7.9% year-on-year reported between January and October and would support a tendency to slowdown. The export-import rate stood at 65.2 in the first eleven months of the year, one decimal above the same period in 2006.
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From the beginning of the year the slowing down of the increase in the deficit was mainly due to the easing of the energy balance in the trade balance. In recent months the improvement in the energy balance has lost some strength while the non-energy balance showed a rise that was interrupted in November. Immediate prospects are not overly bright as it is possible that the imbalance in the energy balance may again increase.
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In more general terms, it should be pointed out that in the period January-November exports grew by 7.7% year-on-year while imports were up 7.4%. The trade deficit thus rose by 7.0%, the lowest growth since 2003. In real terms, the gap between exports and imports continues, given that, while the former grew by 4.8% year-on-year, purchases abroad were up 7.4%.
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In November, the most dynamic groups of products exported were energy goods which, in spite of representing 5.2% of exports, doubled their figure compared with the same period the year before. Sectors of greater weight such as food and capital goods reported advances of 15% while the chemicals sector improved by 13.0%. Energy imports also showed strong with an increase of 18.2% because of the increase in the price of oil. Consumer goods and food also reported important increases.
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Trade with countries outside European Union shows strongest growth.
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Finally, the performance in foreign markets continues to follow recent trends. The European Union (EU) remains the reference trading partner for Spain’s economy, representing as it does the destination of 69% of the country’s exports and the origin of 60% of Spain’s purchases abroad. Nevertheless, exports to Asia showed great drive with growth of 35.2% while those to Africa were up 26.5%. Also showing strong growth were exports to Turkey (47.5%), Russia (40.9%) and Norway (29.9%). Imports from North America and Asia rose by 8.8% and 8.7% respectively.
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Balance of payments: incomes deficit reaches high levels
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Trade deficit eases and worsening of current account deficit slows down.
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The current account balance recorded a deficit of 9.77 billion euros in October, a figure 29.6% higher than one year earlier. The widening of the current account imbalance was due, in practically equal measure, to the increased deficits in the transfers balance and the trade balance which again contributed to the negative balance following the turn-around in August. The increase in the deficit in the incomes balance was also substantial but less than in previous months.
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In order to evaluate these results over a longer time-frame it would be useful to show the trend in cumulative figures for 12 months which provide a better view of trends. To start off, we should point out that the current account imbalance is tending to show slower growth, a course that began in 2005. In the 12 months ending in October, the current account deficit grew by 18.4% year-on-year, one percentage point less than the cumulative figure for 12 months ending September. The main contribution to this slowdown came from the drop in the growth of the trade deficit.
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Deficit in transfers balance growing while incomes balance fails to improve.
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Nevertheless, whereas the services balance is still following a stationary trend, the incomes balance and the transfers balance are growing increasingly worse so that in the 12 months end in October both contributed two-thirds to the worsening (by 15.70 billion euros) of the current account balance compared with the same period the year before.
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With regard to financial flows, the outstanding note is that, in terms of the cumulative figure of 12 months, the decrease in the balance of portfolio investment is getting sharper with net entries of 117.71 billion euros, 64.80 billion less than one year earlier. In turn, net outflows for direct investment showed a small advance after several months of decreases.
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Savings and financing
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Funding to private sector losing steam
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12-month Euribor moves down in January.
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In December, the 12-month Euribor came to the peak of a series of increases. Widely used as a reference in many contracts, this rate rose to 4.79% on monthly average going to its highest level since December 2000. As a result, it recorded an increase of 0.87 percentage points compared with one year earlier. Nevertheless, this increase was lower than that marked up in 2006. In fact, the increase in December was largely due to liquidity problems in the interbank market with the approach of the year-end. In the early weeks of January, the 12-month Euribor moved down with the expectation of a less aggressive position by the European Central Bank and went back to the level in May 2007.
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Drop in financing to private sector because of lower demand and more stringent lending terms.
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The trend to an increase in interest rates explains the fact that funding to the private sector has shown a slowdown, to which less brilliant economic prospects have contributed. The annual change rate of this variable was 17.1% in November, some 7.1 percentage points less than at the end of 2006. This slowdown in funding was due to lower demand but also to more stringent lending terms. Nevertheless, the annual change rate continues to be substantially above that for the Euro Area.
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Funding company investments continues to show good level.
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The lower growth rate for funding of companies has sharpened in recent months. Year-to-year growth went from 23.4% in August to 19.3% in November. Commercial credit, used to finance working capital of companies, showed a drop in annual change rate to less than 10%. Nevertheless, funding for investment, as seen from leasing operations, continued to show a good level.
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Increased interest rates and housing prices dampen demand for mortgage loans.
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Funds going to households also continue to ease gradually. In the past 12 months ending in November these showed an annual increase of 14.2%. Finance for housing showed a similar annual increase at 14.6%. This rate was 5.8 percentage points lower than in December 2006. The drop in this funding was the result of lower demand in view of higher interest rates and increased housing prices.
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Mortgage market reform law passed.
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December also saw approval of Law 41/2007 dealing with reform of the mortgage market aimed at making it more flexible. The law establishes the bases for development of the mortgage market in coming years. It regulates transparency in loan and mortgage contracts and modifies refinancing mechanisms with regard to bonds and «cédulas hipotecarias» (covered mortgage bonds).
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The default rate continued to rise slightly in November going to 0.91%. This rate means an increase of less than two decimals over the level at the end of 2006 and is relatively low. Furthermore, Spain’s financial institutions have substantial provisions to meet any foreseeable increase in default.
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Major withdrawals from mutual funds in 2007
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Funding difficulties of financial institutions in capital markets following the outbreak of the subprime mortgage crisis in the United States led to a broadening of other means of financing loans granted. Apart from the issue of notes, which are short-term instruments, there was greater competition for attracting bank deposits. As a result, the interest rate on time-deposits by individuals moved up to 4.3% in November, more than one point higher than the level in December 2006.
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Sharper competition to attract bank deposits...
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The improved return on bank accounts has boosted the growth of deposits by the private sector which went up 18.5% in the past 12 months ending in November. The biggest increase showed up in accounts in foreign currency boosted by interest rate differentials in their favour, although these accounted for only 3.5% of total deposits. The bulk of deposits showed up in time-deposits for terms up to two years which reported a sharp annual increase of 40.7%. On the other hand, on-demand and savings accounts grew by only 0.9% over the past year as a result of low returns, substantially below inflation.
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In spite of the attractiveness of these products, the household savings rate does not seem to be reacting. According to figures supplied by the National Institute of Statistics, the household savings rate in the third quarter of 2007 stood at 4.8% of disposable income, one point less than a year earlier. This result was due to the relatively modest year-on-year growth of disposable income (3.8%) under the effect of a 21.4% increase in income and property taxes and an increase in consumer spending of 5.1%. If we take the last four months into consideration, the household savings rate stood at 9.9% of disposable income, three decimals less than in the preceding period.
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...has negative effect on mutual funds.
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As well as deposits, other instruments used for saving are securities mutual funds shares. Nevertheless, in 2007 there were net withdrawals of securities mutual funds shares for a value of 20.19 billion euros with the result that assets of these funds dropped by 6.1% to 238.70 billion euros.
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This negative trend may be explained by a number of factors. On the one hand, as explained above, the marketing policies financial institutions have been concentrating on attracting deposits to the detriment of other products such as mutual funds. In addition, savers began to compare past returns on funds with future returns offered by deposits without always taking into account that we were in a period of increasing interest rates. Furthermore, in the latter part of the year, the upsets in international financial markets increased risk aversion of participants. As a result, in the course of 2007 the number of participants in mutual funds dropped by 6.3% o 8,264,240.
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Yield on securities mutual funds stands at 2.4% in 2007 with wide range depending on type.
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The average annual yield obtained on securities mutual funds was 2.4% although for the last 16 years as a whole yield rose to 4.5%, which was above average inflation for the period. On the other hand, yields were widely varied depending on type of fund. Share-based funds of emerging markets headed the classification with capital gains of 22.7%, followed some distance behind by national share-based funds with gains of 7.7%. The most conservative funds reported the most modest increases, as was the case with short-term bond-based funds with gains of 2.8%. The appreciation of the euro contributed to increase losses in Japanese share-based funds which recorded the biggest losses at 16.3%.
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Another type of fund, so-called hedge funds, raised their assets to 818 million euros at the end of 2007, practically still at the beginning of their development in the Spanish market. In spite of their growth, the total for these funds represents only 0.25% of the total volume of mutual fund institutions. The number of participants is also small with a figure of 2,716 at year-end.
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The number of participants in real estate mutual funds rose by 165,781. Assets of this type of fund were up 2.1% in 2007 going to 8.61 billion euros. Average yield on these funds was 5.4% while in the past 10 years it showed 7.0%.
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