The European Central Bank's surprise rate cut on May 10 may be felt differently in Spain than in Germany, where economic data have turned sharply weaker. Lower rates could complicate Spain's efforts to keep inflation under control.
Spain's economy has cooled off from its 4%-or-better growth rate of the past four years, but it's still hot enough to stoke wage and price pressures. The April consumer price index rose 4% from a year ago, one of the fastest inflation rates in the euro zone. Even excluding energy and food, the rate is 3.4%, fueled by service prices. Overall inflation is well above the April euro zone average of 2.9%, which itself is above the ECB's 2% ceiling (chart).
Moreover, wage growth continues to pick up. Some three-fourths of Spain's negotiated-wage agreements are indexed to inflation. Overall contractual wages in February rose 3.8% from a year ago--up from a 3.3% pace for all of last year--and unemployment continues to fall. Joblessness at 13.4% is the highest in the euro zone, but that's also Spain's lowest rate in over two decades.
The economy will have to slow further in order to ease wage and price pressures. Spain's central bank estimates that first-quarter real gross domestic product grew a brisk 3.5% from a year ago. The official data are due on June 20.
The global slowdown, while likely to retard labor-market improvement this year, nevertheless arrives at a favorable time for Spain. Softer foreign demand is cutting into Spanish exports, especially with its euro zone trading partners. Consumer demand is also slowing, since job growth is not as strong as it was this time last year. As a result, the government has lowered its growth forecast for 2001, to 3.2% from 3.5%, although that pace would still be faster than the expected euro zone average of 2.2%.
With the ECB in a rate-cutting mood, inflation-fighting will be an internal battle for Spain. That puts the onus on the Spanish government to press ahead with fiscal consolidation and labor-market reform to quell wage pressures.
By James C. Cooper & Kathleen Madigan
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