RaboResearch - Economic Research

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Spain: bright spots are emerging gradually

Economic Update


The bright spots for the Spanish economy are beginning to emerge in recent months. First, several sentiment indicators increased considerably in May and June, albeit from still very low levels. Second, the two year relaxation of Spain's budget targets allows the country to avoid a tougher austerity effort going forward. That said, export growth, which used to be a major source of economic activity, has disappointed since end 2012. On balance, the outlook has improved and the recession might end sooner than previously expected. But we must stress that the recovery of sentiment amongst Spaniards is not strong enough to prevent a mild GDP contraction in 13Q2 and 13Q3.

Year-on-year change (%)

Source: Reuters EcoWin, Rabobank

Exports unable to underpin GDP growth

Spanish GDP contracted in 13Q1 by 0.5% q-o-q. On a positive note, domestic spending dropped at a much slower pace than before. What was remarkable, however, was the fact that net exports, in contrast to recent quarters, was not able to contribute positively to the growth figure. This was not due to higher imports, but to rather weak export growth. In specific, export volume contracted both in 12Q4 and 13Q1. The figure shows that this was the case across the eurozone, which might partly be due to a lagged effect of the rise of the euro on a trade-weighted basis in the second half of 2012. Further, the comparison shows that the Spanish export sector performed relatively well since 2008.

Export volume

Source: Reuters EcoWin

Industrial production slowly moving out of the red

Industrial production (IP) declined in April by 1.4% m-o-m. However, due to the steep rise in March (+2.2% m-o-m), IP growth has managed to enter the positive territory on a 3m/3m basis. Worth of note is that the production of consumption goods contributed positively to this growth figure in contrast to recent months. The stabilisation of IP corresponds with the expectation of entrepreneurs in the manufacturing sector that the capacity utilisation rate will rise in 13Q2 (realisation not available yet), as described in our previous Economic Update. Based on rising sentiment indicators (next box), a further large contraction of IP does not seem to be on the cards in the coming months.

Industrial production

Source: Reuters EcoWin

Sentiment indicators surprise on the upside

Sentiment amongst purchasing managers (PMI) improved considerably in recent months. PMI manufacturing even rose to 50, which is higher than the index for the eurozone as a whole. In specific, the rise of the subindex of new (mainly foreign) orders was behind this improvement. Other leading indicators show a similar picture. The Economic Sentiment Indicator of the European Commission rose in June to its highest level in 16 months. Mind you that the current senti-ment levels still correspond with a mild GDP contraction. However, if this improvement continues in the months to come, the end of the recession might become more likely at the end of the year.

Purchasing managers index

Source: Reuters EcoWin

June’s rise of inflation seems temporary

Inflation increased in June to 2.1%, from 1.7% in May. Regarding the components, the Statistics Office only revealed that the contribution of energy prices was less negative than in April and May. This effect seems temporary as oil prices dropped steeply in June 2012 but rebounded one month later. As a result, the y-o-y change of energy prices will probably remain negative in the coming months. Regarding food prices, we expect a small negative contribution to the headline figure going forward because prices have decreased gradually since autumn last year. Core inflation will remain high until September due to the VAT-hike. On balance, we expect further downward pressure on the headline inflation.

Consumer price index

Source: Reuters EcoWin

Two years of budget relaxation ≠ end of austerity

The EC granted Spain two more years to reach its budget target of 3%-GDP. From an economic perspective this is perfectly justifiable. The required structural budgetary effort for 2013-2016 is 1%, on average. Although this is lower than last year, the amount of public sector retrenchment is still robust and will, therefore, act as a strong economic headwind in the coming years. We believe there is a substantial risk that the budget deficits might turn out to be higher than these targets. For one, the GDP growth assumption of the EC for 2014 (0.9%) seems overly optimistic. Besides that, the possible need for further bank recapitalisations might further push up the deficit.

Budget deficit, realisation and target

Source: Reuters EcoWin, European Commission


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