The ins and outs of the expansive moment

The economy is showing good feelings, driven by the foreign sector, but the continuity of these results depends to a large extent on the diagnosis of the European situation by the ECB in a context of still high inflation.

The surprising boost in activity, with a healthy expansion of Spanish GDP of 0.5% in the first quarter, can be explained almost entirely by the boom in tourism and exports of non-tourism services. In both cases, the volume of sales abroad is more than 30% above the pre-pandemic level, in seasonally adjusted terms and discounting inflation. The external surplus, which had been reduced (but without disappearing) during the pandemic and later as a consequence of the energy crisis, shot up: in the first two months of the year the current account balance reached 70% of all the surplus accumulated in 2022.

Everything points to the fact that European consumers are increasing their spending on travel and services, to the detriment of the consumption of goods, the most affected by the rise in prices. It is the countries most dependent on tourism that lead the European ranking, such as Italy (+0.5% in the first quarter, the same as Spain) and, above all, Portugal (+1.6%), while they are stuck industrial powers such as Germany (0%) and Austria (-0.3%).

Internal growth factors, however, show clear signs of weakness, even in countries that grow the most, such as Spain: private consumption plummets for the second consecutive quarter in line with the loss of household purchasing power, a contraction that is now extends to the consumption of administrations. Investment takes a breath, but without recovering the ground lost in the second half of last year. In addition, the rise in interest rates has partially passed through to the financial costs borne by indebted households and companies, so that the prospects for demand are still highly uncertain. Especially given the warnings from some of the most influential members of the ECB about the persistence of inflation.

Although the general CPI moderates in Spain and the information available for the European partners points in the same direction, the underlying tensions remain. In addition, supporters of monetary tightening consider that the strong increase in business margins is due to global excess demand, and that the Central European labor market is close to full employment, something that will end up putting pressure on wages, perpetuating inflation. The markets are already discounting a rise in interest rates next week, while the Euribor is close to 4%.

Beyond what is decided next week, it is to be expected that other arguments will be considered, such as the strong contraction of the household savings cushion: this will not be able to continue supporting demand for much longer. On the other hand, access to credit —an advanced indicator of activity— has been restricted and its cost has become more expensive as a result of the rise in interest rates. All of this will end up weighing down investment and consumption. Finally, the recent episode of financial instability reveals vulnerabilities that intensify with each additional increase in interest rates.

Fortunately, the Spanish economy is not the most exposed to monetary restriction, thanks to the resilience of the foreign sector and the strength of the labor market. It is clear that containing budgetary imbalances would help to shore up this position: let us not forget that Spain, together with Belgium, France and Italy, is one of the European countries that does not meet its deficit or debt targets. The reduction of the deficit is in our hands, on the eve of the reactivation of the European fiscal rules. But an exercise in realism is also expected from the ECB.

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