Research Dept. News
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Monthly Report, num 359 - July-August 2012
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Spain: overall analysis - Foreign sector
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Weak European demand reduces exports
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April's exports fall by 0.8% year-on-year.
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The slowdown in Europe's economy in the second quarter of 2012 is taking its toll on the foreign sector. The Old Continent's weak demand once again dragged April's exports down towards negative rates, specifically 0.8% year-on-year. However, a larger decline in imports means that the foreign sector's net contribution is still positive and the trade deficit is continuing to shrink.
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The export and import figures for April have undoubtedly been affected by the weakness in demand, both at a global level and in Spain. On the one hand, real exports recorded their third consecutive drop in April, by 0.5% year-on-year. Leading activity indicators, particularly in the European market, do not suggest any change in direction of export trends in the short term. In the same period, the drop in real imports was considerably higher, specifically 7.2% year-on-year.
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In the case of nominal trade flows, the squeeze in imports also exceeded that of exports. This led to a further correction in the trade balance of 15.3% year-on-year, reducing the cumulative deficit for the last twelve months to 43.6 billion euros, rewinding to the levels of 2003. A more detailed analysis of these series can help us to determine the underlying factors that will determine the trend in the foreign sector over the coming months.
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The weakness of imports reduces the deficit to 43.6 billion euros.
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Once again, the deterioration in exports to the European Union, 4.6% lower than in April 2011, concealed the good performance of trade with the rest of the world. Of note was the sharp fall in demand from countries such as Portugal, the United Kingdom and Italy. This contraction means that the relative importance of exports aimed at the EU market continues to decrease, currently accounting for 65% of Spanish goods compared with 75% eight years ago. This ratio is still high, so that the squeeze in Europe's economy will keep export trends in the negative.
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However, the trend in the correction of the balance of goods deficit is unlikely to reverse. On the one hand, the drop in Spanish domestic demand will continue to improve the non-energy balance, which remained almost the same in April, something that hasn't happened since 1986. With regard to the energy deficit, this increased again in April, coming close to the peak reached in 2008.
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Exports to the European Union account for 65% of the total.
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However, we predict that the fall recorded in oil prices in May and June will correct this imbalance over the next few months. Something that already happened in 2009, when the fall in energy prices, 44.2% between the maximum and the minimum, led to a 40.8% correction in the deficit from the maximum. Between February and June 2012, oil prices in euros have fallen by 26.2%. This means that, should the relation observed in the past continue, the energy deficit might decrease by around 8 tenths of a percentage point of gross domestic product (GDP).
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The ECB's liquidity injection shifts financing through other channels.
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This good performance by the balance of goods could help to improve the current deficit, taking over from the balance of services. In fact, according to data from the Bank of Spain, revenue from foreign tourism stood still, remaining at 2.9% of GDP in the month of May. However, the upswing in the number of tourists entering Spain in May, 5.8% year-on- year, invites optimism. Should further increases be recorded over the coming months, the improvement in the services balance could neutralize the progressive rise in the income deficit. This is due to the higher cost of financing Spanish debt within a context of a severe lack of confidence on the part of international investors.
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In fact, within this tense situation, the composition of Spanish financing has undergone a significant change. As can be seen in the financial account, the Eurosystem has become the main source of the net inflow of capital during the first quarter of the year, up by over 101 billion euros. This increase is due to the high liquidity injections carried out by the European Central Bank in the banking system. As a consequence, net borrowing via other, more traditional channels has fallen dramatically.
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