July 25, 2021

Change of guidelines in the expansion | Economy

Change of guidelines in the expansion | Economy

Growth data for the third quarter show that the shockwave is maintained, although with signs of imbalance. The Spanish economy grew at an annual rate of 2.5%, the same as the previous quarter and in line with the forecasts of slowdown of the majority of analysts. The results are positive compared to the eurozone, which grew by 1.7%, five tenths less than the previous quarter. Germany and France slow down, while Italy stagnates. Thus, neither the financial turbulence from the transalpine country, nor the commercial tensions and the slowdown of the world economy seem to have taken their toll.

That for now, because disturbing symptoms have appeared of a loss of protagonism of the external sector as the architect of the recovery, which now depends exclusively on domestic demand. Exports suffer a slowdown, which together with the increase in imports explains that foreign trade has begun to detract from activity. Export sluggishness reflects an unexpected, and probably prolonged, weakening of the eurozone, as well as temporary factors (such as adjustments in the automobile industry). And the end of the upward cycle of the American economy overshadows the international environment in the medium term.

In this context, The main victim is the surplus of the external balance. Until August, the surplus reached barely 2,000 million euros, compared to 9,200 million a year earlier. If the trend continues, that mattress that guaranteed the sustainability of the recovery will disappear in less than two years. A perspective that should be monitored, taking into account that the external debt still exceeds a year and a half of national wealth. Largely because of the error of not having corrected the budgetary imbalances during the recovery.

Change of pattern in the expansion

In terms of domestic demand, while maintaining its robustness, everything points to losing steam in the coming quarters. Especially because of the unsustainable evolution of private consumption. Households spend at a faster rate than their income. They barely save and their debt has started to rebound. The last barometer of bank credit shows that entities continue to relax the financing conditions for households, especially in the consumer loan segment. This situation can not last, on pain of opening a new focus of instability for the Spanish economy.

On the other hand, the best news is the solidity of investment in capital goods and intangible assets, which, with a year-on-year increase of more than 9%, is the most dynamic component of demand. In addition, foreign direct investment in Spain seems to have broken the downward path. According to the balance of payments data, between January and August, 35,500 million came in, almost twice as much as a year before.

Non-tourism deficit

Until August, revenues from sales abroad of goods and services amounted to 316,400 million euros, 3.7% more than during the same period last year (balance of payments data released this week). Payments abroad reached 314,400 million, an increase of 6.3%. Thus, the balance between income and payments shows a slight surplus, of nearly 2,000 million, 78% less than in 2017. Excluding tourism, external accounts leave behind the surplus of previous years to show an imbalance of 12,000 million.

Looking ahead, it seems unlikely that the investment will follow a trend outside the rest of the activity. On the other hand, the normalization of the monetary policy announced by the ECB could be less gradual than originally foreseen, which would affect the investment prospects. Inflation slightly exceeds the 2% target and the labor market of the hard core countries of the euro approaches full employment. The weakness of the euro and the rise in the price of oil, which is quoted in dollars, also combine to increase imports and raise inflation. The hawks of orthodoxy have not lost the opportunity to advocate a more forceful monetary turn. It would be reasonable to ignore such a recommendation, taking into account the weak underlying inflation and the incomplete economic recovery. However, markets could begin to discount future rate hikes, making private and state financing more expensive.

In sum, the deceleration is confirmed and a growth of just over 2% is expected for 2019. Still enough to cut unemployment. But further deterioration of the external environment and insufficient action to contain the public debt would shake this scenario.

Raymond Torres He is the director of Conjuncture of Funcas. On Twitter, @RaymondTorres_


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