The Spanish Economy

The goal of economic policy is to improve wellbeing …

RECENT PERFORMANCE OF THE SPANISH ECONOMY

Spain’s economy grew more than the European average …

As for the Spanish economy’s recent evolution, after growing 2.5% in 2003, real GDP continued to grow at a healthy rate for the first half of the current year (2.6% year on-year), showing a nine tenths spread with respect to that registered by the rest of the euro zone. Growth slowed from 2.7% in the first quarter to 2.6% in the second due to the drop in the net contribution of net exports to GDP growth, -1.3 percentage points, while internal demand gained force, contributing 3.9 points. This acceleration is explained by an increase in capital investment growth, while consumption’s growth rate fell.

Employment rose 2% …

With regards to the labour market, employment in terms of full time jobs registered in the second quarter, according to the Quarterly National Accounts, a year-on-year increase of 2% (seasonally adjusted series), one tenth less than the prior quarter, which assumes a net creation of 323,400 jobs with respect to a year before. Salaried employment reduced its growth rate two tenths, to 2%, in contrast to a half percentage point rise in non-salaried employment, whose rate of growth reached 2.1%.

The employment creation process is supported by services and construction

The Labour Force Survey also shows a slow down in the rate of employment growth throughout the year, despite which economic growth continues to be employment intensive. Its year-on-year variation settled at 2.3% in the second quarter, as a result of the higher rate in services (3.7%), followed by construction (2.5%), while dips were observed in industry and agriculture (-1.2 and –2.7%, respectively). The quarterly profile shows a deceleration between the first and second quarters in all sectors, except industry, where the rate of decrease was reduced, in consonance with the recovery of activity.

Despite the slow down in employment growth, also reflected in the updated social security enrolment numbers, the more marked slow down in the increase in active population explains the decrease in the unemployment rate to 10.9% in the second quarter of the current year, compared to 11.2% in the fourth quarter of 2003.

Inflation is at 3.3%

With regards to prices, the downward trend in inflation in the Spanish economy started in August of 2003, froze between April and June, and continued its descent in July and August, coming in at 3.3%, compared to 2.6% in December of 2003. Underlying inflation, which excludes the price of energy and non-processed foods, has progressed in parallel to the general index, as it increased four tenths its rate of variation between December and August, from 2.5 to 2.9%, a rate four tenths lower than global inflation.

The macroeconomic scenario that accompanies the State’s General Budget for 2005 (table) is based, aside from Spain’s economic evolution and trends as described, on the following basic hypothesis regarding the external environment.

Global growth will significantly intensify this year, to 4.5 percent, and will dip by two tenths in 2005 due to the slowing down of the U.S. economy. Global trade will experience a marked recovery this year, maintaining a similar rate of growth in 2005, although pain’s export markets will grow less due to the sluggishness of the euro zone as compared to the U.S. and emerging markets.

As for the euro/dollar exchange rate, a settling at around 1.23 dollars per euro is forecast, which would mean a rise of 8.9 percent this year for the euro and a near evening off the next. The nominal effective rate will undergo a much lower increase in 2004, at 1.4 percent, due to the weight of the euro zone on Spanish exports. The yearly average of the price of a barrel of Brent oil will rise from 28.3 dollars in 2003 to 35.8 dollars in 2004 to then decrease to 33.5 in 2005. It should be noted that its dollar rate increase in 2004, which is estimated at 26.5 percent, drops down to 13.6 percent when expressed in euros. Lastly, interest rates are expected to follow a moderately upward trend, although for the current year short term rates will remain, expressed as a yearly average, at levels similar to 2003 and long-term rates at slightly higher levels.

Strengthening of the Spanish economy’s recovery …

The macroeconomic scenario takes into account a strengthening of the Spanisheconomy’s recovery that started at the end of 2002. GDP growth for 2004 will reach 2.8 percent, three tenths more than in 2003, continuing its acceleration next year when it will reach a rate of 3 percent. Since 1998, the Spanish economy has been registering growth in internal demand above that of GDP, which translates into a negative contribution of net exports to GDP growth. A significant change in this model should not be expected in the years to come. However, it is expected that internal demand, whose growth phase has reached maturity, will stabilize, in parallel with a gradual improvement in net exports’ contribution to GDP growth as benefits are felt from the more dynamic activity derived from euro zone economies’ more rapid growth.

… supported by internal demand …

The rate of growth in internal demand, after intensifying in the current year to 3.5 percent, seven tenths above GDP, will drop one tenth in 2005, as a result of the stabilization of private consumption growth and an increase in investment in equipment and other products, which will compensate the slowing down of public consumption and construction investment. As for private consumption, its rate of growth this year and next (3.2 percent) will continue to be above GDP, due, among other reasons, to the continue favorable growth in employment. The public administrations’ final consumption should continue to follow the path of greater moderation in real growth after the high rates registered throughout the last few years. This will make maintaining fiscal pressure while achieving a gradual rise in the budget surplus and increasing the public investment necessary to improve productivity, compatible. The Spanish economy’s fixed capital investments are expected to advance at a faster pace this year and next, although that increase will not be very acute since more dynamic investment in equipment will partially compensate the more moderate growth in construction. As for investment in equipment, a number of factors indicate that a significant recovery of the aggregate can be expected, despite the foreseen increase in interest rates. Among them are the prolonged rise in internal demand to high levels, the increase in exports, the good financial health of companies and the need to introduce technological improvements and increase productivity in a more competitive environment.