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Economic activity
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The recession is easing up
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Economic stimuli help to slow up the decline in activity.
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The decline in activity has slowed up thanks largely to the monetary and fiscal stimuli implemented by the European Central Bank and the Spanish government, and also to the improved international situation. Confidence is therefore returning gradually, as can be seen in the graph below. However, economic progress is fragile and requires the boost provided by stimuli. Confidence indicators were therefore still below past averages.
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Business profits slump.
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Within this context, of particular interest is the economic situation of companies, a fundamental factor in recovering from recession. According to data from the Quarterly Composite Balance Sheet, published by the Bank of Spain, in the first six months of 2009 the value added of firms in the sample (calculated by subtracting intermediate consumption goods from the value of production) fell by 15.7% year-on-year compared with a rise of 2.1% during the first half of 2008.
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Staff costs fell by 0.7%. Similarly, gross operating profit was down 27.0% compared with a year ago and the net ordinary result suffered a similar year-on-year decrease of 28.0%. Lower profits than usual intensified the slump in results for the year, these being 37.4% compared with a high of 43.6% in the first six months of 2008. However, this surplus continues to be notably positive, accounting for 34.2% of gross value added. On the other hand, both the ordinary return on net assets as well as on equity continued their downward slide, standing at 5.6% and 7.4%, respectively.
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Automobile sales are up thanks to direct subsidies.
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Going back to the economic situation overall, available data show less deterioration in consumption but with some good and bad points. The best results come from automobile sales, which in September recorded a year-on-year rise of 18.0% thanks to the direct subsidies of the Plan 2000-E implemented by the central government and most autonomous communities. However, the worsening of unemployment in September, once the effects of the municipal works plan financed by the central government had come to an end, was bound to have a negative effect on consumer confidence, whose index has fallen slightly.
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With regard to investment, some indicators, such as the productionof capital goods and registration of industrial vehicles, suggest that the downward trend is being contained. Nevertheless, domestic sales of equipment and software in large firms continue their sharp year-on-year drop, falling by 25.0% in the first two months of the third quarter.
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Sharp contraction in investment.
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Investment in construction, an early indicator based on the apparent consumption of cement over the last few months, is falling more slowly but still saw a year-on-year decrease of 23.7% in September. In fact, the residential subsector is continuing the readjustment forced on it by ever-increasing stocks of housing, as the number of finished homes exceed the number of houses being sold, although house purchases have been helped to a certain extent by the fall in interest rates and real estate prices over the last few months.
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From the point of view of supply, data for industrial production in August showed the odd hint of improvement. This is offset, however, by the higher year-on-year fall in electricity consumption in September, 2.8% compared with 0.5% the previous month, and the slight setback in the confidence index of the secondary sector at the end of the third quarter.
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Turnover for services fell by 14.4% year-on-year, adjusted for the number of working days in August, a decrease that is practically no lower than the one recorded for the previous month, although slightly lower than the figure for the first four months. The subsectors with the highest year-on-year drops were trade, transport and company services. Neither are the trends favorable in tourism, also affected by the international crisis. The summer season was a little better than the first half of the year but it ended with a year-on-year fall of 7.8% in visits by foreign tourists in the third quarter, a mere 0.4 percentage points less than the previous quarter.
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More companies being wound up.
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The difficult economic situation has led to fewer companies being set up. Accordingly, 4,663 commercial companies were registered in August, 18.3% fewer than in the same month in 2008. Overall, this drop is less than the accumulated figure for the first eight months of the year, namely 29.2%. However, more companies are being wound up. In August, 974 firms were dissolved, 33.8% more than twelve months before.
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A gradual recovery in the economy is expected.
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In terms of the outlook, the economic situation continues to recover but in no way can we say that the huge imbalances accumulated by the Spanish economy have been completely amended. Consequently, and with the help of higher foreign demand, the Spanish economy is likely to continue moving out of recession, but this will happen very gradually.
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Shopping mall or main street shopping?
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The Bolkestein Directive has reignited debate on the liberalization of Spain's retail trade
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The 15th century Grand Bazaar in Istanbul holds 55,000 square meters of stores and covers more than 58 streets. For some people it is the first large shopping mall in history. However, the image evoked by today's notion of a shopping mall is not that of a legendary marketplace in the heart of the city but of a modern commercial area on its outskirts. Now that the deadline for transposing the European Services Directive is approaching, the debate in Spain has intensified on the costs and benefits of liberalizing retail trade, a debate that tends to oppose this new generation of commercial areas to more urban and traditional small-format stores.
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In a market economy, the aim of regulation, not only that on retail trade but on any sector, is either to correct a market failure yielding a sub-optimum allocation of available resources, or to achieve non-economic goals, generally of a social or political nature. When this regulation manages to resolve a market failure, resources are allocated more efficiently. However, when regulatory intervention has non-economic aims, a certain loss of efficiency is justified by defending other priorities of general interest, such as preserving the environment or a more evenly balanced urban development. In both scenarios, regulation can improve welfare in its broadest and not exclusively economic sense.
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In retailing, regulation usually takes the form of technical or administrative barriers, either to new companies entering the market, by means of prior licensing to start up a business or moratoria on start-ups, or by limiting how established firms operate through regulation of business hours or sales periods. In the case of Spain, an additional hurdle comes from the complexity of the legal framework, the result of the particular organization of the territory and the distribution of powers among the central government, autonomous communities, and local authorities. Although it's true that trade restrictions in Spain have been gradually relaxed since the Retail Trade Act (Ley de Ordenación del Comercio Minorista) came into force in 1996, they still exceed the OECD average (see the diagram below). In this respect, those defending liberalization hope that the new Services Directive will encourage greater progress and lead the way to a more open and flexible commercial network in Spain.
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The Services Directive, otherwise known as the Bolkestein Directive, aims to eliminate barriers to the freedom of establishment, provision, and movement of services within the European Union, as well as to harmonize regulation of the tertiary sector across member states. Among the measures stipulated by the Directive regarding retail trade, it is worth noting the homogenization of regulations across territories and the elimination of any kind of establishment license, except when pursuing non-economic goals of general interest and providing such limitations are not discriminatory or disproportionate with regard to those objectives. In any case, the transposition of the Directive to the legal framework of each country lies in the hands of the member states and, in Spain, this will take the form of two new laws: the act on free access to service activities and on exercising this right, otherwise known as the «Ley Paraguas» (or «Umbrella Act»), which establishes the general framework of reference, and the Omnibus Act, which adapts several earlier laws to the former. The specific regulations for each sector will also be amended, including those governing retail trade.
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The bill to revise the Retail Trade Act was approved by the Council of Ministers in August but, despite following the Directive's general criteria, it has not avoided controversy. The roots of this controversy lie in the relative flexibility of the new bill and in the margin for interpretation given to the governments of autonomous communities which have, according to the 1996 Act, the last word in terms of retail trade taking place within their territory. Some bodies, including the Spanish Competition Authority and the Bank of Spain, have expressed certain unease, fearing that the new legislation does not open the door to competition as per the European Commission's aim, wasting a unique opportunity to move forward in an area where, in the opinion both of these bodies and of the Commission itself, there is still a lot to be done.
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The defense of retail liberalization is based on different arguments, but the cost incurred by inadequate legislation for economic agents in terms of efficiency and welfare is, in all certainty, a key factor. In regard to retail, it is estimated that the inefficient allocation of available resources, resulting from excessive or incorrect regulation, reduces the degree of competition, impedes efficiencies associated with economies of scale and dissuades innovation. This leads to lower productivity and higher margins for incumbent firms that, in turn, lead to higher prices, a loss in purchasing power for real wages and, ultimately, less consumer welfare and lower revenue for firms deterred from entering the market in question. Some people believe that this reasoning essentially explains the low growth in retail productivity in countries such as France and Spain (see the diagram below).
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On the other side of the debate, those who advocate retail trade regulation generally prioritize economic dimensions other than pure efficiency. The most usual arguments are: urban development criteria that defend a city model incorporating a dynamic commercial town center; protecting consumers with little mobility and the work-life balance of those employed in the sector. This kind of regulation tends to favor more urban, small-format retail stores rather than large-scale malls on city outskirts. The 1996 Act, for example, explicitly aims to protect small local retailers. On the other hand, certain restrictions to free trade are based on the existence of market failures, such as negative externalities of an environmental nature associated with certain commercial formats that require private transportation.
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Efficiency aside, those in favor of a more flexible retail sector also mention women in paid employment when they advocate the liberalization of store opening hours, another usual and controversial barrier to free commercial activity. This structural change in the modern Spanish labor market means that many families can only shop on their days off or outside working hours that, in many cases, do not coincide with store opening hours. However, this argument comes head to head against one of the reasons used to defend store opening hours restrictions: the negative impact of extending these hours on the work-life balance of those employed in retailing.
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In short, the discussion originated by the proposal to revise the Retail Act shows that the historical controversy concerning the liberalization of such a key sector for the economy has not abated. It is to be hoped that the definitive act and the final judgment by the European Commission regarding this legislation will help the different parties to find some common ground and to improve the status quo of society in general. Ultimately, retail trade is a service and, as such, its raison d'être is none other than service for the benefit of all those involved, be it in a legendary town marketplace, in a modern shopping mall on the city outskirts or in a small store in a classic town or modern city center.
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This box was prepared by Marta Noguer
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International Unit, "la Caixa" Research Department
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Labour market
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Deterioration in the labor market becomes more marked
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The effects on employment of the State Local Investment Fund's municipal works plan are coming to an end.
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The slump in economic activity continues to damage the labor market. In September, on average 17,935,095 people were registered as employed with Social Security, 66,216 fewer than the previous month. The slowdown in the downward trend that had been seen over the last few months has therefore been cut short. One fact contributing to this decline is that many municipal works financed by the State Local Investment Fund have ended.
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In the last twelve months, the number of people registered as employed with Social Security has fallen by 1,085,265, a percentage of 5.7%, although this year-on-year decrease is less than in preceding months. Most sectors lost workers in this period except for agriculture, which rose 10.2%, and domestic workers, increasing by 1.4%. Overall, the number of registered wage-earners fell by 5.8%, while non-wage-earners fell by 5.2%.
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Construction has recorded the biggest year-on-year drop in Social Security registrations of 21.2%.
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By sector, the biggest drop in the last year was in construction, down 21.2%, resulting primarily from the tough changes occurring in the residential segment. The number of registered workers in the industrial sector also fell sharply by 11.2%, because of the crisis in the sector. Service registrations were also down but to a lesser degree, by 2.9%, while agriculture was up 5.6%.
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By sex, the drop in registrations was higher among men than women, who tend to predominate in services, the large sector that has seen the smallest fall in registrations. While male registrations fell by 7.7%, female registrations were down 3.1%. The proportion of female registrations therefore stood at 44.1%, almost equaling the record level achieved last May.
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By nationality, the slump in registration since September 2008 was greater among foreigners, who are overly concentrated in construction, this figure falling by 8.6%. For their part, Spanish registrations were down 5.3%.
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Notable drop in permanent employment contracts.
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The labor market's loss of dynamism is also reflected in the smaller number of employment contracts. In fact, 1,354,836 contracts were recorded in September, a year-on-year decrease of 9.8%. The greatest decline was for permanent contracts, standing at 128,374, an annual decrease of 26.0%, while temporary contracts totaled 1,226,462, down 7.7%. Overall, these year-on-year reductions were a little less severe than in previous months.
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Registered unemployment confirms its upward trend
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Registered unemployment up 41% in one year.
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Understandably, the increasing destruction of jobs has led to a rise in unemployment. At the end of the third quarter, there were 3,709,447 unemployed people registered at the public employment offices, 80,367 more than in August, the second consecutive monthly increase. This figure represents a year-on-year rise of 41.3%, a little lower than the rate of previous months.
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More than 80% of the monthly increase in registered unemployed was concentrated in the services sector, partly related to the end of the tourist season. There was also a significant increase of 17,448 people looking for their first job. A rise in the labor force is typical after the holiday period and at the end of the academic year. However, in seasonally-adjusted terms unemployment has clearly speeded up over the last few months.
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Sharp rise in unemployment benefits.
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The sharp rise in unemployment figures with the advent of the economic crisis, which has supposed an increase of almost 1.7 million people in the last two years, has led to huge increases in unemployment benefit. The total number of people receiving benefit at the end of August was 2,708,204, a growth of 46.1% compared with the same month last year. Total expenditure in August was 2,608 million euros, 45.5% higher than twelve months before.
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More than 50,000 applications to join the unemployment and job-seeking protection scheme.
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The rate of coverage, defined as the ratio between the total number of people receiving benefits and the total registered unemployed with work experience, plus those receiving temporary agricultural aid, was 76.65% in August. On the other hand, at the end of September 52,252 people had already applied to join the unemployment and job-seeking protection scheme so as to receive a benefit of 422 euros per month.
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The outlook for unemployment over the coming months is not encouraging. Employment is not expected to rise until the economy enjoys significant growth once again, so that any drop in the unemployment figures will take a few quarters yet.
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Prices
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Relapse in prices
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The CPI has fallen 1.0% over the last twelve months.
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The consumer price index (CPI) recorded a year-on-year drop of 1.0% in September, 0.2 percentage points more than in the previous month. However, this fall was 0.3 percentage points less than that recorded in July, the biggest drop in recent decades.
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The accelerating downward trend in September's prices can be attributed to the most stable core of prices, known as underlying inflation. This fell more than expected with a year-on-year drop of 0.3 percentage points to 0.1%, the lowest level in decades, reflecting the strong deflationary pressure on prices. In fact, although this is also a result of the latest fall in commodity prices, many companies have also cut prices to boost sales and stimulate weakened consumption.
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Core inflation is down 0.3 percentage points to 0.1% due to the underlying slump.
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This deflationary pressure on prices in September comes principally from non-energy industrial goods, contributing almost 0.1 percentage point to the decrease in the CPI year-on-year rate, with these prices falling 2.1% over the twelve months up to September, 0.3 percentage points more than the preceding month and also representing the largest fall in recent decades. Both the weak demand and pressure from international markets have contributed to this trend. Particularly of note in September was the year-on-year drop in the price of automobiles to 7.0%.
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Prices for goodsof industrial origin are falling...
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Shrinking consumption is also having an effect on services, although these are less affected by foreign competition. Service prices therefore continued to slow up, recording a year-on-year change of 1.8%, 0.2 percentage points less than in August. Almost half this drop can be explained by the slowdown in prices for hotels, cafeterias and restaurants, to 1.3%.
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Processed foods contributed a decrease of 0.05 percentage points to the CPI year-on-year change. Both mineral water and soft drinks, as well as some dairy products, also contributed to this decrease, although processed food as a whole saw a year-on-year increase of 0.5%.
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...while service prices are slowing down.
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On the other hand, unprocessed food had practically no effect at all on the change in the CPI year-on-year rate in September, as the year-on-year fall in its prices remained at 2.5%. The other highly volatile component of prices, energy products, had a very slight positive effect on the CPI change rate as its year-on-year drop leveled out slightly.
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The year-on-year CPI harmonized with the European Union also fell 1.0% in the last year. As a result, the inflation differential with the Euro Area remained at 0.6 points, 0.3 percentage points lower than the record figure in May.
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Inflation in general will return to positive figures by the end of the year.
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The continuing deflationary pressure on prices suggests that the fall in core inflation will continue and might even reach negative figures. However, given the expected development in crude prices, the most likely situation is for prices to pick up again over the next few months, getting back to a positive year-on-year inflation rate by the end of the year.
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The fall in producer prices is easing
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Producer prices recorded a year-on-year decrease of 5.5% in August. This constitutes a turning point after the minimum of recent decades of 6.7%, recorded in July 2009. This trend is mostly explained by trends in commodity prices and particularly oil, which reached record levels in July 2008. The decrease in most of the components of producer prices eased off slightly, except in capital goods which continued to slide, reaching a year-on-year change rate of 0.3%.
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The fall in farm prices at source accelerated in July.
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Import prices also picked up in August and their year-on-year decrease fell by 1.5 points to 9.8%. Farm prices at source fell more quickly in July, up to a year-on-year decrease of 17.9%. This was mostly due to farm products, which fell by 26.9%, while market livestock prices picked up and recorded a year-on-year rate of 1.1%.
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Foreign sector
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The trade deficit continues to fall
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The trade deficit for the first eight months of the year falls by 52.4% year-on-year.
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The Spanish trade deficit for the month of August fell by 40.5% compared with August 2008, totaling 4,523 million euros. This drop was slightly more moderate than those recorded in previous months but, including this month, reductions have been accumulating for the last fourteen months in a row. Consequently, the accumulated deficit in the first eight months of the year fell by 52.4% compared with the same period last year.
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The volume of trade flows has started to stabilize.
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As in previous months, this drop in deficit occurred within a context of falling trade flows. However, the accumulated fall in imports for the first eight months of 2009 of 31.1%, compared with the same period in 2008, was higher than that of exports (19.8% in the same period). This has improved the trade balance and has increased the export-import ratio to 76.1% for this period, more than ten percentage points higher than last year.
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A more detailed analysis of these figures shows that, in August, the drop in the value of trade flows can largely be explained by a fall in prices, particularly in energy and food products. For this reason, in the last few months the real data show a rapid deceleration of the drop in the volume of exports and imports. Consequently, as can be seen in the graph, the real fall in exports in August was 6.4% year-on-year, 10.5 percentage points less than the nominal change. Similarly, the year-on-year drop in actual imports for the same month was 11.4%.
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The fall in deficit is expected to slow up over the coming months.
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In spite of the fact that falls in trade flows have been widespread, both in terms of sector and also geographically, it can be seen that, in August, vehicle exports rose 18.8% compared with the same month last year. This figure was undoubtedly the result of the different subsidy plans for vehicle purchase in the main European countries. Similarly, imports of automobile components also picked up in the same period, growing by 6.1%.
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Furthermore, the economic recovery in France and Germany has also led to an increase in foreign demand by these countries. This trend is expected to continue in the short term. However, the end of fiscal stimuli by governments and the trend shown by real imports leads to the conclusion that the rate of decrease in the deficit will slow up over the coming months.
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Balance of payments: financing needs continue reducing
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Current account deficit goes on falling in July...
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Improvements in the trade and incomes balances in the month of July led to the current account deficit for this month recording a fall of 73.6% compared with the same month in 2008, totaling 2,046 million euros. Only the services balance has bucked this trend, as it recorded a drop in its surplus for the third consecutive month, the result of less revenue coming from tourism.
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...reducing financing needs to 2006 levels.
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This latest reduction in July's current balance followed the trend of the accumulated balance in the last twelve months, down 34.6% compared with the same period last year. The lower current deficit greatly offset the reduction in surplus of the capital account and meant that the accumulated deficit for the last twelve months stood at 69,076 million euros, similar levels to those of June 2006. New data from international trade for the month of August also suggest that this trend will continue, with an adjustment in the Spanish foreign imbalance, although increasingly less marked.
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Short-term financing continues to lose importance.
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With regard to financial flows, the fall in deficit has led to a reduction in foreign capital inflows for the year. The heading most affected was short-term investment, which saw portfolio investments become the main net capital inflow in July, although short-term investment continued to be the main source of funds in this period.
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Public sector
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The central government budget for 2010
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The main aim of the 2010 budget is to rebalance public accounts and ease the effects of the economic crisis.
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The central government presented its 2010 General Budget (PGE-2010 in Spanish) for debate and approval in the midst of the worst economic recession in recent decades. This budget has been prepared with the aim of rebalancing public accounts due to commitments assumed under the Stability and Growth Pact of the European Union, as well as easing the effects of the economic crisis and also realigning the model of growth. After an expected general government deficit of 9.5% of gross domestic product (GDP) in 2009, the public deficit forecast for 2010 is 8.1% of GDP.
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The 2010 General Budget was drawn up based on a macroeconomic situation that predicted a fall in GDP of 3.6% in 2009 and of 0.3% in 2010, although it's worth mentioning that the latter is slightly less than that forecast by analysts in general.
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The consolidated expenditure forecast is slightly higher than the initial budget for 2009.
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The consolidated expenditure forecast by the PGE-2010 for the central government public sector (excluding public enterprises) is 350,657 million euros, including financial assets. This figure accounts for 33.4% of forecast GDP, one decimal more than in 2009. This is 0.1% higher than the initial forecast for 2009 and 0.4 points more than the estimated nominal growth for the economy. This consolidated growth excludes the change in financial liabilities and does not include growth by territorial governments (autonomous communities and local government) or the activities of the public enterprise sector or other public entities or foundations.
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Financial expenditure is up by 33% to 2.2% of gross domestic product.
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Consolidated current non-financial expenditure is up 8.2% compared with the initial 2009 forecast but the heading with the biggest increase is financial costs, rising 33.2% to 23,267 million euros, 2.2% of GDP, in spite of very low interest rates, due to the huge expansion in public debt. The largest item, current transfers, has increased 7.4%. Staff costs are up 2.3%. This rise can be explained particularly by the increase in workforce and improved resources in the Justice and Citizen Security Administration, as the pay rise has been fixed at 0.3%. However, the salaries of top government officials and those from other central government institutions have been frozen for the second year running.
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For their part, consolidated capital costs are up 10.1%. Real investment is down 10.2%, although capital transfers have risen by 35.2%.
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Social spending accounts for 51.6% of total consolidated expenditure.
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In terms of expenditure policy, it's clear that the government has prioritized social expenditure. In fact, social expenditure as a whole is up 3.8%, not only above nominal GDP but also above consolidated expenditure as a whole. It has therefore increased its relative weight by 1.8 points, up to 51.6%.
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Spending on pensions is up while spending on unemployment growth almost reaches 60%.
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The main heading within social expenditure is pensions, which go to make up 30.9% of the consolidated budget, an increase of 2.1%. Expenditure on pensions represents 10.3% of GDP. The increase in this heading comes from the 1.0% rise in pensions, as well as the 1.8% increase in the number of contributory pensioners and improved minimum pensions, among other factors. The other large heading for social expenditure, namely unemployment, is up 57.9% due to the escalation in the number of unemployed. This heading includes extraordinary aid for the unemployed of 420 euros a month for workers who have used up all their prior benefits and subsidies.
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Spending is up on infrastructures but there are cuts in R&D&I.
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Government spending on infrastructures is considered to be of prime importance in boosting the economy, increasing productivity and ensuring the market of goods and services works effectively, as well as encouraging development of the most disadvantaged areas. Expenditure on infrastructures totals 14,070 million euros in the consolidated budget, up 6.8%. This figure accounts for 4.0% of the total and represents 1.3% of GDP. 2010 will continue with the development and implementation of medium and long-term action plans, basically the Strategic Plan for Infrastructures and Transport and the National Hydrological Plan.
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Both civil and military research, development and innovation have been cut, although the latter to a greater degree. Overall, R&D&I is down 5.5% to 9,129 million euros, 2.6% of the total. This amount represents 0.87% of GDP, not only slightly below the level of investment for the most developed countries but even half a decimal lower than the 2009 figure.
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Change in tax orientation: the 400 euro deduction in income tax is withdrawn while rates on savings and VAT are increased.
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On the other side of the budgetary balance sheet, it is expected that consolidated receipts will fall by 9.0% compared with the initial budget, down to 274,424 million euros, 26.1% of GDP. However, the main heading in tax collection, namely personal income tax, is expected to rise by 7.2% compared with the early figures for collections in 2009 because of several legislative measures. This increase is mostly due to the removal the deduction of 400 euros, although a proposal has been made in parliament for only part of this deduction to be withdrawn. Such a removal would lead to an estimated rise in taxes collected of 4,100 million euros, as well as to the rise in the savings tax rate, from 18% to 19% for the first 6,000 euros and the rest at 21%, and also to the effect on the total tax due of bringing forward to 2009 the tax credits for investment in the main residence.
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Company tax is down 9.5% in terms of early figures for collections in 2009 because of the downward trend in corporate profits. This is also affected by a reduction of 5 points in the tax rate (25% to 20%) for SMEs with fewer than 25 workers and revenue below 5 million euros that maintain or create jobs.
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Receipts from indirect taxation are expected to rise by 16.3% compared with the early figures for collections in 2009. Revenue from value added tax (VAT) is up 26.1% because the effect of introducing the new monthly rebate system in 2009 has now disappeared, as well as due to the tax increase that will come into effect as from 1 July 2010. The general tax rate will rise by 2 points, up to 18%, while the low tax rate goes up to 8% and the extra low rate stays the same at 4%. On the other hand, receipts from special taxes will rise 4.8%, due particularly to the increase, in June 2009, in rates levied on tobacco products and hydrocarbons.
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Public debt will rise to 62.5% of GDP.
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The 2010 General Budget shows a consolidated deficit (national accounts basis) equivalent to 8.1% of GDP, 1.4 points lower than the 2009 forecast. This is the result of a central government deficit of 5.4% of GDP, a Social Security surplus of 0.2%, deficits of 2.5% from the autonomous communities and of 0.4% from local entities. Overall, the debt ratio of general government in GDP terms will increase to 62.5% of GDP, 9.1 points higher than in 2009.
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Savings and financing
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The private sector continues to deleverage
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Private sector financing has grown by 1% in the last twelve months.
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In August, the financing received by firms and households continued to slow down. This process of adjustment after the high levels of debt reached before the start of the economic crisis is being driven by weak demand and more cautious risk management on the part of financial institutions. Funding for the resident private sector therefore only rose 1.1% in the last twelve months, 7.6 points less than in August 2008.
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Bond issues become a larger part of company funding.
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The funding of non-financial companies continued the slowdown of the last period and recorded a year-on-year growth of 1.8%, slightly under the 9.9% recorded one year before. In fact, loans from resident financial institutions have fallen by 1.1% since August 2008. However, bond issues have risen 24.2% over the last twelve months thanks to improved conditions in the financial markets. For their part, foreign loans were up 7.9% compared with August last year.
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On the other hand, commercial loans, used to finance companies' working capital, are still suffering, falling 36.4% in the last twelve months up to August. Investment funding continues to be very weak, judging by the year-on-year decrease of 16.6% in financial leasing.
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Financing to households was at the same level as twelve months previously, continuing the slowdown of the last few years. Loans for housing continued to decelerate and rose by 0.5% compared with August 2008, 6.1 points less than one year ago. However, there have been fewer drops in the number of mortgaged homes in the last few months. According to data from the National Institute of Statistics, 58,995 mortgages were taken out on homes in July, 19.1% less than twelve months before but comparing favorably with an accumulated year-on-year drop of 29.7% in the first seven months of the year.
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The 12-month Euribor rate hit a new record low of 1.26% in September and continued falling in October.
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This relative improvement is partly due to the fall in the 12-month Euribor rate, widely used as an index in the mortgage market, whose monthly average hit another record low in September of 1.26%, 412 basis points less than a year earlier. This decrease reflects the cuts made in the official European Central Bank interest rate in the last period, as well as the reduction in risk premium in the interbank market. It even dropped below this level during the first few weeks of October. The fall in real estate prices also contributed, so that the theoretical effort to buy a home is now slightly less than last year.
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The default rate has risen to 4.9%.
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However, default has continued to rise due to the economic recession. The default rate for financial institutions as a whole rose two decimals in August, up to 4.9%, 2.4 points more than twelve months before.
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With regard to public sector financing, this is showing an upward trend. August saw a year-on-year growth of 34.1%, although 2.6 points lower than that recorded for July. The overall financing of resident sectors therefore continued to slow up, with a year-on-year increase of 4.9%, 0.5 percentage points less than in July and 3.5 points less than in August the previous year.
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Growth in bank deposits slows up
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Families are saving more.
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Household savings continue to recover after having hit rock bottom during the boom years. These savings have largely been stimulated by caution in view of the uncertainty created by the sharp rise in unemployment. According to data from the National Institute of Statistics for the second quarter, the disposable income of households rose 4.3% year-on-year. Given that consumption costs fell by 8.6% and that investment was down 27.0% compared with the second quarter of 2009, net lending stood at 29,087 million euros in the second quarter. This is equivalent to 10.9% of the quarterly gross domestic product (GDP), compared with 0.5% a year ago.
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This net financial saving was placed particularly in bank deposits. However, in the first few months of the third quarter, private sector deposits as a whole tended to slow up, contributing to a slight drop in yield.
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For the first time in the last five years, on demand and savings deposits have grown more than term deposits.
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Consequently, bank deposits overall had a year-on-year change rate of 5.2% in August, 10.7 points less than one year ago. For the first time in five years, year-on-year growth in on-demand and savings deposits was higher than that of term deposits, at 5.6%. This was due, on the one hand, to the smaller gap between short and medium-term interest rates and also to investors opting for liquidity.
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Mutual funds went back to net withdrawals in September.
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Competition between bank deposits and some share issues led to mutual funds recording net withdrawals once again in September, after having recorded net subscriptions in August. In September, sales of shares in mutual funds exceeded purchases by 1,560 million euros, so that the net accumulated withdrawals in the first nine months of 2009 totaled 10,668 million euros. However, most mutual fund categories recorded net subscriptions, such as long-term Euro bonds, international mixed equity, mixed Euro bonds and global funds. Free investment funds, the so-called hedge funds, also recorded net gains due to the improved situation in international financial markets, although to a much lesser degree.
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All mutual fund categories achieved positive yields compared with December, with an average of 4%.
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Accumulated yield up to the end of the third quarter was positive for all types of mutual fund, being higher than 4% on average. The average yield over the last twelve months was 2.6%, with a wide spread. The greatest gains came from international equity from emerging markets, with 10.6%, and from national equity, with 9.0%, while the biggest drop was in US international equity, of 11.3%.
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