Spain is a prime example of how divergent the euro zone remains. Despite the zone's woes, the Spanish economy is doing well due to household spending. And a boost from the government will help keep consumers going in 2003.
In November, retail sales were up 7.8% from a year ago. And strong consumer demand is lifting prospects for manufacturers. Monthly industrial production grew 0.8% in November, led by consumer goods.
Given the strong pace of domestic demand, along with a pickup in exports, the government is forecasting fourth-quarter economic growth at an annual rate of 2%, vs. projections of less than 1% for the whole euro zone.
Low interest rates are helping to fuel domestic demand. Real rates are negative, given the European Central Bank rate of 2.75% and Spain's 4% inflation. That should keep home demand strong, even after estimates that mortgages outstanding jumped by 20% in 2002.
Wage gains, like the 3.7% rise in the third quarter, are keeping close pace with inflation, softening the effect of rising joblessness. And even though Spain's unemployment rate, at 11.8%, is tops in the euro zone, strong growth and labor reforms have helped slash the rate from 17.5% five years ago.
Plus, income tax cuts of $3.1 billion are set to begin in January, part of a larger $4.8 billion package of cuts for 2003. But the move won't jeopardize the government's balance sheet: Despite a fall in revenues, the 2002 budget deficit is expected to equal 0.2% of gross domestic product.
To be sure, a stagnant global economy, rising oil prices, and stubbornly high inflation pose risks. Indeed, a prolonged increase in oil prices could accelerate inflation and crimp growth. But economic and labor reforms made in the late 1990s in order to fully join the European Union have enabled Spain to outperform its counterparts. That should continue in 2003, with real GDP growth potentially double the pace of the rest of the euro zone.
By James Mehring in New York