"La Caixa" Bank
Spain Economic Report - November 1996
Economic Situation:
The economic situation in the industrialized countries in the second half of the year indicates a
firmer thrust than in the first half-year especially in the countries of the European Union (EU)
where weakness showed most strongly in the first part of the year. Consumption has begun to
take off in these countries although for the moment the advance is gradual. In Germany the signs
of recovery of economic activity however are somewhat clearer judging by the figures shown in
some indicators. Something of the same kind is happening in France although the thrust is weaker
than in Germany.
With regard to the United Kingdom whose economic cycle is more advanced available figures
continue to confirm the strong growth of the British economy which also is reflected in the
gradual decrease in the unemployment rate. In Italy, however, manufacturing industry shows
some weakness and the economic climate remains stagnant. Outside the EU we should mention
the recession in Switzerland which showed a contraction of its gross domestic product in the first
half.
In the United States, the rate of economic activity is sustained although indicators for the third
quarter suggest some moderation. This is made apparent by the slight slowdown in consumer
credit and a slight drop in the index of purchasing managers. In any case, the utilization of
production capacity in industry rose in September. The situation is improving in Japan. Industrial
production is rising while construction activity both private and public is more active and
consumption shows clear signs of recovery.
In spite of the control being maintained over inflation in all countries the situation in the oil market
has somewhat darkened prospects as the per barrel price of oil has gone above 25 dollars, the
highest level since the Gulf War. In any case, there is the perception that this problem may be of
a temporary nature so that it is not expected to have a major effect on price indices at a moment
when other raw materials are tending to moderate in price.
With regard to interest rates, these continue to maintain a downward tone in the peripheral
European countries in both monetary and capital markets. In this respect, the various government
budgets for 1997 were well received in the markets. The positive tone has favoured the decrease
in some official interest rates which have been adapting to a situation the market had anticipated.
All of this had contributed to maintaining favourable prospects on the European Monetary Union
(EMU) which has strengthened the downward trend even further which continues to favour
convergence with German interest rates.
Also in keeping with European convergence was the decision of the Finnish government to bring
its currency into the exchange rate mechanism of the European Monetary System in order to
demonstrate that country's desire to join the EMU.
In addition, we should mention the appreciation of the dollar in foreign exchange markets
favoured by growth of the U.S. economy, the increase in Japanese investment in securities issued
in dollars and the prospect of an increase in U.S. interest rates in coming months.
The climate of relaxation in monetary policy and the greater solidity of figures on economic
activity has had its effect in stock markets so that the upward path taken by prices in September
continued in October. This way, the indices of the main stock markets have reached all-time
highs while they continue to move within a feeling of optimism.
In keeping with the performance of some indicators, Spain's economy will maintain a stable
growth rate in the final months of the year without there being the hoped for recovery. On the
supply side, the situation appears to have improved somewhat in industry if we look at the
business situation survey for August which showed fairly optimistic views on the future
performance of order books and trends in production. In construction, on the other hand, figures
for residential building for the first half do not show a particularly favourable trend with significant
annual decreases in the number of units planned or started. A more positive sign was that
government contracting showed notable moderation in the rate of decrease. Finally, in services
the situation is rather uneven with some decrease in rate of activity in some segments such as
transportation of passengers and an improved situation in others such as tourism.
On the demand side, the main unknowns continue to hang over the trend in private consumption.
In July both domestic production and imports of consumer goods showed major advances but
due to the thrust in exports availabilities for domestic consumption still stood below the 1995
level. Other indicators however show a more sustained level as in the case of passenger car
sales. The tone in investment also is generally holding firm with a clearly upward trend.
Furthermore, companies generally continue in a sound financial situation. From January to July
gross operating profit contracted slightly due to the fact that the lower rise in added value
coincided with the increase in wages. Nevertheless, the decrease in interest payments and
moderation in policy relating to depreciation and provisions made it possible for net profits to go
slightly above the first half of 1995.
In the labour market we note some moderation in rate of improvement given that in September
the increase in registered unemployment was substantially higher than in earlier years.
Nevertheless, the total number of unemployed at month-end continued to be the lowest for the
same period since 1982. In the first nine months the cumulative decrease in unemployment
especially benefited the tertiary sector while in industry, construction and among those seeking
their first job the cumulative reduction in unemployment was lower than in 1995. The most
favourable note came in the total number of hiring contracts recorded and this continued to rise
with special strength being noted in part-time hiring.
In inflation, the consumer price index showed a slight increase in September meaning that the
year-to-year change rate was down slightly to 3.6%. This slight improvement was due to the
general containment of the various components of the index with the exception of energy prices.
The annual increases in industrial goods (excluding energy) and services (excluding rents) stood
at all-time lows while the good performance in fresh foods was also notable. As for the rest,
industrial prices continued to moderate in August thanks to the notable drop in farm prices and
the favourable performance in consumer good and capital goods.
In the foreign trade sphere, according to balance of payments figures, the trade deficit showed a
major decrease in the first eight months due to the fact that the increase in exports (12.4%) was
clearly above imports (7.5%). The good tone in foreign sales was based on the improved
economic climate in European economies and the drive in non-EU markets. In addition, the
current account balance up to August showed a surplus of 136.3 billion pesetas as against the
deficit recorded in the first eight months of last year. Given that capital account and financial
account also showed positive balances up to August foreign exchange reserves of the Bank of
Spain grew notably. At the end of September reserves stood at 56.4 billion pesetas, nearly 50%
higher than one year ago.
The cumulative Treasury deficit up to September was reduced by 13.2%. This decrease came
about thanks to the fact that the growth rate of spending was below that for revenues. The
relative moderation in total spending was brought about mainly through a major cut in investment
spending and to a lesser extent by containment of current spending. Under the heading of
revenue, the increase in profits on government property were much higher than that from taxes.
Financial markets valued the 1997 budget positively seeing it as one which attempted to reach
the objective on public deficit set under the Treaty of Maastricht in order to join the single
currency (3% of the GDP for the public sector as a whole). In a climate of optimism on the
possibility of Spain's currency being included right from the beginning interest rates continued to
drop in October. On October 3 the Bank of Spain cut its 10-day intervention rate by a
half-point down to 6.75%, a new all-time low. Interbank interest rates which had anticipated the
move continued to drop gradually to reach new all-time low for all terms in mid-October
although they moved up slightly later.
This optimism also shifted to government bond markets where yields on medium and long-term
issues sharpened the downward thrust. Auctions for issue of these securities brought strong
demand although thanks to the Treasury's comfortable financial situation it placed less than half of
the amount applied for. Compared with the previous auction, marginal interest rates dropped
between three-quarters and one percentage point depending on term.
In secondary markets yields also fell to new all-time lows. The euphoria was heightened by the
figure revealing an improvement in the deficit in September. Yield on 10-year bonds stood close
to 7.5%, some 3.4 percentage points less than one year ago. At the same time the differential
with similar German bonds narrowed to a low of 1.55 points. Later on various statements by
representatives of the German central bank on the strict adherence of convergence criteria
cooled off prospects so that the differential with German rates widened to 1.8 points.
The foreign exchange market was not left outside the optimistic prospects on Spain's meeting the
convergence criteria of the Treaty of Maastricht. As a result, the peseta exchange rate was
subjected to upward pressures. The exchange rate against the D-mark stood around values
slightly above 84 pesetas.
Stock markets in turn benefited from the downward climate floating over interest rates and the
new thrust taken by the New York stock exchange so that in the second half of October the
IBEX-35 index went above its all-time high on various occasions in a market clearly moving
upward.
Top of Page
CHRONOLOGICAL SUMMARY 1996
- January 1 Royal Decree Law 12/1995 dated December 28,
1995 on urgent measures of a budgetary, taxation and
financial nature (BOE 30-12-95) which prorogued the
1995 government budget in the absence of an approved
1996 budget.
- January 12 Bank of Spain cuts 10-day auction rate from 9% to
8.75%.
- January 17 Law to Regulate Retail Trade (Law 7/1996 dated January
15, 1996) and complementary Fundamental Law 2/1996
of same date published in <<Boletín Oficial
del Estado>>.
- January 31 The Federal Open Market Committee of U.S. Federal
Reserve lowers discount rate and Federal Funds rate
by a quarter-point to 5.0% and 5.25% respectively.
- March 3 General elections to Spanish parliament.
- March 13 Bank of Spain reduces 10-day auction rate from 8.75%
to 8.25%.
- March 27 Peseta shows annual high against deutschemark with
Bank of Spain fixing at 84.04 pesetas to the deutschemark,
highest appreciation against German currency since
December 16, 1994.
- April 3 Bank of Spain reduces interest rate at 10-day
auction of certificates for third time this year from
8.25% to 7.75%.
- April 18 Bundesbank, Germany's central bank, lowers official
interest rates. Discount rate goes from 3% to 2.50%
and Lombard rate from 5% to 4.50%.
- April 26 Peseta reaches exchange rate of 82.864 pesetas to
the deutschemark (Bank of Spain fixing), the highest
figure for Spain's currency since October 10, 1994.
IBEX-35 index for Spanish stock exchanges reaches all-time
high closing at 4,124.31.
- May 4 José M(a) Aznar named Spain's Prime Minister.
- May 7 Bank of Spain reduces 10-day auction rate for certificates
from 7.75% to 7.50%, the fourth interest rate cut this
year.
- May 28 IBEX-35 index for Spain's stock exchanges hits all-time
high closing at 4,166.86.
- June 3 Government announces cut of 200 billion pesetas
in public spending spread over various Ministries.
- June 4 Bank of Spain drops 10-day auction rate for fifth
time this year from 7.50% to 7.25%, an all-time low.
- June 8 Official government bulletin (BOE) publishes Royal
Decrees 5, 6, 7 and 8/1996 on economic liberalization
and fiscal measures.
- June 28 Government announces privatization programme for
public companies.
- July 1 IBEX-35 index for Spanish stock exchanges reaches
all-time high closing at 4,278.31.
- July 31 Coming into force of Royal Decree 12/1996, dated
July 26, providing for special credits to meet obligations
from previous years and regularize advances of funds
and increasing special taxes on tobacco and alcohol
(BOE 30-7-96).
- August 22 Bundesbank, Germany's central bank, lowers
interest rates on repos to 3.00% from earlier 3.3%
maintained since February.
- September 27 Spanish government approves bill for 1997
budget.
Top of Page
Reproduced courtesy of "La Caixa" Bank
"La Caixa" publish the English language Spanish Economy Monthly Report. It is available in Adobe Acrobat (C) format from http://lacaixa.datalab.es/inf_an.html
