Research Dept. News
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Monthly Report, num 352 - December 2011
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Spain: overall analysis - Economic activity
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The green shoots wither in winter
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Greater risk of a double dip recession.
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The deterioration in the growth of gross domestic product (GDP) is being confirmed and, consequently, the Spanish economy is increasingly likely to enter a recession in the coming quarters. So a double dip recession appears to be a given. Now the big question is how extensive and how long the recession will be. In principle, the bulk of the evidence suggests that it will be temporary and not very far-reaching but uncertainty is still very high.
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For the moment, the third quarter's growth figures were not very encouraging. As in the last few quarters, domestic demand continued to adjust. This time, one of the main causes was the performance by private consumption, down 0.1% in quarter-on-quarter terms and thereby losing the ground it had gained in the second quarter. The re-estimation of the historic series also brought about a significant change. The positive trend it exhibited, with quarter-on-quarter growth averaging 0.4% between the last quarter of 2009 and the second quarter of 2011, has now become 0.1%.
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Public consumption also failed to contribute positively to the GDP flash estimate; quite the opposite, in fact. Severe public spending cuts are starting to result in significant declines in public consumption. Specifically, in the third quarter this fell by 1.1%, placing the year-on-year rate of change at -2.3%, five tenths of a percentage point below the figure posted for the previous quarter.
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Public and private consumption are down on the previous quarter.
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Investment figures were slightly better thanks to the trend in investment in capital goods and transportation. After a significant drop of 1.3% in the second quarter, this grew by 2.3% in the third quarter, bringing the year-on-year rate of change to 2.5%. However, investment in construction took a step backwards. We already expected this to continue deteriorating but the extent of the reduction, namely 1.9% in quarter-on-quarter terms, was greater than expected.
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The change in the savings rate will be key to the consumption trend.
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As a whole, domestic demand therefore fell by 0.4% compared with the previous quarter and, according to leading indicators for the fourth quarter, it will continue this clearly downward trend. The consumer confidence index, for example, fell by 2.6 points, totalling -19.6 points, a level it has not reached since April this year. The automobile sector is also having a hard time again, with registrations dropping by 6.7% in October in year-on-year terms, 5.4 percentage points lower than in September.
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The supply indicators for the fourth quarter don't warrant much optimism either. In October, electricity consumption posted a large decrease of 3.7% in year-on-year terms and the confidence index for industry, although slightly better than in September, has remained at a relatively low level.
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The possible deterioration in the foreign sector casts a shadow over the recovery.
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Nonetheless, one of the most worrying factors in the short term is how private consumption and investment will respond, faced with increased tensions in the sovereign debt markets and the significant upswing in unemployment in the third quarter. Both factors increase uncertainty regarding the economic prospects of households and firms and, in such a situation, both usually increase their savings as a precautionary measure. This is precisely what happened in 2009, when the savings rate picked up suddenly from 13.6% of households' disposable income to 18.5% in one year. Such a trend is not in evidence for the moment but, in order to make sure it doesn't happen, it's vitally important for the main European leaders to speed up reforms and the implementation of the measures approved at the last summit, such as the start-up of the European Financial Stability Fund (EFSF). Given that the European Central Bank's capacity to intervene in the public debt markets seems to be limited, it's very important for the EFSF to act quickly, effectively and decisively.
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Within this context of weaker domestic demand, all the cards for the Spanish economy's recovery are held by a single hand: the contribution of the foreign sector. This became decisive again in the third quarter this year and, in quarter-on-quarter terms, its contribution to GDP growth was 2.0%. This was possible particularly thanks to the strong progress made by exports, up by 3.1% in quarter-on-quarter terms, one percentage point above their average growth during the last year. Imports, however, remained weak and only advanced by 1.6%, largely reflecting the weakness of the Spanish economy's domestic demand as a whole.
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Another big risk hovering over the Spanish economy is therefore a decline in the foreign sector. And this, given the circumstances facing the main European countries, does not seem to be a remote possibility. Quite the opposite, in fact. In spite of the good GDP figures for the third quarter offered by Germany and France, both countries have seen the main leading indicators for their respective economies deteriorate significantly over the last few months. The same thing is happening for the euro area as a whole. The consensus of economists, which in June forecast 1.7% growth in GDP in 2012, is now expecting 0.4%, a level similar to the one forecast by the Research Department of "la Caixa", specifically 0.3%.
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Under such circumstances, the foreign sector is unlikely to continue boosting the recovery of Spain's economy with the same vigour. We have therefore appreciably reduced our GDP growth forecast for the whole of 2012, from 1.1% to 0.2%. We expect the foreign sector's contribution to continue being positive, specifically 1.2%, 0.9 percentage points less than in 2011. As we have already mentioned, domestic demand will more than likely fall moderately by 1.0%.
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Although we believe that the risks facing this new forecast have been suitably balanced upwards and downwards, it's important to note that the degree of uncertainty surrounding such forecasts is very high. Given the nature of the economic situation, there are many different factors that might substantially alter the course of economic activity over the coming quarters. Among these, and as we have already mentioned, of particular importance is the capacity to resolve the sovereign debt crisis. The Spanish economy's growth prospects could notably improve should this resolution be faster than expected.
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