Spain: Waning Worries Over Inflation And Trade

Powered by strong growth in domestic demand, Spain's robust economy created two problems in 1999: It opened up a large trade deficit, and it helped to lift inflation well past the government's target. For 2000, growth is very likely to remain brawny, but both trade and inflation should improve.

Spain appears to have grown about 4% in 1999, and analysts expect a similar pace in 2000. Historically low interest rates are fueling consumer demand, especially for cars and other durable goods. Retail sales in November surged 7.6% from a year ago. In addition, capital spending is growing apace, and construction is booming. The resulting rapid job growth is generating solid gains in household income, sharply cutting Europe's highest jobless rate. The downside: December inflation jumped to 2.9% (chart), a three-year high that was double the 1998 rate and well above the government's original 1.8% target for 1999. For 2000, the overshoot automatically enters the wage structure of some 4.5 million union workers, on top of any new agreement.

However, November's 15.4% jobless rate continues to temper wage demands. Also, in reaction to the missed inflation mark, the government has cut regulated prices for energy, telephone, and transportation services, and opened up some utility markets to foreign competition. Most analysts believe that inflation will fall this year, and that the 2% government target for 2000 can be met.

Spain: Waning Worries over Inflation and Trade

The trade balance should also take a turn for the better. Last year's slump in Europe, the market for 70% of Spain's exports, combined with a flood of imports to cause a ballooning in Spain's trade deficit. For 2000, however, exports were already picking up sharply at the end of 1999. In November they grew some 20% from a year earlier, up from the August pace of about 3%. Improving trade is the chief reason why overall economic growth in 1999 likely exceeded the government's 3.7% forecast, and it is helping to put growth on a solid track for the coming year.