Bank of Spain first quarter report

Bank of Spain
Spain in “a renewed recessionary situation” – Bank of Spain

The Bank of Spain have released their Spanish economy quarterly report for the first quarter of 2012.


In 2012 Q1, Spanish economic activity continued on the declining path initiated in the closing months of 2011, in a setting of high financial tension. On the as-yet incomplete information available, the contraction in GDP is estimated to have been slightly higher than that in 2011 Q4, with a quarter-on-quarter rate of change of -0.4%. National demand fell once again (-0.9 pp), as has been the case over the past four years, although the decline was milder than in the preceding quarter, while the contribution of net external demand was positive once more (0.6 pp), but likewise lower than that in the previous three months. After posting rises for seven consecutive quarters in year-on-year terms, GDP fell back to a rate of -0.5% (0.3% in the previous quarter).

Employment fell once more, sharply so, posting an estimated year-on-year decline of close to 4%. And compensation per employee slowed across the economy, leading, in combination with high productivity growth, to a significant reduction in unit labour costs, prolonging the trajectory of the last eight quarters. The considerable sluggishness of domestic spending prompted a slowdown in the year-on-year rate of change of consumer prices from December to March, and the CPI stood at a 12-month growth rate of 1.9% in this latter month. Easing was more visible in the CPI excluding unprocessed food and energy, the year-on-year growth rate of which fell to 1.2%. In terms of the HICP, the inflation differential with the euro area stood in March at -0.9 pp, reflecting a reduction which was extensive to all the main HICP components.

On the international economic front, the situation on euro area markets improved somewhat compared with the stress peaks experienced in the closing months of 2011. Here, the ECB’s conventional and non-conventional monetary policy measures contributed notably, as did the approval of the second bail-out programme for Greece following the restructuring of its debt in private hands and the progress in the ongoing reform of economic governance in the euro area. However, instability returned in the opening days of April, affecting Spain and Italy acutely owing to the doubts arising over the adjustment processes under way in both countries.

The indicators available suggest economic activity in the euro area stabilised – or fell off very moderately – in the opening months of 2012, following the fall in GDP in 2012 Q4; nonetheless, cyclical divergences between the member countries continued to widen. Outside the euro area there was a moderate recovery in the United States, some improvement in Japan and a gradual slowdown in activity in the emerging economies, which nevertheless remain very buoyant. Global inflation continued to slacken, although the rise in oil prices, which peaked at $125 per barrel in February to dip slightly thereafter, poses a risk.

Turning to economic policies, measures in the euro area played a key role throughout the quarter. In terms of European governance, the seriousness of the sovereign debt crisis led control over public finances to be strengthened. This took the form of the signing, on 2 March, of the Treaty of Stability, Coordination and Governance in the Economic and Monetary Union. The Treaty incorporates the Fiscal Compact, under which 25 Member States, including Spain, have committed themselves to transposing into national legal frameworks a balanced-budget rule and an automatic correction mechanism for deviations at national level. Further, to reinforce surveillance of non-fiscal macroeconomic imbalances, the Commission presented in February its first Annual Alert Mechanism Report, designed to detect and correct situations of risk in this area. The report identifies 12 EU countries, including Spain, which should be examined in greater depth to determine whether the degree of severity of the imbalances detected calls for the initiation of an excessive imbalance procedure. As to crisis-prevention and resolution mechanisms, significant headway in setting up the European Stability Mechanism (ESM) was also made. The ESM required amendments to the Treaty on European Union, and its full operationality as a permanent facility has been brought forward one year (to July 2012) and its financial capacity (€500 billion) has been temporarily raised with the resources not used by the European Financial Stability Facility.

The ECB adopted a broad range of measures to restore monetary policy transmission channels and to reduce the likelihood of a traumatic contraction in credit supply that could have ensued given the growing feedback loop between sovereign risk and banking risk in the euro area that became discernible in the closing months of 2011. Among its standard policy measures, the ECB Governing Council held interest rates at an all-time low of 1% for its main refinancing operations, following the cuts made in November and December. This was in a setting in which euro area inflation, at 2.7% in March, was chiefly attributed to increases in the more volatile components, and in which inflation expectations remained anchored over the policy-relevant horizon. As to non-standard measures, in February the ECB approved specific criteria for the temporary acceptance of additional credit claims as collateral and implemented the second three-year longer-term refinancing operation with full allotment. Taken together, the two tenders considerably increased the liquidity buffer available to banks to undertake their refinancing operations, and they proved key to overcoming the moments of peak tension experienced last November.

There is a lot more… you can read the full press release here: Quarterly Report on the Spanish Economy

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