Spain: Slower Growth--and Louder Calls for a Rate Cut

Spain, the euro zone's fourth-largest economy, is slowing markedly. The cooldown adds to the pressure on the European Central Bank (ECB) to cut short-term interest rates.

Real gross domestic product rose just 0.8% from the third quarter to the fourth. For all of 2000, real GDP grew 3.2%, the smallest gain in four years. Consumer spending, some three-quarters of Spain's economy, increased by only 0.2% in the fourth quarter.

Past rate hikes and higher inflation have combined to curb Spanish domestic demand. The ECB lifted interest rates seven times from November, 1999, to October, 2000. In addition, thanks mostly to higher energy costs, total consumer prices increased 3.7% in the 12 months ended in January, up from a 2.9% gain the year before. Core prices, which exclude food and fuel, grew 3.1%, up from 2.3%.

Tighter monetary policy reined in capital spending. Equipment purchases were virtually flat in the second half of 2000, compared with an annual rate increase of 2.8% in the first half. Businesses are wary about adding capacity when prospects for global growth are dimming. Nonetheless, Spanish exports are holding up. They rose 10.4% for all of 2000, up from a 9.1% gain in 1999.

The economic slowdown has begun to loosen up Spain's already slack labor markets. Companies barely added any workers in the fourth quarter, and during all of 2000, job growth stood at 4.1%, down from 5.2% in 1999 (chart). Harsh weather conditions in the fourth quarter may have cut into construction payrolls, but job growth elsewhere was also weak. The jobless rate stood at 13.6% in the fourth quarter, little changed from 13.7% the quarter before.

Slower job creation will heighten calls for lower interest rates. Although the ECB remains concerned about the value of the euro and rising inflation, the recent fall in fuel prices, as well as the sharp cooling off in demand in Spain and other euro zone economies, may swing the ECB's bias toward one aimed at stimulating growth.

By James C. Cooper & Kathleen Madigan

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