Research Dept. News
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Monthly Report, num 347 - June 2011
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Spain: overall analysis - Foreign sector
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The foreign sector boosts the economy in the first quarter
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Foreign demand contributes 0.3 percentage points to growth in the first quarter.
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The upswing in foreign demand was once again the main factor in Spain's economic recovery in the first quarter of 2011. According to the data from the National Accounts system, the foreign sector's contribution to the quarterly growth in gross domestic product (GDP) was 0.3%, offsetting the weak domestic demand. Dynamic international trade, the recovery in Europe's economy and the upswing in tourism boosted exports of goods and services. This favourable context is expected to continue throughout the year, maintaining the foreign sector's positive contribution. Domestic demand won't take over the reins of the Spanish economy until 2012.
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This good performance by exports has been widespread among the different economic sectors. Customs data point to exports of intermediate goods as the most dynamic in the first few months of 2011, due to the recovery in industrial activity in the heart of the European Union. In the first quarter of the year, capital equipment and semi-manufactured non-chemical goods recorded year-on-year growth of 26.1% and 32.0% respectively. In addition to these products, and without taking into account the sharp rise in exports of commodities and energy products because of their small relative weight, of note is the gradual improvement in the automobile sector. Car and motorbike exports picked up in the first quarter, after the stagnation recorded in the second half of last year due to the end of subsidies for buying vehicles.
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Sharp upswing in exports of intermediate goods.
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As a consequence, goods exports rose by 23.4% year-on-year in the first quarter. If we take the change in the volume of exports into account, net of the price effect, this figure falls to 15.8%. In the case of imports, this difference between the nominal and real variation is much greater, due to the sharp rise in oil prices and the rest of commodities. This explains why, in spite of the foreign sector's positive contribution in the first quarter of the year, the trade deficit worsened in March.
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Rising oil prices tarnish the recovery in the non-energy balance.
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In fact, an analysis of the data accumulated over the last twelve months, which provide a more reliable reflection of the long-term trend, shows that the trade deficit increased to 52,689 million euros in March, equivalent to 4.9% of GDP. This figure represents an increase of three tenths of a percentage point compared with the minimum reached in March 2010. As shown by the graph below, the widening of the energy imbalance was the reason behind this higher deficit, exceeding the good performance of the non-energy component. For the remainder of the year, a gradual fall in commodity prices and the good performance of the European economy are expected to slightly reduce Spain's trade deficit, albeit remaining at levels similar to that of 2010.
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Tourism will be the main way to reduce the current deficit
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The current deficit stands at 48,370 million euros in February.
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In spite of this worsening of the trade balance, the figures for the balance of payments show a fall in the current deficit in February, standing at 48,370 million euros accumulated over the last twelve months. This level is similar to the one recorded in 2005. The reason for this improvement is the reduction in the income deficit, while the rest of the components remained almost stable.
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The upswing in tourism will help to correct the current deficit to 4.3% of GDP in 2011.
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However, beyond what monthly comparisons can tell us, influenced as they are by calendar effects, the underlying trends point to tourism as the main force behind the correction in the current deficit over the last few months. The upswing in tourism, intensified by the outbreak of political conflict in North Africa, has hugely increased revenue from the services balance during the first two months of the year. The good news regarding the entry of tourists in March and April, with overall growth of 11.3% compared with the same months in 2010, is an encouraging sign of what tourism might do throughout the year.
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This improvement will help to correct the current deficit by around two tenths of a percentage point in 2011, down to 4.3% of GDP. This small reduction will be due to the stagnation in the goods balance and a more than likely increase in the income deficit, given the rising financing costs required for Spanish debt by the markets.
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Portfolio investment takes prime position as the main source of financing.
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With regard to financial flows, of note is the high portfolio investment, with a net inflow of 16,211 million euros in February. This figure, together with the also high inflow recorded the previous month, makes portfolio investment the main source of external financing for the last twelve months. On the other hand, Spanish financial institutions had resorted to the European Central Bank for most of their financing needs up to the middle of last year. This reduction is due to the gradual opening up of financing markets during the first quarter of 2011. The recent tensions appearing once again in the risk premium are expected to ease over the coming months, keeping the use of the Eurosystem at a low level.
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