Global Insight Perspective | |
Significance | The Spanish economy continued to grow robustly in the second quarter of 2007, despite major concerns about the health of the construction and property sectors. |
Implications | Global Insight believes the rate of expansion has now peaked. |
Outlook | The economy is set to lose some momentum from the second half of 2007. Rising interest rates, coupled with high levels of household indebtedness and concerns about the housing market, and the prospect of a stronger euro will act as a brake on the economy, with growth slowing to 2.8% in 2008 from an estimated 3.6% in 2007. |
The Spanish economy continued to grow robustly in the second quarter of 2007, according to a final estimate released by the National Statistics Institute. Real GDP expanded 0.9% quarter-on-quarter (q/q) and 4.0% year-on-year (y/y), as compared with a rise of 1.0% q/q and 4.1% y/y in the first quarter of 2007, which was its fastest annual rate since the second half of 2001.
The breakdown of second-quarter GDP data shows that robust domestic demand was again the main engine of growth. It expanded by an adjusted 4.9% y/y in the second quarter of 2007, down slightly from a 5.0% y/y rise in the first quarter of 2007. There are signs that the consumer boom has begun to peak. Household spending growth decelerated slightly to 0.8% q/q in the second quarter of 2007, down from a 1.0% q/q rise in the first quarter. In addition, the adjusted y/y growth rate edged down from 3.4% to 3.3%, the slowest performance since the final quarter of 2003. We suspect spending on services remained high, while spending on goods cooled. The volume of retail spending increased by 3.1% y/y in the second quarter, down from a 4.1% y/y rise in the first quarter of 2007. However, the demand for new car sales contracted, with the average level of new registrations declining 2.7% y/y after having fallen 0.7% y/y in the previous quarter.
Government spending continued to rise sharply in the second quarter of 2007, up by 0.8% q/q and was 5.5% higher than it had been a year earlier.
Domestic demand was also boosted by lively fixed investment spending, which rose by 1.3% q/q and 6.6% y/y in the second quarter. Spending on capital goods expanded 3.1% q/q, and was 13.0% higher than in the second quarter of 2006. The pick-up in industrial production since the latter stages of 2005 has boosted investment intentions. In addition, the level of capacity utilisation in the manufacturing sector has risen again to stand at 81.4% in the third quarter, up from 80.6% at end-2006. Ongoing concerns about the health of the property market appeared to cool construction activity, although it still continued to perform well in the second quarter. It grew by 0.5% q/q and 4.6% y/y, down from rises of 1.8% q/q and 5.2% y/y in the first quarter of 2007.
Export performance has improved in 2006 and the first half of 2007, boosted by stronger demand across the Eurozone, particularly from Germany. Exports of goods and services rose by 2.2% q/q in the second quarter, after a 0.1% q/q fall in the first quarter and 1.7% q/q rise in the final three months of 2006. In addition, the adjusted y/y growth rate accelerated from 3.7% in the first quarter to 4.8%. The improved export performance, coupled with robust domestic spending on capital goods, lifted the industrial sector, which has lagged behind the economy as a whole. Industrial production rose by 2.6% y/y in the second quarter, compared to increases of 4.2% in the first quarter and 4.6% at end-2006. Meanwhile, lively domestic spending ensured that import demand remained very strong, as it went up by 1.9% q/q and 6.7% y/y. Consequently, net exports continued to be a significant drag on growth during the second quarter.
Outlook and Implications
Spain is set to remain one of the strongest economies in the Eurozone, but concerns about the housing market, rising consumer indebtedness, and higher interest rates are expected to act as a brake on the economy from the second half of 2007. Consequently, real GDP growth is expected to slow from 3.9% in 2006 to 3.8% in 2007, and then to 2.8% in 2008 and 2.4% in 2009. Increasing fears of an impending property-market crash will hurt both consumer and business confidence, coupled with the prospect of a sharper than previously anticipated slowdown in construction activity will dampen near-term growth prospects.
Domestic spending is expected to cool from late 2007 but still remain at a high level. Consumer spending is likely to remain an important engine of growth because of sizeable household income and wealth gains. Nevertheless, we believe some households will begin to rein in their spending to consolidate the rapid debt accumulation of the last few years in the face of higher interest rates. An important contributor to overall activity has been residential construction, but this is set to cool as the property market could be enveloped by oversupply. This is a concern given that construction activity has been an important engine of growth in the past nine years. It has contributed around one percentage point per annum to overall real GDP growth, and now accounts for 15.7% of real GDP. In addition, the construction sector has been a major source of new jobs, creating 186,000 of the 774,000 new employment opportunities to arise in 2006. This implies that the sector directly employed two and a half million workers in 2006, while many others were employed in services which surround it. Meanwhile, equipment investment gained momentum in 2006, after it began to recover from a low level during the second half of 2004. It will continue to be supported by healthy business confidence and low interest rates, but the diminishing need to upgrade or replace some plants and equipment following the low level of capital expenditure in 2002-03 will begin to apply a gentle brake to capital spending from 2008.
Export growth is projected to slow from the second half of 2007, as a result of the euro making significant gains in 2007 and 2008, coupled with softer domestic spending across the Eurozone.