Research Dept. News
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Monthly Report, num 349 - September 2011
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Spain: overall analysis - Economic activity
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The weakening of economic activity is confirmed
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GDP grows by 0.2% in the second quarter compared with the previous period.
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The Spanish economy continued its moderate recovery in the second quarter of 2011 with quarter-on-quarter growth in gross domestic product (GDP) of 0.2%, according to the flash figures from the Spanish Statistics Institute (INE). This progress was two tenths of a percentage point less than the figure recorded in the previous period, slowing up the year-on-year growth rate by two tenths of a percentage point to 0.7%. This weakening in activity was to be expected, based on an interpretation of the different supply and demand indicators for the second quarter and the worsening of the sovereign debt crisis in the euro area.
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Although the breakdown of GDP trends is still not available, estimates by the Bank of Spain point to a slowdown in activity due to the significant decline in domestic demand, sharper than the one recorded in the previous period. Within this context, it's important to bear in mind the fact that the concentration of expenditure in the second quarter of 2010 in anticipation of the value added tax (VAT) hike in July and the end of direct subsidies for purchasing vehicles might affect the year-on-year rates for private consumption in the second quarter and, consequently, provide relatively low figures. On the other hand, the flash figures from the INE point to net foreign demand increasing its positive contribution to GDP growth, possibly helped by the good performance by tourism. Therefore, the foreign sector was once again the driving force behind growth in this second quarter.
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The worsening of the sovereign debt crisis could have a negative effect on spending in the third quarter.
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There is only limited information available on the third quarter but everything points to no improvement in the intensity of growth in activity over the coming months. Of note is the worsening sovereign debt crisis. A new phase seems to have begun after the episodes of Greece, Ireland and Portugal. At the beginning of August, it was the turn of Spain, Italy and France to suffer significant movements in their risk premia, leading to widespread losses in the main European stock markets. Although these risk premia dropped back significantly during the second half of August, volatility remains at a relatively high level and this might eat away at the confidence of the different agents. In this respect, July's generalized decline in confidence indicators is significant. Particularly important is the drop in confidence of industry, returning to the levels of last summer.
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Moreover, there has been a change in international economic conditions that does not benefit the interests of the Spanish economy either. The bulk of the evidence available suggests that growth in the main advanced economies will be less than expected in the second half of the year. This is reflected in the lower GDP growth forecast for the United States and the euro area. For the United States, for example, in January 2011 the consensus of analysts predicted that GDP would grow by 3.1% in 2011. In July this figure had fallen to 2.5%, while in August it stood at 1.8%. Without doubt, this is resulting in a smaller boost from global trade and might therefore weaken the contribution of Spain's foreign trade.
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Excellent tourism season in 2011.
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For the moment, the sector that continues to offer the best news is tourism. In fact, in June visits by foreign tourists maintained the good rate achieved in previous months, with a rise of 8.5% year-on-year, and this trend is expected to continue for the remainder of the year, in spite of signs of an economic slowdown in the euro area. With this figure, 24.8 million tourists have now visited Spain in the first half of 2011, 7.5% more than in the same period in 2010.
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So far, this recovery in the foreign sector has yet to be reflected in a rise in industrial production. Although this index stopped falling two years ago, it has remained almost static since then. This is partly due to the low utilization of production capacity which, although increasing slowly, is still at a relatively low level. In July, however, and due to greater uncertainty at an international level, the industrial production index fell notably. The same thing happened in the euro area as a whole where, after several months of strong recovery, the upward swing seems to be running out of steam. For the coming quarters, the adjustments and gains in productivity of the foreign sector should gradually boost the recovery in industrial production, although recent events might delay this a little longer.
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The revival in industrial production fails to appear.
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In short, economic developments over the last few months point to a weak recovery. The GDP flash estimate confirms that economic activity lost steam somewhat in the second quarter, as suggested by the different indicators, although the contribution made by the foreign sector remains strong. For the second half of the year, developments in the sovereign debt crisis will have to be monitored closely. Although a new package of aid was approved for Greece and the Franco-German axis, as required, seems finally to be taking hold of the reins and has proposed far-reaching reforms, the situation is far from resolved. In this respect, the new measures proposed by the Spanish government, such as reforms to pharmaceutical expenditure and to the Constitution to limit the public deficit, should boost the confidence of international investors in the Spanish economy.
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