Research Dept. News
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Monthly Report, num 351 - November 2011
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Spain: overall analysis - Foreign sector
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The trade deficit, caused by oil and the European economy
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Trade deficit up 10.4% year-on-year in August.
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August's trade deficit increased by 10.4% year-on-year, putting an end to four consecutive months of correction. This large imbalance results from the upswing in imports, up by 17.5% year-on-year, after their moderate fall in July. In spite of this temporary decline, the bulk of the evidence available suggests that the foreign sector will continue to be the main engine of the economy during the second half of the year. Weak domestic demand, which is reducing the pace of growth of imports, will play in its favour. However, there are two factors that will determine the future trend of the trade balance: the pace of growth of Europe's economy and trends in oil prices.
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In fact, close to two thirds of the Spanish goods exported during 2011 went to a country in the European Union. The good performance of exports to these countries, up 19.3% year-on-year in August, has resulted in a favourable trade balance for Spain with the European Union as a whole. This situation has not occurred since 1986. Of particular note is the case of France and Portugal, where the cumulative surplus for the last twelve months reached 9.3 and 7.8 billion euros respectively.
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The slowdown in Europe's economy jeopardizes exports.
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Given these data, there's no doubt that the decline in economic vigour expected in Europe for the coming quarters will lead to a slowdown in Spanish exports. However, the rate of exports to countries with less trading tradition with Spain might absorb part of this drop. One clear example of this is China. As can be seen in the graph above, the volume of exports to the Asian giant has gradually increased in relative weight over the last few years.
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Energy imports grow by 27.7% year-on-year in August, boosted by the high price of crude.
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On the other hand, the trend in oil prices will also play an important role in determining the future trade imbalance. In fact, the cumulative energy trade deficit between September 2010 and August 2011 reached almost 40 billion euros, accounting for more than 80% of the total trade deficit in this period. The sharp rise in the price of crude since September 2010, easily exceeding 100 dollars per barrel, explains this imbalance. The breakdown of energy imports for this period confirms this. Although these grew by 27.7% year-on-year in August, their increase in real terms was just 2.7% in the same period.
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Future stagnation in the price of crude, not discounting slight falls, could ease the pressure on the trade deficit for the coming quarters.
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The current deficit falls in spite of higher interest costs
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The current deficit accelerates its rate of decline in July.
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Within this context, the cumulative current deficit for the last twelve months speeded up its rate of decline in July with a fall of 16.3% year-on-year. This correction was largely due to the good performance by the balance of goods, revived by the fall in imports. However, the foreign trade figures point to less adjustment in August. In addition to this current balance component, also of note are the items of services and income due to their opposing trends.
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In the case of the former, the cumulative service balance surplus for the last twelve months reached 31.5 billion euros, 20.9% more than the figure for the same period a year ago. The rise in tourism was the main reason. This can be seen in the trend of tourism revenue, almost reaching 2008's record high in July. Europe's relatively healthy economy and the armed conflict in North Africa boosted visits by foreign tourists.
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The income deficit rises due to the higher financing cost for Spanish debt.
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However, there are risks of a slowdown in tourism's rate of growth as from 2012. At the same time, we also expect the income balance deficit to go on increasing. Between August 2010 and July 2011, this reached 26.8 billion euros, up 14.8% year-on-year. The rise in payments due to the higher financing cost of Spain's public and private debt is one of the main reasons. Tension in the financing markets is expected to continue over the coming quarters, moderating the adjustment in the current deficit in the medium term.
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