Research Dept. News
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Monthly Report, num 312 - April 2008
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Spain: overall analysis - Economic activity
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Economic prospects notably worse
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Growth of Spain’s economy fast slowing down.
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At the beginning of 2008, available indicators point to a sharpening of the economic slowdown in recent months. The drop in growth rate is affecting both consumption and investment. On the supply side, there has been a notable loss of drive in construction. Short and long-term prospects suggest these trends will continue.
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Retail sales continued to drop in January. The month showed a drop of 2.4% in constant prices compared with the same month last year, one of the biggest year-on-year decreases in the European Union. Nevertheless, the drop slowed somewhat in February. In addition, car sales were down 5.9% in the first two months of the year. This drop was partly due to the elimination of the Prever Plan aimed at replacing passenger cars more than 10 years old and the increase in fuel prices. Nevertheless, it also reflects the decrease in consumer confidence.
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Retail sales and car sales down at start of year.
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In fact, the consumer confidence index in February reported the lowest level since 1994, under the effect of the worsening of the labour market, less favourable financial terms and relatively high debt levels. Nevertheless, it stood far from the low seen in 1992. In addition, industrial production of consumer goods showed something of a recovery in January with a year-on-year increase of 1.8%.
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The slowdown in domestic consumption and the worsening of international prospects because of the spreading of the crisis in world financial markets is having its effect on investment demand. Commercial vehicles reported sharp drops in the early months of the year. At the beginning of the year, domestic sales of capital goods and software by large companies showed the biggest year-on-year drops since 2002. Capital goods production, however, reported a rise in January, with a year-on-year rise of 4.6%, thus indicating a certain strength.
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New housing permits down 25% in 2007.
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Construction investment, however, continues at low levels. Cement consumption was down 7.0% in the first two months of the year compared with 12 months earlier. Another early indicator, permits for new housing, was down 24.7% in 2007 compared with the record in 2006, going to 651,427 units, a relatively high figure. The trend in this indicator is pointing to continuation of a substantial drop.
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Strong drive in manufacturing of electronic equipment, tobacco, leather and food.
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On the supply side, industrial production recovered in January following earlier drops. The general industrial production index rose by 0.7% compared with the same month last year, which means the rate of manufacturing growth was modest. Capital goods, showed a better performance over the past 12 months with a rise of 4.6%, followed by non-durable consumer goods, with an annual increase of 2.3%. The most dynamic branches were electronic equipment manufacturing, the tobacco industry, leather, food, textiles, paper and motor vehicles. The biggest decreases came in office machinery manufacturing, mining of energy products, wood and cork.
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With regard to industrial prospects, the confidence index for industry continued to drop in February going to the lowest level since mid-2005, under the negative effect of the increased cost of raw materials. Nevertheless, figures for new orders in January, with a rise of 6.2% compared with the same month in 2006, lead to a moderately optimistic outlook.
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Housing deals down 14% in 2007.
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With regard to construction, the housing segment is undergoing a process of adjustment due to the slack in the real estate market. Housing deals continued to drop in 2007 with a year-on-year decrease of 13.9%, according to figures from the Spanish Association of Property and Mercantile Registrars. In January 2008 the year-on-year drop sharpened to 27.1%.
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With regard to the services sector, foreign tourist arrivals in the first two months of the year showed an increase of 3.9% compared with the same period last year. Overnight hotel stays reported an increase of 2.3% in the past 12 months, a rise slightly higher than that for January 2007. Air passenger traffic showed a considerable year-on-year rise of 8.5% in the first two months of the year although there was a slowdown profile. Road passenger traffic registered a year-on-year increase of 2.8%, slightly lower than in 2007. The retail sector was unfavourably affected by the slowdown in private consumption. In this respect, the confidence index for the services sector for the early months of the year stood at the lowest levels in recent years.
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Total amount of commercial paper unpaid up 49% in January compared with same month in 2007.
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The slowdown in sale of goods and services by companies has brought an increase in business default, yet another sign of change in the cycle. The number of commercial credit items past-due and unpaid was up 3.9% in January compared with the same month last year, coming to 4.2% of the total figure, while the amount involved rose by 48.7%. In this respect, business activity showed a drop while the establishment of new companies was down 21.3% in January compared with 12 months earlier. In the same period the number of companies going out of business was up by 42.5%.
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Series of anti-cyclical measures proposed to deal with current economic situation...
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In this situation, the economic sentiment index dropped to the lowest level in recent years due to the worsening of world economic prospects in the wake of the spread of the crisis in international financial markets. The new government arising from the elections early in March will therefore find itself in the most complicated economic situation seen in the past decade. In order to deal with this some measures have already been indicated, generally of an anti-cyclical nature, such as the lowering of tax holdbacks on wages in order to promote consumption, moves on subsidized housing construction and more spending on public works, fostering of rental housing, aid for relocating unemployed persons and increasing the competitiveness of businesses.
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...but R&D spending must be raised to reach European level.
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These measures and others that surely will be adopted are indeed needed. However, it should not be forgotten that an increase in productivity is essential in order to ensure a sustained improvement in general welfare in the future. One important aspect is research and development (R&D). In this respect, as may be seen from the above graph, figures recently released by Eurostat indicate that it will be necessary for Spain to redouble its efforts to reach the European average. In fact, Spain’s spending on R&D in 2006 was 1.2% of gross domestic product (GDP), substantially below the average for the 27 countries now making up the European Union with a figure of 1.8%, less than one-third of spending by Sweden at 3.8% of GDP.
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