Future scenarios for Spain's balance of tradeFuture scenarios for Spain's balance of tradeFuture scenarios for Spain's balance of trade

The improvement in the balance of trade is one of the most widely used examples when illustrating that the Spanish economy has corrected its main macroeconomic imbalances over the last few years. A positive trade balance can indicate that gains in competitiveness have occurred and it is essential in order to reduce external debt. However, in the last few months, together with the incipient recovery in domestic demand, the rate of improvement in the trade balance has lost steam and fears regarding whether this correction in the trade balance is structural or simply cyclical have returned.

60% of the correction in the trade balance is the result of growth in exports while the fall in imports accounts for the remaining 40%. In principle, the fact that a considerable proportion of this correction is due to the good performance of exports gives cause for relative optimism as, in the worst case scenario, exports could stop growing but it is difficult to imagine a scenario in which their trend would change direction very quickly. The role that appears to have been played by domestic demand is no less important but gains in competitiveness may have reduced its import content. Imports for domestic consumption and investment as a proportion of domestic demand have fallen considerably over the last few years.

We can construct different scenarios to determine more accurately the most likely margin within which the trade balance might move in the coming years. In a first scenario, we assume that exports will only grow as long as external demand grows (assuming a growth rate equal to the GDP forecast for trading partners of Spain). In this case, the average annual change of exports between 2014 and 2018 would be 2.6%. In the second scenario it is assumed that exports will maintain the growth rate in their market share seen over the last few years. In this case, exports would grow at an annual rate of 5.8%. For this scenario, the gains in competitiveness would have to be maintained.

For imports, in a first scenario we assume that domestic demand will grow by 1% annually on average. This is the trend forecast by "la Caixa" Research, very similar to the forecast of the consensus of analysts. A second scenario assumes a more vigorous recovery which allows domestic demand to reach growth rates similar to those of the period 2001-2004, namely 3.9% on average. It is important to note that both scenarios assume that the import content of domestic demand remains constant when, in fact, this is likely to fall if gains in competitiveness continue.

The likely trend in the trade balance in the worst and best scenario can be seen in the last graph. The trade balance seems unlikely to deteriorate significantly over the next few years although gains in competitiveness must continue for it to go on improving.