SPANISH ECONOMY SITUATION REPORT
Forecasts of world economy has worsened in recent months due to various reasons. On one side, there was slower growth than expected, especially in relation to the developed economies. Second, the sovereign debt crisis in European countries has increased more. At the international level according to the IMF, it has been produced whatit calls stagnation of two adjustments that are necessary to achieve "a vigorous growth, balanced and sustainable ".
Regarding the internal rebalancing, what is needed is to move from fiscal stimulus to private demand. Fiscal consolidation is occurring in most of
advanced economies. However, private demand is not taking over.
The main reasons are the shortage of bank credit, the legacy ofhousing boom and the high paralysis of many homes, which are holding back recovery more than expected.
In relation to the external rebalancing, advanced economies with
current account deficits, especially the United States, need to compensate weak domestic demand with an increase in external demand. Economies with large external surpluses must rely increasingly on domestic demand, and thosewith large deficits should do the opposite. Even though imbalances declined during the crisis, that was due more to a sharp decline in output of advanced economies in relation to emerging markets than to a structural adjustment in these economies. Looking ahead, we project an extension of the imbalances, not a decrease.
Turn now to the second event unfavorable: the worsening of the fiscal and financialuncertainty. It is clear that the markets now doubt more of the ability of many countries to stabilize the public debt. The last meetings of October are thought to be on the right track. However, it remains to clear many other questions, in particular how it will guarantee the sovereign liquidity using an European Financial Stability Facility , the restructuring of Greek debt by privateinvestors and a "plan" to unify tax criteria through a good European governance. Thus, it is necessary a decrease of financial stress that shakes Europe in order to transmit confidence and send a positive message for European growth.
Situation in Spain
Uncertainty about the global economic growth has had a negative effect on recovery expectations of the Spanish economic activity. Spain has amainly distinguishing feature compared with other European and world economies, the high unemployment rate. By the consumption side, the credit crunch, the exhaustion of unemployment benefits and the deposit war continue affecting negatively to the private demand. Regarding investment, with the end of fiscal stimulus and the continued adjustment of public deficit imposed by the UE, causes it tobe stagnant. The key element that makes Spain not having negative growth in external demand, supported by exports, although the data for the third quarter point to a stalemate. In financial matter, the increase in risk premium for the past three months and expectations about a slower decline to consistent levels would detract growth in 2012. On the other hand, the uncertainty related to economic policy and,in particular, with the ultimate resolution of the sovereign crisis would have already begun to affect expectations of firms and households, which have a negative effect on consumption and investment during the following quarters.
Evolution of GDP
With all these constraints, the evolution of GDP has undergone a change. The inter-quarterly growth rates were slightly higher than expected earlierthis year and have come to be below expectations in the second half of 2011. Thus, the timid advance that occurred in the first half of the year seems to indicate that it would be stopping, increasing the probability of occurrence of a contraction of the economy during the current quarter. With the downward correction of trade flows in the second quarter of 2011, the composition of...
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