The Spanish economy takes off

Rafael Pampillón and Cristina Mª de Haro. IE Business School and Universidad San Pablo (CEU)

8 May 2015

Economic figures published in recent weeks serve to underscore the recovery of Spain’s economy and brings with it the hope that the resulting impact will mean that citizens will soon start to feel the difference in their pockets.

Some very positive data on the current situation of the Spanish economy were published recently. The Spanish Institute for Statistics (INE) announced the national accounts figures for the first quarter of this year, along with the evolution of consumer prices during the month of April. Furthermore, the Bank of Spain published the balance of payment of the first two months of this year. The Retail Trade Index for March also came out.  The upshot was that all these figures serve to confirm that the Spanish economy is growing fast in the first half of 2015 thanks to internal demand and exports. There are fewer and fewer doubts that the massive increase in exports that occurred during the crisis (2007-2013) was due to purely structural reasons (so the exports are now here to stay). Effectively, now that the economy is growing at a faster pace, exports are growing too, and the trade deficit is going down.

The excellent performance of the export sector has helped produce extremely positive national accounts figures for the first quarter. Spanish production of goods and services (GDP) rose by 0.9% in the first quarter of this year, thereby consolidating a growth trend that began in the third quarter of 2013, almost two years ago now.  In annual terms Spain’s GDP grew at a rate of 2.6%, which is the fastest rate of growth since the beginning of the crisis. If this trend continues, we can expect to see GDP grow by 3%, which is greater than the rate forecast for macroeconomic growth which was approved yesterday by the Council of Ministers.

Although we will have to wait until May 28 to know more details of the national accounts figures, available economic data permits us to forecast that the growth rate of GDP in the first quarter of this year is due to the increase in all the components of aggregate demand: consumption by families, public spending, investment in capital assets and in construction, and the export of goods and services.

Stronger internal demand

According to the Spanish tax authorities in the first quarter of 2015 the level of public spending was 2.6% greater than in the first quarter of last year due to elections and the funding of communities and city councils. Unfortunately, the cutbacks in the spending that public administrations should continue to make this year will not happen. In other words, public consumption will continue to rise over the coming months due to the fact that 2015 is an election year.

Household consumption also rose for the seventh consecutive quarter. Retail trade is another indicator that is enjoying similar growth levels. Figures published recently by Spain’s Institute of Statistics show an annual rise in the month of March in retail trade of some 2.8% (seasonally adjusted). This trend looks set to continue in the future given that the retail trade confidence indicator announced recently by the Bank of Spain points to further improvement in expectations in the sector.

With regard to investment, there will continue to be a growth trend. The Eurostat figures on confidence among entrepreneurs pointed to expectations that the Spanish Economy has the best outlook of any Eurozone country, better than even Germany, France, Italy and Portugal, and slightly lower that of the UK.

Exports too

According to recent information given out by the Bank of Spain, Spain’s exports of goods and services grew fast during the first two months of this year, at a rate that was 3% higher than that of the same time last year. As a consequence, the balance of payments showed that the current account now has a negative balance of 2,500 million euros, which is far lower than the 3,000 million euros at the same time last year.

In short, it would appear that the export of goods and services continue to grow at a rate that is faster than that at which they are produced in Spain, and can be expected to continue to grow at this rate during the rest of this year, with the help of a depreciating euro, a greater economic growth in key client countries, and the low level of prices in Spain’s economy.

Effectively, the prices of consumer goods continue to fall and Spain continues to gain competitiveness. The CPI figures announced by Spain’s national Institute for Statistics for the month of April are still negative (-0.6%), but are slightly higher than the same figures for March (-0.7%). Hence the trend of negative growth of prices that began some ten months ago looks set to continue. Moreover, Eurostat announced that the Eurozone as a whole is managing to keep its prices stable (0%), which means that Spain’s prices are increasingly lower than those of the countries with which it has to compete. That is good news for the country’s economy, given that lower prices mean gains in purchasing power for consumers, coupled with an increase in competitiveness for our exports.

Although prices are going down, there do not seem to be symptoms of deflation, at least for now, given that spending on durable consumer goods continues to rise. That is to say, consumers are not waiting to see until prices go down to buy. Hence in March of this year retail sales of household goods (furniture, household appliances and technology) were 7% up on the same month last year, allowing for seasonal adjustment.

To summarize, internal demand and exports continue to grow fast. This increase in internal demand, contrary to what happened in previous recovery phases, has been increasing the positive balance of goods and services as we have seen in recent years, and also in the first two months of this year. This is due to the fact that during the crisis our entrepreneurs have made a big effort to export and to substitute imports with domestic production. This is precisely what –Spain’s future growth should be based on – stable and growing levels of exportation.

Negative interest rates come to Spain

Furthermore, the excellent performance of the Spanish economy extends to the bond market, where investor confidence in the Spanish economy is now evident. Just recently the price of two-year fixed rate bonds went negative for the first time. This indicates that Spanish bonds are considered a safe place in which to invest the excess liquidity that has been generated as a result of the quantitative easing carried out by the European Central Bank.

The interest rates of longer-term bonds continue to fall, and are at far lower levels than those seen in the worst years of the crisis. Recently, a ten-year fixed rate bond stood at 1.47% (compared to 7% in 2012) and the risk premium stood at 118 points (while in July 2012 it had reached 630 points).

In short, the good economic data coming out of Spain shows that the Spanish economy is on the road to recovery, moving at an increasing pace. The cruising speed of the economy, an annualized rate of 3.6% in the first quarter of this year, reflects a marked increase in consumption and employment. If we add to that a greater level of purchasing power as a result of a drop in the price of consumer goods, it is reasonable to think that citizens of Spain will start to notice the improvement in the economic situation from a personal perspective sooner rather than later, along with the fact that the country is exiting the crisis.


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