Research Dept. News
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Monthly Report, num 358 - June 2012
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Spain: overall analysis - Foreign sector
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Exports lose steam
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Foreign demand's contribution to GDP growth drops in the first quarter of 2012.
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The figures from the National Accounts system for the first quarter confirmed the signs of a slowdown in foreign demand suggested by higher frequency indicators. The foreign sector's contribution to quarterly growth in gross domestic product (GDP) fell sharply in this period. A contraction in exports lies behind this lower contribution by what has been the main engine of the economy over the last two years. But within a scenario of weak domestic demand in the medium term, the trend in the foreign component will be crucial in determining the pace of the economy's recovery, as well as the extent of correction in the current imbalance.
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Service exports fall sharply.
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In fact, the slowdown in the economy of our main trading partners weakened the performance of exports, down 0.9% quarter-on-quarter in the first three months of 2012. But unlike what happened one quarter ago, this fall was exclusively due to a decline in the services component. Specifically, this fell by 5.0% quarter-on-quarter, after two years of continuous increases. As can be seen in the graph below, the slowdown in the number of tourists visiting Spain is the main reason for this drop. In this respect, April's figures, with 1.7% fewer arrivals than the same month in 2011, does not augur any recovery in service exports in the short term.
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The current deficit falls by 0.3 percentage points to 3.6% of GDP in March.
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We expect this loss of dynamism in exports to be accompanied by further falls in imports, caused by the weakness in domestic demand. As a consequence, the foreign sector's contribution to economic growth will remain in positive terrain over the next few months, although at a relatively low level. This was the case of the first quarter of 2012, when the contraction in imports, namely 1.3% quarter-on-quarter, placed the contribution by foreign demand to GDP at 2 tenths of a percentage point. A figure that is far from the previous quarter's contribution of 1.4 percentage points.
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Within this context of diminishing trade flows, we can see further advances in the correction of the external imbalance between January and March. The cumulative figures for the last four quarters show an improvement in the current account deficit of 0.3 percentage points, to 3.6% of GDP. A level that has not been reached since 2000 and which represents a contraction of 7.1 percentage points compared with the maximum reached in 2008. The extensive adjustment in the balance of goods, and more specifically in non-energy goods, lies behind most of this correction.
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According to the data from the Customs department, the correction in the balance of non-energy goods was still the main source of adjustment in the current deficit in the first quarter of 2012. Of note is the further increase in the trade surplus with the rest of the countries in the European Union, which nearly reached 6.7 billion euros in March 2012 in cumulative terms over twelve months.
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The trade surplus with the European Union approaches 6.7 billion euros in March.
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Looking to the future, we have kept to our forecast of a current deficit at 2.4% of GDP by the end of 2012. However, there are two factors that might slow up this rate of correction. Firstly, a loss of dynamism in exports of goods and services towards the euro area would affect the trade balance. Secondly, an upswing in tension in the financing markets could continue to push up the cost of financing Spain's external debt. As a consequence, the deficit in the income balance, which had already increased by 7 tenths of a percentage point in 2011, would continue to rise.
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The ECB's injection of liquidity boosts financing via the Eurosystem.
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In fact, this turbulence has led to a change in the composition of Spain's financing. As can be seen in the financial account, the Eurosystem became the main source for the net inflow of capital, increasing by 38.8 billion euros. This rise was due to the extensive liquidity injections carried out by the European Central Bank into the banking system and contrasts with the sharp fall in portfolio and other types of investment, totalling 11.0 and 25.0 billion euros respectively.
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