GLEC Assignment-Country Report (Spain)

GLEC Assignment - Country Report Spain, Study Group A3 Sakshi Chand, Deepak Gaur, Sohil Aggarwal, Ranjani Krishnan,
n, S Sundar Kumar
SPAIN
This report aims at acquainting the reader with the macroeconomic trends in Spain, broadly covering the following1. Economic performance indicators 2. Currency fluctuations 3. Imports and domestic demand 4. Inflation 5. Balance of payments accounts - It includes capital and current account balances 6. Money supply 7. Interest rates 8. Labor force - Covers participation rate, employment /unemployment rate 9. Exchange Rate & Currency Crisis 10. Production and economic growth 11. International trade, trade restrictions and barriers 12. Taxes, Debts, deficits and liquidity trap Spains economy, twelfth-largest globally (based upon nominal GDP comparisons and fifth-largest in Europe) is regarded as world's 15th most developed country. It was regarded as one of the most dynamic economies within the EU until 2008, attracting significant amount of foreign investment. Spain's economy had been credited with having avoided the virtual zero growth rate of some of its largest partners in the EU. In fact, the country's economy had created more than half of all the new jobs in the European Union over the five years ending 2005, a process that is rapidly being reversed (Source: Wikipedia)
GLEC Assignment - Country Report Spain, Study Group A3 Sakshi Chand, Deepak Gaur, Sohil Aggarwal, Ranjani Krishnan, S Sundar Kumar
Country Snapshot: (Source: EIU Report June 2011) Total Area - 504,880 sq km; including 30% arable, 8% permanent crops, 13% pasture, 33% forest Population 45.2M (January 2007 official estimate) Fiscal Year Calendar Year Currency 1 Euro = 100 Cents Spain is part of a monetary union, the Euro-zone (dark blue) and of the EU single market. It issued Euro in 2002. (1) Economic Performance Indicators: Real GDP rose by 0.3% in the first quarter of 2011 (Source: EIU Report June 2011 for data and Wikipedia for Definitions, unless otherwise mentioned) Real Gross Domestic Product (GDP) is a macroeconomic measure of the value of output economy adjusted for price changes (that is, inflation or deflation). The adjustment transforms the money-value measure, called nominal GDP, into an index for quantity of total output. According to national accounts figures from the National Statistics Institute (INE), real GDP of Spain rose by 0.3% between the final quarter of 2010 and the first quarter of 2011, pushing the year-on-year growth rate up to 0.8%. The growth was largely fuelled by the growth in exports that stood at approximately 5% QOQ during the first 3 months, equivalent to an annualized growth rate of 21.6%.
Looking at the above graph, it can be seen that, both the exports and imports have increased sharply over the last year, 2009. Also, the negative contribution to real GDP growth on account of total domestic demand has decreased, thus boosting Spains economy further.
Above data further explains the trend in Real GDP over the last 2 years. The main surprise in 2011 Q1 figures was a QoQ jump of 1.4% in real public consumption. This was attributed to a concentration of government purchases at the beginning of the year because of which, public consumption had fallen in five of the previous six quarters. The graph on left shows the % change in Real GDP year on year from 2003 till date and Quarter on Quarter for every 1st quarter of the abovementioned years. As it can be seen, Real GDP was nearly constant until 2008. It fell drastically in 2009 due to sever financial meltdown of the economy. However, since then, it has shown steady signs of recovery and is up the Nil mark in 2011, with expectations to rise up further in 2012.
(2) Currency Fluctuations (Source: EIU Report June 2011 for data and Wikipedia for Definitions, unless otherwise mentioned) From the graph on right, we see that Euro continued to fall against USD throughout 2003 until 2008, with minor exceptions. It tanked up during the financial meltdown in 2009 on account of US Dollar requirements by the US financial institutions to meet local obligations. Since 2009, its been fluctuating within a range of 0.10 Euros. Basis EIUs forecast the euro would display considerable volatility on account of debt crisis.
(3) Imports and Domestic Demand (Source: EIU Report June 2011 for data and Wikipedia for Definitions, unless otherwise mentioned) - Spains trade plays a significant role in the nations economy, accounting for more than half of its GDP.
Spains imports were valued at $293.2 billion in 2009, which was a considerable decline from the 2008 level of $415.5 billion. The reason for such a wide gap between Spains exports and imports is the lack of resources in the nation, particularly oil. The nation imports a sizeable 1.813 million barrels of oil per day. Other vital import commodities of Spain are mechanical and electric machinery, and iron and steel. (Source same as above) Exports of goods and services (Source: EIU Report June 2011 for data and Wikipedia for Definitions, unless otherwise mentioned) Spains top export and import partners are from the EU region. Key export commodities of the nation include motor vehicles, foodstuffs, medicines, machinery and pharmaceuticals. During 2009, Spain had net earnings of $215.7 billion from its exports. This represented a decline of $70.2 billion from the export earnings of 2008. (Source same as above)
(4) Inflation (Source: EIU Report June 2011 for data and Wikipedia for Definitions, unless otherwise mentioned) A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households. The CPI is defined by the United States Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." The annual percentage change in a CPI is used as a measure of Consumer Price Inflation. Price increases or decreases, as measured by the producer price index are referred to as Producer Price Inflation. We see that the prices have been on an increasing trend since July 2009. National consumer price inflation increased further in April 2011, to 3.8%, while the EU measure rose to 3.5%. This not only poses threat for undermining real income, but could also put upward pressure on wage agreements. EIU expects inflation to decelerate during the remainder of 2011, as the impact of last years escalation in energy prices and rise in value added tax (VAT) falls out of the index.
(5) Exchange Rates Balance of Payments Accounts: (Source: CIA fact book & EIU reports) a. Current Account Balance The current account deficit for Spain for the year 2011 is USD 66.74 billion. When compared to year 2010, USD 80.38 billion, the deficit has reduced by 16.96%. The current account measures all imports and exports of goods and services along with all unilateral transfers of foreign aid. This shows that the imports for Spain have been higher and moving upwards in comparison to its imports.
The above graph shows that the deficit had increased till 2008, mainly due to an increase in goods trade deficit. After 2008 the deficit has decreased mainly due to the cost of oil falling. The exports for Spain have been weak mainly due to the lack of competitiveness and lack of global demand. b. Capital Account Balance The capital accounts for a country show the investments by the government. This also includes the foreign direct investment, Portfolio investment, & Reserve Account of a country. For Spain, the capital Account balance stood at USD 7.9 billion in 2009. The capital account balance is opposite of the current account balance. This is because the government usually favors investments.
The net foreign direct investment in Spain was USD -8.67 billion. As a percent of GDP the net inflow of foreign direct investment stood at 4.4 %. The net outflow of foreign direct investment as a percentage of GDP was 5%.
The main source for FDI came from countries such as UK, France & Holland, followed by USA and Italy. The FDI came in mainly sectors such as transport, manufacturing & real estate. The balance of payments deficit for Spain was USD 11.9 billion by the end of 4th quarter of 2010. This had bettered from USD 20.5 billion in 4th quarter of 2009 by 40%. The exchange rate for euro to dollar has remained constant over the last few years. The Euro traded at 1.45 dollars at the end of 2009 and at 1.45 dollars at the end of 2010. But the fall of dollar and the gain the Euro is getting is a problem for a price-competiveness of an economy like Spain. The Euro exchange rate has depreciated 3.29% in the last 12 months. (Trading economics)
(6) Money Supply & Inflation (Source: EIU reports, CIA Fact book, bde.es, ECB & Economywatch.com) a. Money Supply Money supply is the amount of money available in an economy at a given amount of time. The government has the monopoly over the supply of money. Since Spain is part of the European Union (EU), the European Central Bank is the only issuer of bank reserves and currency and thus the sole supplier of monetary base. The monetary supply at the end of 2010 was 4702 Euro Billions for M1, 8399.4 Euro billions for M2 and 9524 Euro billions for M3. The growth rates for M1, M2 & M3 were 4.3%, 2.2% & 1.7% respectively. While the growth rate came down for M1 from 12.2% in 2009, it rose for M2 & M3 from 1.5% & -0.4% respectively.
The above graph shows that the growth rate for M1 which had reached close to zero in 2008, during the economic crisis, shot up sharply in 2009 due to the influx of money by the European Central Bank as a way to bring Europe out of the crisis. The M3, which includes savings, actually went up during the crisis, when people did not have money for consumption, and we see as the economy became better, this has come down. Now as Spain enters another crisis, M3 has is showing an upward trend and M1 is moving down. b. Inflation Inflation for Spain has been rising since January 2010 and was 3.5% in May 2011. From 2002 to 2010, the average inflation rate for Spain was 2.8%. The high point for inflation was 5% in 2008, during the world economic crisis. As the country fights another economic turmoil, the unemployment rates have gone over 20% with the rising inflation. This rise in inflation in turns raises the interest rates.
(7) Interest Rate Spain is a member of Euro Area, an economic and monetary union (EU). The interest rates decisions are taken by the European Central Bank. The benchmark for the Euro Area for interest rate is 1%. As of June 2011, the interest rate stands at 1.25%.
Looking at the graph, we can infer that the interest rates were highest during the economic crisis of 2008. If the Interest Rates are higher, the FDI is higher during the period. This was done to improve the financial situation world over. In order to study Spains economy and prepare a country report out of it, we have tried to touch upon the various technical aspects covered in class till now (session 5 to8) and connect them with Spains data. The economy of Spain is the twelfth-largest economy in the world, based on nominal GDP comparisons, and the fifth-largest in Europe. It is regarded as the world's 15th most developed country. Until 2008 the economy of Spain had been regarded as one of the most dynamic within the EU, attracting significant amounts of foreign investment. Spain's economy had been credited with having avoided the virtual zero growth rates of some of its largest partners in the EU. In fact, the country's economy had created more than half of all the new jobs in the European Union over the five years ending 2005, a process that is rapidly being reversed. (Source: Wikipedia)
(8) Labor Force: (Source: CIA fact book & EIU reports)
The above graph shows the Labor force growth of Spain over the last few years. The labor force provides the total of employed and unemployed workers. This number stood at 22.96 million in 2008. It had grown from 2003 at an average growth rate of 3.86%. Spain is ranked 26 in the world in terms of labor force with China and India being at the top. But better measures of labor are participation rate, Employment rate and Unemployment Rate, which we will look at below. a. Participation Rate: Participation rate is defined as the ration of labor force to the total population. In a booming economy, the ratio is high. In the graph below we see that the ratio was 58.6 in 2008 for Spain. A high participation rate signifies that a larger amount of work force is ready to work. Though, participation rate along with unemployment rate is a better indicator of the state of the economy.
b. Employment & Unemployment Rate: Employment rate is defined as the ratio of the number of people employed to the total labor force. This is a good indicator of the state of the economy. A high employment rate means a low unemployment rate as unemployment rate is just (1-employment rate). When an economy is booming, unemployment is smaller than the long run average. As we see in the graph below, Spains unemployment rate has been on a steady rise since 2009. This is in direct relation to the economic downturn and is the highest amongst European Union. This is due to the large government debt of Spain.
(9) Exchange Rate & Currency Crisis: (Source: CIA fact book & EIU reports) Spain has one of the biggest foreign trade deficits. This debt along with a tumbling European economy impacts the stability of exchange rate and world trade. An increase in saving helps reduce trade deficit. The graph below indicates that the exchange rate for euro has been increasing since 2009. An increase in exchange rate further increases trade deficit as the country will have more imports than exports.
Due to this increase in trade deficit, there is the possibility of currency crisis. Spain would like to export more but the currencies of other countries like China refuse to appreciate. A weak exchange rate does not help imports and Spain with its impending trade deficit would like to change that, but other countries do not oblige. As the graph below shows that the trade deficit for Spain has been on a steady rise since July 09. Their current trade deficit stands at 4.6 billion Euros. The European Union accounts for 70% of exports and 59% of imports. With the whole European Union in a slum, the exports for Spain have been reducing and thus further increasing the woes of exchange rate of euro and a currency crisis.
(10) Production & Economic Growth: (Source: CIA fact book & EIU reports) An economy can be thought of as a giant firm. The economy uses Labor and Capital to produce goods and services. The other factor contributing to the growth of an economy is the technical knowledge and efficiency also referred to as total factor productivity. The graph shown below tells us that the Industrial growth rate of Spain as of today is -1.6%. Since 1980, the average growth rate for Spain has been about 3%. Most of this growth has been fueled by capital investment and accumulation. The rest has been due to increase in labor force and human capital.
Due to the current economic crisis in Europe, investment has been hard to come by. Most of the investors are moving to emerging economies to look for profitability in their investments. This has reduced the capital in Spain, thus reducing economic growth. Also, the European Union has seen a real threat of technical stagnation. Again, the main reason for this has been the huge credit and trade deficit of Europe, especially Spain. This has resulted in increased inflation with rise in oil and food prices and falling purchasing power. The government of Spain has tried to reduce the large debt by reductions in public investments. A decrease in government spending increases production. This has helped Spain to reduce debt from 11% of GDP to 6% of GDP. This can be seen by the GDP growth graph for Spain given below. The GDP for Spain has grown 0.8% in the 1st quarter of 2011. From 1996 to 2010, the average growth rate of Spain has been 2.84%.
(11) International Trade: (Source: CIA fact book & EIU reports, www.lamoncloa.gob.es) The share of Spains exports over the years has remained the same, but its imports have increased. The graph below of imports and exports display this trend. The imports for Spain were 24.24 billion EUR in March 2011. The major imports are machinery and equipment, fuels, chemicals and consumer goods. The main countries of import are of European Union and China. The exports for Spain were 19.65 billion EUR in March 2011. The main exports are motor vehicles, semi-finished goods and wine.
Spains trade policy is similar to European Union Policy. It performs well in business, trade and investment and supports private-sector development. The main challenge is the government expenditure. It accounts for close to 40% of GDP, thus decreasing total production and slow growth rate of GDP.
As displayed in the graph above, due to excessive geographical concentration, when the growth rate of European economies slows, the impact of the slowdown on Spanish exports is much more than it would be if the markets were diversified as the world trade is structured. The structural problem of external sector is not the geographical concentration alone, but also the level of technological sophistication of Spanish products gets reduced when compared with main trading partners.
Trade Restrictions and Barriers: (Source: Economywatch.com) Spanish trade policy has several non-tariff barriers. This is specifically in the primary and secondary sectors. Examples are subsidies and quotas, Import restrictions or bans on shipment of certain goods and Market access restrictions in certain services sectors. Other issues with Spains trade include inconsistent customs and regulatory administration and protection of intellectual property rights. (12) Taxes, Debts, deficits: (Source: Wikipedia, www.lamoncloa.gob.es) In 2010, there were excessive levels of debt in Spain. Economists recommended imposition of corrective policies to control public debt which include austerity measures and substantially higher taxes. Though the debt of Spain was rising rapidly with the onset of the crisis, Spain's public debt in the beginning of 2010, as a percentage of GDP, was still not high by European standards. It was still lower than the public debt levels of other countries in the EU. Concern was that the central government has little control over the spending of the regional governments. Under the shared structure of governmental responsibilities responsibility for spending had been given back to the regions without handing over responsibility of raising the required taxes. The central government currently finds itself unable to gain support for unpopular spending cuts from the recalcitrant regional governments. The graph below for Indebtness ratio shows how financial liabilities have risen significantly (from 33% in 2000 to 44% in 2004). Households can also acquire real assets such as properties to materialize their savings. If financial liabilities are divided by total assets (real and financial), indebtedness does not increase significantly. This can be explained by the reduction in interest rates associated with Spains entry to EMU.
Liquidity Trap: (Source: www.ine.es) The rise in the country's personal savings rate was at 7.9% compared to 4.8% in the year earlier period. Household savings increased from 8 billion to 13 billion euros. Disposable income has decreased by 19% over the same period. Behind this is a 12% decrease in tax receipts. This is divided into a 15% drop in
value-added, and a 7% diminution of income, taxes collected. Added to this the 18% increment in government social expenditures leads to the liquidity trap. Summary To summarize, this report evaluates the trends and analyses the Crisis, Economic performance indicators such as GDP, Currency fluctuations, Imports and domestic demand, Inflation, Exchange rate and currency crisis, Balance of payments accounts which includes capital and current account balances, Money supply, Interest rates, Labor force (Covering participation rate, employment /unemployment rate), Production and economic growth, International trade, trade restrictions and barriers, Taxes, Debts, deficits and liquidity trap of SPAIN.

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GLEC Assignment - Country Report Spain, Study Group A3 Sakshi Chand, Deepak Gaur, Sohil Aggarwal, Ranjani Krishnan,

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