Research Dept. News
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Monthly Report, num 348 - July-August 2011
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Spain: overall analysis - Economic activity
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Very gradual progress for Spain's economy
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Growth will remain very weak in the second quarter.
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Although the Spanish economy exited the recession more than a year ago, the rate of progress since then has been very slow, clearly less than the countries in the euro area as a whole. Available indicators suggest that the rate of growth in activity will not improve over the coming months and might even slow down a little. In particular, the contribution of domestic demand is expected to be negative during the second quarter, so that the foreign sector's support will continue to be crucial. So, on average, the outlook is for growth in the second quarter of 2011 to remain relatively stagnant.
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Household consumption will improve very slowly...
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In fact, from the point of view of domestic demand, an interpretation of the indicators for private consumption points to slow progress in the period from April to June, with growth only slightly higher than the figure recorded during the previous quarter. Variables are showing divergent signs. On the positive side, of note is the slowdown in the drop in retail sales as, in April, the general retail trade index, adjusted for calendar effects, fell by 2.0% year-on-year, six and a half points below the decrease recorded in March. Sales were boosted by the good performance of large chains and department stores but fell in other distribution channels. One positive consequence of the trend in retail trade is the improvement in the rate of the year-on-year drop in the employment index for this sector, approaching a change in trend.
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...and public expenditure is likely to fall this quarter.
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Consumer confidence also improved in the month of May, although still below its long-term average. Less favourable are the figures for vehicle registrations in May, which remain at a standstill, as well as the fall in consumer goods imports in April.
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On the other hand, public consumption is expected to decrease significantly during the second quarter. After the surprising upswing in the previous period, now it should fall to meet the deficit targets announced for 2011. Investment won't contribute positively to growth either this quarter, although investment in capital goods will perform very differently to investment in construction.
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In the first case, indicators are giving off mixed signals and, as a whole, point to a very slight growth in investment in capital goods. On the not so optimistic side, of note is the sharp drop in industrial production that, once adjusted for calendar effects, fell substantially in April, placing the year-on-year growth rate at -1.6%, more than one point lower than the figure recorded for March. This sharp fall, widespread throughout all economic areas, puts an end to the positive trend seen at the beginning of the year. Capital goods, in spite of falling sharply in April, were the only group to maintain a positive year-on-year rate of growth.
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Investment will continue to deduct from growth due to construction performing badly.
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Another variable that was not very favourable was the purchases of industrial vehicles, which also fell in April. On the other hand, industrial confidence improved in the month of May and so did industrial capacity utilization, although both indicators are quite a lot lower than their average long-term level. In the case of construction, the most recent information still points towards the adjustment process continuing and it will go on deducting from GDP growth next year.
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The capacity to recover will depend on the foreign sector.
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The foreign sector is therefore likely to continue being crucial for the Spanish economy as a whole to keep up its rate of recovery in the second quarter. In this respect, tourism will make a significant contribution, which is looking healthy. In April it actually speeded up its rate of recovery as the number of visitors grew by 20.9% year-on-year. These figures confirm the good performance by the tourism sector, which received a million tourists more in the first four months of the year than in the same period in 2010. The recovery in the European economy and the political tensions in North Africa are expected to sustain this trend for the remainder of the year.
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In short, in view of the trend in the various indicators available, the prospect is for the revival in the economy to lose steam somewhat in the second quarter. Firstly, household consumption will grow little as it is still suffering from a lot of pressure, especially if inflation continues or the recovery in the labour market comes to a halt, as both factors will reduce disposable income. The expected gradual rise in interest rates won't help to speed up consumption either. The data also highlight the fact that investment will not make a positive contribution to growth. But one of the factors that will most condition the slowdown in the recovery in the second quarter is the trend in public expenditure. This will actually reflect the commitment of all public administrations to reduce the deficit.
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The European Commission estimates that the Spanish economy will grow by 0.8% in 2011.
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In fact, among the European Commission's recommendations for Spain, published in June with the aim of advising on this country's programme of reforms and fiscal stability for 2011, of note is its request for a strict application of the mechanisms to control the deficit and debt in regional governments. This organisation also recommends reducing social security contributions and raising VAT to boost competitiveness. In the employment area, it defends a reform of collective bargaining that links wages to productivity and proposes reviewing the results of the labour reform at the end of 2011. Lastly, regarding the financial system, it is in favour of continuing to promote the current restructuring of savings banks.
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