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  Private consumption was one of the launch pads for growth in many developed countries during the last expansionary cycle. In fact, in most of them its relative weight in gross domestic product (GDP) exceeds 50%. However, in some countries this process was accompanied by a sharp rise in imports, thereby raising doubts as to its sustainability. This is the case of the Spanish economy. Intense growth in consumption led to the relative weight of private consumption reaching 60% of GDP, a slightly higher level than in most developed countries. But this process was accompanied by incredibly intense growth in imports that helped to push the current account deficit to 10% of GDP in 2008, a rate difficult to sustain over the long term. Now that the economy is starting to recover, it's important to ask whether the new expansionary cycle will be based on a more balanced growth in consumption.

  Usually, the variation of the domestic demand and the imports of a country are closely interrelated. The push from consumption during the pre-crisis years and the good performance of international trade in the last expansionary period, as well as the consolidation of the single market (particularly in the European case) boosted imports of goods and services even further. As can be seen in the graph on the left on the previous page, growth in imports of consumer goods between 1999 and 2007 was greater than the growth in total household consumption in the main European countries. As a consequence, the percentage of consumer goods imported (known as the import share of consumption) also grew during this period.

  The case of Spain particularly stands out, where both consumption and imports of final consumer goods posted higher growth than any other European country. Between 1985, one year before Spain joined the European Economic Community (EEC), and 2007, imports of consumer goods multiplied by 26.4. This figure contrasts with the overall growth in imports (10.1 times) and consumption (5.4 times). As a consequence, goods from abroad accounted for 12.8% of Spanish household consumption in 2007, more than 10 percentage points above the figure recorded 22 years previously.

  A breakdown by economic sector shows the important role played by durables in this sharp rise in imports of consumer goods. In fact, households' greater purchasing power boosted the penetration of imports from those sectors with the highest technology. Moreover, the upsurge in the real estate market during this period also helped this process. As a result, the rise in imports of cars, domestic appliances and furniture exceeded the average of the rest of imports during the last expansionary cycle.

  In terms of growth, this greater share of imports partially offset the contribution of consumption to Spanish GDP. The graph on the right on the previous page shows the opposing trends in both series. Between 1986 and 2007, the average contribution of consumption to growth, namely 2.1 percentage points per year, was reduced by 0.6 percentage points due to imports of consumer goods, a brake that reached 0.8 percentage points on average during the years prior to the start of the crisis.

  The gradual recovery in consumption will once again boost imports and their negative contribution to growth. However, the bulk of the evidence available suggests that this brake on growth will not be so big in the future. There are mainly two reasons for this. Firstly, because the recovery in private consumption will be very gradual in the coming years (see the Box 'Outlook of household consumption in Spain' for a more detailed explanation) and, therefore, also the rise in imports of final consumer goods. But especially because it will be more difficult for consumer durables to boom again. This has been the usual picture throughout the cycle in all countries throughout history. Consumer durables tend to grow above average at boom times and usually see weaker growth rates at difficult times. However, in the case of Spain, this will be augmented by the significant adjustment in the real estate sector. In short, given the high relative weight of consumer durables in imported consumer goods as a whole, the share of consumer goods from abroad is very likely to fall in the coming years.

  In the previous graph, we can already see a fall in the relative weight of imports of consumer goods. Since the peak reached in March 2007, the percentage of consumer goods from other countries has fallen by 3 percentage points, stabilizing close to 10% at the end of 2010. This trend contrasts with the one seen in the French and German economies. Both countries have recorded lower growth in the import share in consumption than in Spain since the beginning of the century, but the adjustment during the years of recession has also been less.

  Consequently, the weak recovery in private consumption in the next few years will be partly offset by fewer imports of consumer goods. A simple numerical exercise can help us to estimate the impact this might have. We assume the relative weight of imports of consumer goods is converging gradually towards 11.5%, an intermediate level between the peak reached in 2007 and the current level, and that the average rate of growth for consumption in the next 5 years is 2.0% (1.7 percentage points lower than in the pre-crisis period). In this case, the contribution of consumption to GDP growth would fall by 8 tenths of a percentage point, to 1.3 percentage points. However, the lower growth in imports of consumer goods would place the contribution of consumption net of imports at 1.0 percentage points, only 5 tenths of a percentage point below the figure recorded in the expansionary period.

  In short, although the process of recovery will be slow, it does seem that the dependency of growth in consumption on imports will partially correct itself in the coming years. In terms of growth this is good news, but we must continue to monitor the ultimate size of this adjustment, as it's very important not to go back to the imbalances of the past.

  This box was prepared by Joan Daniel Pina

  European Unit, Research Department, "la Caixa"

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