Private consumption, pillar of the economy ( 340,09 KB )

 

  Private consumption was one of the supports for growth in the Spanish economy during the last expansionary cycle. The numbers speak for themselves. Between 1995 and 2007, the average growth rate was 3.8%, almost two percentage points above the rate for the euro area as a whole. Given its significant weight in the overall economy, accounting for 59% of the gross domestic product (GDP), the performance of private consumption was fundamental to keep the growth rate of the Spanish economy on the right track. However, its role in the recovery is not clear, at least if we look at the forecasts of the main institutions, both national and international. While the IMF expects 1.3% growth for 2011, the consensus of analysts places this at 0.3%. The forecasts of the Bank of Spain, the OECD and "la Caixa" lie between these two values (see the table below). Why such disparity? And, particularly, what is the most likely path?

  Its good performance seen throughout 2010, advancing 1.3% in real terms, could allow us to be optimistic to some extent. But as can be seen in the table above, few predict an improvement for this year. This is fundamentally because last year's figure is above all due to a significant reduction in the savings rate. Savings had remained stable during the years of expansion at around 11% of households' gross disposable income (HGDI), but when the international financial crisis erupted, this figure rocketed, reaching 18% in 2009. An abnormally high value but reasonable given the sharp increase in uncertainty and the deterioration in the labour market. In 2010, as the global economy started to recover and the Spanish economy was showing signs of stabilizing, the savings rate began a rapid drop until it reached 13% at the end of the year. The contribution of this factor was therefore fundamental. If the savings rate had remained constant, private consumption would have fallen approximately 4.7% in real terms.

  After the strong correction in savings in 2010, its downturn is now more limited. The current level is close to the one during the years of expansion but uncertainty still remains high. The push it might give to consumption will therefore be much lower.

  In addition to the little room for manoeuvre of the savings rate, there are other factors that also limit consumption's capacity to recover, with the VAT hike and rising commodity prices being the two main ones.

  As is well known, in June last year the lower VAT rate rose from 7% to 8%, and the general rate from 16% to 18%. Although it's true that this tax hike boosted consumption in the first half of the year because it encouraged people to bring forward some purchases, especially those of durables, the impact it had on households' purchasing power overall cannot be ignored. To get an idea of its size, we only need to remember that VAT revenue accounts for approximately 6% of the HGDI. An increase in this tax such as the one occurring last year therefore represents around 0.8 percentage points of the HGDI. However, it's important to remember that, in terms of growth, the effect is spread over last year and this, as the increase occurred in June 2010. Moreover, the VAT hike was crucial for the government to get the public deficit down to 9.2% and thereby to maintain the confidence of the international financial markets.

  The effect of rising commodity prices in general, and oil in particular, on the purchasing power of Spanish households isn't marginal either. The relative weight of fuels in household expenditure is large and, in general, demand for this product does not respond much to price variations in the short term. Specifically, the year-on-year growth rate in the price of Brent quality oil stood at 50% in May. In Europe, however, this increase has been lower, namely 30%, thanks to the appreciation of the European currency. Moreover, not all the rise in the price of crude has been passed on to prices at the pumps. In fact, this only represents 35% of the final price, approximately. As fuel expenditure accounts for 6% of expenditure on final consumption, the rise in price reduces the consumption capacity by 0.6 percentage points.

  Given this scenario, the trend in household consumption is unlikely to be a source of much joy in the short term. It's difficult to estimate the final impact of each of the factors mentioned and this is probably one of the reasons why the forecasts from different institutions are so disparate. But although part of the effects may be offset by the increase in households' gross disposable income, this probably won't be enough to stop consumption from posting a substantially lower rate to the one last year. In fact, signs of a downward trend could already been seen in the last quarter. After posting a 2.2% year-on-year change rate in the second quarter of 2010, this dropped to 0.7% in the first quarter of 2011.

  But it's not all bad news. It's important to stress that these factors are temporary. The effect of VAT on the growth rate will disappear during the second half of this year and oil prices are likely to stabilize gradually over the coming months. This will provide some support during the second half of the year and will help consumption to pick up somewhat more strongly in 2012. Moreover, consumption is also likely to receive support from the labour market by that time. This is a fundamental aspect for household income as a whole to grow again and thereby strengthen the recovery in private consumption and in the economy in general.

  This box was prepared by Oriol Aspachs Bracons

  European Unit, Research Department, "la Caixa"

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