Businessweek Archives

Spain: Sailing Toward The Euro


Business Outlook: SPAIN

SPAIN: SAILING TOWARD THE EURO

Fueled by renewed vitality in domestic demand and the ongoing export boom, the Spanish economy is gaining momentum, paving the way for Spain's entry into Europe's single currency.

Economic growth is besting earlier forecasts. The government has lifted its growth targets to 3.2% for 1997 and 3.4% for 1998, and private analysts mostly agree. The Bank of Spain expects second-quarter growth from a year ago to hit 3%, with domestic spending accounting for two-thirds of the gain.

The consumer recovery is on track, too. Second-quarter real household spending rose 4.2% from a year ago, up from 0.8% in the first quarter. In July, auto sales, retail buying, and credit growth were strong. Low interest rates, the result of tame inflation and fiscal restraint, are supporting consumer and business outlays, as labor-market reform and prospects for initial entry into the euro's single-currency system have boosted confidence. Unemployment, at 21% in the second quarter, remains Europe's highest, but it's falling.

The 3% Maastricht Treaty target for 1997's public deficit, as a percentage of gross domestic product, is now easily within Spain's grasp. And the 1998 deficit is on track to meet the 2.4% target expected in the upcoming budget.

Exports will remain a strong growth engine, powered by a 6% fall in the trade-weighted peseta from its already competitive level at the end of last year and by strengthening demand in Europe. The trade gap in goods is narrowing, and given the record year for tourism, Spain's second-quarter current-account surplus was 2 1/2 times greater than a year ago.

A small problem brewing for 1998, which may complicate monetary policy, is inflation. At 1.8% in August, it is near a record low, but tourism-driven service inflation is up, and the weaker peseta is lifting import prices. The Bank of Spain's dilemma: With interest rates at 5 1/4%, vs. 3% in Germany, it needs to cut rates to converge with Germany's, but it also must ensure that Spain stays within the euro's inflation criterion.BY JAMES C. COOPERReturn to top

Return to top


Cash Is for Losers
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus