Spain: Recent Economic Developments and Selected Issues

This Recent Economic Developments and Selected Issues paper highlights that after several years of relatively buoyant growth, Spain’s economy went into recession in late 1992 and through 1993, but recovered rapidly in 1994 and early 1995. Toward the end of 1995, there was a renewed slowdown, though less marked than in other European countries, followed by a gradual acceleration during 1996. Over the three-year period 1994–96, GDP growth averaged 2.4 percent a year. The employment growth picked up relatively strongly in 1995 and 1996.

Abstract

This Recent Economic Developments and Selected Issues paper highlights that after several years of relatively buoyant growth, Spain’s economy went into recession in late 1992 and through 1993, but recovered rapidly in 1994 and early 1995. Toward the end of 1995, there was a renewed slowdown, though less marked than in other European countries, followed by a gradual acceleration during 1996. Over the three-year period 1994–96, GDP growth averaged 2.4 percent a year. The employment growth picked up relatively strongly in 1995 and 1996.

I. Recent Economic Developments

A. Output and Employment

Overview

1. After several years of relatively buoyant growth, Spain’s economy went into recession in late 1992 and through 1993, but recovered rapidly in 1994 and early 1995. Toward the end of 1995 there was a renewed slowdown, though less marked than in other European countries, followed by a gradual acceleration during 1996. Over the three-year period 1994-96, GDP growth averaged 2.4 percent a year. The recession of 1992-93 marked an important turning point, as it was associated with significant shedding of permanent workers and a sharp hike in unemployment that was already high as a result of structural factors and rigid labor markets. With the labor market reforms effected in 1994 and a notable moderation of wages in the wake of the recession-induced jump in unemployment, employment growth picked up relatively strongly in 1995 and 1996. Wage moderation, as well as tight monetary policies, facilitated a noticeable reduction of inflation, with consumer prices slowing to a rate of 2.9 percent (year-on-year) by end-January 1997, from rates of about 6 percent a year at the beginning of the decade.

Output

2. A sizable external contribution to growth mitigated the recession of 1992-93, and spurred the recovery of 1994. The strong performance of the external sector reflected not only the weakness of domestic demand, but also the effects of the improvement in competitiveness brought about by the large devaluations of the peseta that took place in 1992-93. After mid-1994, domestic demand became the primary source of growth, with the external contribution turning slightly negative even though exports continued rising strongly despite only a modest growth in the rest of Europe. The favorable prospects for exports may also underlie the pickup of equipment investment in 1995 and 1996, while import growth remained relatively subdued despite the incipient recovery in domestic demand (Tables 1-3).1

3. Private consumption has grown relatively slowly in recent years reflecting the effects of increased unemployment and wage moderation on real disposable income and a slight increase in the personal saving ratio (Tables 4-5).

4. The process of fiscal adjustment in the effort to undertake convergence with the Maastricht criteria resulted in a negative impulse from the public sector in 1994-96, with low public consumption growth and declines in real public investment. However, the fiscal adjustment facilitated a major decline in long-term interest rates in the second half of 1996, which spurred the recovery in private investment, particularly in equipment.

5. Gross fixed capital formation in equipment, after a sharp fall in 1992-93, has grown strongly since then, with a brief pause in the second half of 1995 related in part to a tightening of monetary policies. The strong performance of equipment investment in recent years was also based on a considerable improvement in the profitability of enterprises. By contrast, investment in construction remained weak, particularly in 1996, in part reflecting the effects of cuts in public investment.

6. On the supply side, agricultural production declined sharply in 1994 and 1995, owing to drought conditions, but recovered in 1996 with abundant rainfall, which led to an agricultural contribution to growth of about ½ percent of GDP in that year. Output in industry (excluding construction), slowed down after the first quarter of 1995, and declined in the first three quarters of 1996. Output of the construction sector mirrored the behavior of industrial production with a lag of one to two quarters. While there were signs of a recovery in industry toward the end of 1996, as of mid-February 1997 there were few indications of a turnaround in the construction sector. Growth in services remained fairly stable at about 2½ percent a year since mid-1994 (Tables 6-7).

Prices

7. After declining steadily from over 7 percent in 1989 to slightly below 5 percent in 1993, little further progress in lowering inflation took place until mid-1995—partly because of temporary factors such as a VAT increase (by 1 percent in early 1995) and the effects of the drought. Since that time, however, inflation has fallen sharply to 2.9 percent (year-on-year) at end-January 1996, the lowest rate in two decades, helped by tight monetary policy, wage moderation, and subdued import prices (Table 8). Wage moderation played a particularly key role especially in the labor-intensive services sector, where the rate of price increases had traditionally been higher than in the rest of the economy.

Employment, unemployment, and wages

8. Over the last two decades, Spain has experienced a long-term upward trend in unemployment owing to a number of structural factors, including a sharp decline in labor demand by the agricultural sector and mature industries (such as coal, steel, shipbuilding, electrical appliances, and textiles), rapid increase in the working-age population and of the female participation rate, and relatively rigid labor markets. The recession of 1992-93 was accompanied by a further sharp rise in unemployment to over 24 percent of the labor force in 1994.2 Despite the subsequent economic recovery, the unemployment rate was still close to 22 percent at end-1996 (Table 9). The large-scale shedding of permanent workers in 1993 and the labor market reforms effected in 1994 (see Box I.1 and SM/95/25, 2/6/95) led to a marked change in wage-setting behavior. Wage restraint in the public sector (wages were frozen in 1994 and adjusted by officially projected inflation in 1995 and 1996) also helped to change the behavior of the private sector. In 1994-95, permanent workers obtained modest real wage increases only through wage-drift, while temporary workers experienced sharp declines in their real wages. Partly as a result of this relative moderation, employment creation since 1995 has been faster than in previous cycles, though still not enough to make a major dent in unemployment (Tables 10-12).

Chart I.1
Chart I.1

SPAIN: COMPARISON OF SURVEY AND REGISTERED UNEMPLOYMENT

Citation: IMF Staff Country Reports 1997, 039; 10.5089/9781451812008.002.A001

Source: Ministry of Economy and Finance, and INE.
Chart I.2
Chart I.2

SPAIN: COMPARISON OF SURVEY AND REGISTERED UNEMPLOYMENT

(In thousands)

Citation: IMF Staff Country Reports 1997, 039; 10.5089/9781451812008.002.A001

Source: Ministry of Economy and Finance, and INE.

9. Ever since the use of temporary contracts was liberalized in the early 1980s, the Spanish labor market has been characterized by a sharp and growing dualism between permanent workers, protected by high firing costs, and temporary workers. The labor market reforms of 1994 were partly directed at curbing the use of temporary contracts while reducing effective firing costs by including “economic” reasons among the acceptable causes for “justified” dismissals. However, this does not seem to have been specified with sufficient clarity, as the courts have continued to rule that dismissals are unjustified in the large majority of cases, entitling workers to generous compensation. As a result, dualism has persisted: the share of temporary employment in total wage earners, which amounted to about 30 percent in 1990, rose steadily to a peak of 35 percent in 1995, and was still 34 percent in the third quarter of 1996.

10. Net employment creation in the last two years consisted almost entirely of new jobs in services, while the declining trend of employment in agriculture showed little sign of abating, and employment in industry remained about unchanged. Nonsalaried employment stagnated, and there has been a marked increase in part-time employment, which contributed about a fifth of the overall employment growth over the last two years.3

11. Among the jobless, the share of the long-term unemployed rose sharply from 49 percent in 1993 to 57 percent in 1995 (a lagged effect of the 1993 recession), decreasing only slightly in 1996. Unemployment continues to be higher among women (with an unemployment rate of 29.6 percent in the third quarter of 1996), and youth (50.2 percent of youth between the ages of 16-19, and 38.7 percent between the ages of 20-24). It also displays wide variations among regions (Table III.3).

12. An agreement between the employers’ association and the trade unions to reduce days lost to strikes by submitting labor disputes to independent arbitration resulted in significantly lower strike activity in 1996.

Labor Market Reforms of 1993-94

• To facilitate hiring: abolition of the monopoly over job placement held by the National Employment Institute (INEM); authorization of private nonprofit employment agencies; legalization of temporary employment firms; introduction of new apprenticeship contracts.

• To reduce effective dismissal costs: expansion of the acceptable reasons for (less costly) “justified” dismissals to include “economic” reasons.

• To facilitate functional and geographic mobility: replacement of the antiquated “Labor Ordinances” (Ordenanzas Laborales) with collective bargaining arrangements on workplace practices.

• To decentralize the bargaining process: introduction of clauses that permit firms to opt out of the sectoral level collective bargaining agreements, with union agreement.

• Unemployment benefits: requirements for eligibility were tightened; duration and generosity reduced.

• Measures were also introduced to encourage part-time employment and to restrict the use of temporary contracts.

B. Public Sector

13. Since the fiscal deficit peaked at 7.4 percent of GDP in 1993 during the last recession, there has been substantial, if uneven, progress on fiscal consolidation. The deficit narrowed to 6.2 percent of GDP in 1994, despite moderate economic growth. For 1995, initial estimates of a deficit of 5.8 percent of GDP had to be revised upward to 6.6 percent of GDP in the wake of additional spending attributable to 1995 discovered in June 1996; this revision meant that little net progress had been made during 1994-95 toward the Maastricht deficit target of 3 percent of GDP until 1996 (Table 13). The structural balance actually deteriorated between 1993 and 1995, climbing from under 3 percent of GDP to over 5 percent. By contrast, preliminary data on the fiscal outturn in 1996 show a sharp drop in the deficit to 4.4 percent of GDP, with the structural balance improving by 1.9 percent of GDP. For 1997, the government’s budget targets a 3 percent of GDP deficit to enable Spain to participate in the first group of countries in stage 3 of the European Monetary Union.

Expenditure performance, 1994-95

14. The disappointing outturn in 1995 did not mean that nothing had been achieved in controlling government spending. Public consumption was reduced by 1 percent of GDP, with a public sector wage freeze in 1994 and wage hikes lower than the rate of inflation in 1995, while spending of goods and services contracted in 1995 (Table 14). Social benefits spending also fell by 1.1 percent of GDP, due almost entirely to reductions in payments of unemployment benefits, as the effects of reforms in unemployment compensation began to take effect, and unemployment began to decline from the cyclical peak reached in early 1994. In contrast, interest payments on the government debt rose in 1995, reflecting the sharp rise in the debt to GDP ratio and higher interest rates stemming from the restrictive monetary policy followed by the Bank of Spain. Investment spending fell in 1994, and was slated to fall even more sharply in 1995, but much of the hidden expenditure discovered in 1996 and attributed to 1995 involved investment projects and capital transfers which boosted the revised total. This included fixed investment undertaken under provisions for “emergency” spending, that was neither budgeted nor recorded until 1996, capital transfers to public enterprises, and EU fines to dairy farmers for overproduction of milk that were covered by the government.

Revenue performance, 1994-95

15. Much of the fiscal deterioration in 1995 came from the income side, where current revenues fell from 41.3 percent of GDP in 1993 to only 39.2 percent of GDP in 1995. This drop had several causes. The recession certainly had some effect on corporate income tax receipts attributable to lower profits during and immediately after the recession. Other factors also played a role. Even as employment recovered, revenues from social contributions declined due to the fact that many of the new jobs created were part-time and apprenticeship contracts with special low contribution rates. In addition, the contribution rate was cut by 1 percentage point in 1995 in a bid to lower labor costs. Real wages also declined, which contributed to a drop in personal income tax revenue as a share of GDP. Regarding indirect taxes, the economic growth attained in 1995 (2.7 percent) came in spite of weak private consumption, which grew by only 1.6 percent, and depressed VAT revenues. The elimination of most remaining border controls as part of the single European market initiative also seems to have affected tariff revenues, as the authorities had to adjust their control and monitoring systems for non-EU imports entering via the rest of Europe. Only an increase of 1 percent in the basic VAT rate implemented in 1995 (to make up for the lower social contribution rate) prevented an even sharper drop in indirect taxes. Nontax revenues declined somewhat in 1995 despite a sharp increase in capital transfers from the EU as the poor performance of publicly owned enterprises affected current revenues from dividends.

Fiscal outturn for 1996

16. Since the 1996 budget was not approved by Parliament, fiscal policy for 1996 was governed by a rollover of the 1995 budget, modified by several decrees which permitted higher expenditure on entitlement programs and debt servicing.4 The rollover budget continued the previous strategy of relying on expenditure cuts for the bulk of the fiscal consolidation, with the expectation that continued economic recovery would produce a rebound in revenues. Public sector wage increases were held to the level of expected inflation, and sharp cuts were to be imposed on goods and services spending, especially on public investment. Social spending was to decline further due to continued reductions in outlays for unemployment compensation, along with expenditure controls to hold health care spending constant as a share of GDP.

17. In the event, economic growth was not as robust as had been foreseen, and the new government (which took office in May) was forced to take additional measures to assure compliance with the 4.4 percent of GDP deficit target. Expenditure cuts amounting to 0.25 percent of GDP were imposed, along with hikes in excise taxes on alcohol and tobacco which yielded around 0.1 percent of GDP. While full data on the fiscal outturn for 1996 are not yet available, preliminary estimates suggest that the deficit target was attained, representing a major improvement over 1995.

18. This fiscal consolidation was achieved on the basis of expenditure cuts in the central government and the regional and local authorities (Tables 19 through 24). Tax revenues remained somewhat weak, recovering by 0.3 percent of GDP from their depressed 1995 levels, as VAT and corporate income tax intake rose while personal income tax revenues and social contributions remained constant as a share of GDP. The central government appears to have overperformed on its target mainly by slashing public investment which fell from 5.8 percent of GDP to 4.4 percent of GDP. The sharp drop in interest rates which occurred during 1996 also improved the outturn on a national accounts basis, as the interest bill came in below its projected level. Public consumption overshot its target, but still fell by 0.3 percent of GDP. The overperformance by the central government compensated for some slippage by the social security system, which exceeded its deficit target for the second consecutive year (by an estimated 0.2 percent of GDP).

The 1997 budget

19. The 1997 budget follows the same fiscal consolidation strategy used in 1996 of sharp cuts in spending. Public consumption is to be reduced by 0.7 percent of GDP, 0.5 percent of which is slated to come from a wage freeze throughout the public sector and hiring restrictions to reduce public employment. Goods and services spending is also budgeted to fall sharply, with cuts imposed on everything from supplies and travel to maintenance and office rental payments. Social contributions are slated to fall by 0.3 percent of GDP reflecting further savings in unemployment payments and modest projected growth rates for pensions and health care spending. Finally, savings of nearly ½ percent of GDP are expected from additional cuts in public investment spending, although some of these cuts (around 0.1 percent of GDP) are to be supplanted by increased private participation in public investment projects, and others (another 0.1 percent of GDP) are accounting changes which effectively postpone payments on some infrastructure investment 2-3 years into the future.

20. On the revenue side, a new tax was introduced on insurance policies with an expected yield of 0.1 percent of GDP. A slight additional boost will be received from the full-year effect of the increase in excise taxes introduced in August 1996. These measures, together with the revenue effects of an improvement in the growth rate of private consumption anticipated in 1997, are expected to boost general government revenues by 0.2-0.3 percent of GDP, while nontax revenue will decline somewhat due to lower interest revenues and reduced dividends from public enterprises resulting from the government’s accelerated privatization program.

Public sector debt

21. Public sector indebtedness climbed sharply as a result of the large deficits run since 1993. Overall debt on a Maastricht basis rose from 48 percent of GDP in 1992 to 65.3 percent in 1995, and 69.3 percent of GDP in 1996. Two factors pushed indebtedness up strongly during the latter year despite a reduction in the fiscal deficit. Additional debt of nearly 1 percent of GDP was issued to liquidate the hidden spending undertaken in 1995 but not discovered until 1996. Also, the government appears to have increased deposits in the Bank of Spain during 1996 by more than 1 percent of GDP, financed by additional debt issues. These deposits, while raising gross indebtedness, obviously represent no increase in the net debt of the public sector (Tables 15, 16, and 18).

22. During 1995 and 1996, the share of public debt issued in foreign currency has remained roughly constant; it rose from 7.3 percent of total central government obligations in 1993 to 7.9 percent in 1995 before declining again to 7.5 percent in late 1996. The share of peseta debt held by foreigners stood at 12¼ percent in 1996, roughly the same level as in 1995. The average maturity of central government debt has lengthened steadily in recent years, from 1 year in 1990 to 3.2 years in 1995 and 1996. This reflects a deliberate strategy by the Treasury to make increased use of longer-term debt instruments, and (in 1995 and 1996) to take advantage of favorable developments in long-term rates, as inflationary expectations declined and expectations strengthened of Spain’s participation among the first group of countries in the European single currency.

C. Monetary and Exchange Rate Developments

Monetary stance

23. Since late 1994, the Bank of Spain’s monetary policy has been focused on lowering inflation to a target of below 3 percent in 1997 and 2 percent in 1998 (announced in December 1996). In line with these objectives, the Bank maintained relatively tight policies in 1995 and 1996, though it eased them somewhat in the second half of that year, as evidenced by an index of monetary conditions based upon estimated real interest rates and the real effective exchange rate (Chart I.3). In 1995, it raised its 10-day repurchase rate (its major policy variable) by a cumulative 130 basis points, in contrast to the Bundesbank, which lowered its key repurchase rate by almost 100 basis points in that year. As inflationary pressures began to abate, the Bank of Spain reduced its repurchase rate by 325 basis points in stages, from 9.25 percent in December 1995 to 6 percent in February 1997, a larger cumulative cut than in ERM partner countries. Even so, the repurchase rate as of February 1997 was still 300 basis points above that of Germany and about 3 percentage points above Spanish inflation.

Chart I.3
Chart I.3

SPAIN: MONETARY CONDITIONS

Citation: IMF Staff Country Reports 1997, 039; 10.5089/9781451812008.002.A001

Sources: WEO, INS, and other RES databases; and staff estimates.The monetary conditions index is a weighted average of the real effective exchange rate (REER) and the real interest rate. The weight of the REER is o three-year moving average of the ratio of exports of goods and services to GDP. Real interest rate are nominal rates minus CPI inflation from a year ago.

Monetary aggregates

24. After a steady acceleration from early 1993 to mid-1995 to about 11 percent (year-on-year), the growth rate of ALP (activos líquidos en memos del público), the monetary aggregate most closely monitored by the Bank of Spain, fell to around 6 percent in the last few months of 1996 and early 1997 (Tables 26-28). By comparison, nominal GDP expanded by 8.1 percent in 1995 and an estimated 6 percent in 1996, evidencing some instability in the relationship between broad monetary aggregates and nominal spending. The sharp deceleration in ALP in the first part of 1996 can be attributed in part to a shift of assets (especially, time deposits at banks) toward holdings in mutual funds.

25. Developments in domestic credit to households and firms have been consistent with the recent evolution of aggregate demand, displaying a slowdown in the second half of 1995 and a moderate recovery in 1996, though credit growth slowed again somewhat in the third quarter.

Exchange rates

26. For a few years after joining the ERM in 1989, Spain maintained the peseta relatively close to its central rate, resulting in a steady real appreciation. This was followed by a crisis in 1992-93, when the peseta was devalued three times and the fluctuation bands were widened (in August 1993). As a result of these developments, the nominal effective exchange rate vis-à-vis other industrial countries depreciated (by more than 20 percent) between mid-1992 and end-1994. A new period of turbulence erupted in early 1995, and the peseta’s central parity within the ERM was lowered by a further 7 percent in March; however, this was quickly overcome, and within a couple of months the peseta had returned to its pre-March values, and has remained broadly stable since then, as the central bank maintained the currency within a narrow range of 83-85 pesetas per deutsche mark throughout the second half of 1995 and 1996. Throughout 1996, the peseta was subject to upward pressures as relatively high interest rates attracted large capital inflows, and the Bank of Spain’s official foreign reserves rose to US$65.3 billion at end-January 1997, from US$36.4 billion in April 1995 (Table 31).

Financial markets

27. Long-term interest rates, which had risen strongly during 1994 and the first half of 1995, have declined sharply since then both in absolute terms as well as relative to other countries. This favorable trend resulted from the improvement in inflationary expectations and the progress made on fiscal adjustment in 1996, which was seen as increasing the likelihood of early EMU participation. Ten-year bond yields declined from a peak of over 12 percent in the spring of 1995 to 6.5 percent in mid-February 1997, and the differential with Germany dropped from 500 basis points in late 1995 to about 100 basis points in mid-February 1997. By that time, the 10-year bond yield differential vis-à-vis the three best inflation performers in the EU had also declined to less than 100 basis points (Table 29).

28. Correspondingly, the shape of the yield curve has changed significantly since end-1995, when it had been flat with high interest rates at all maturities; by mid-February 1997, the yield curve displayed a more normal shape, with short-term rates significantly lower than long-term rates. At the same time, it was sharply inverted for maturities of up to two years, as markets appeared to expect the Bank of Spain to reduce short rates further in the relatively near future.

29. The Spanish stock market has experienced a boom over the last year. The return on the IBEX was 40 percent in 1996 (and almost 50 percent in the year through mid-February 1997), and compared favorably not only with its own historical performance (Table 30), but also with that of other countries. Even so, the price to earnings ratio amounted to 17.6 at end-January 1997, still somewhat below the EU average of 19.9.

The banking sector

30. During the last decade, the profitability of Spanish banks has compared favorably with that of France and Germany. It declined somewhat in 1994, but recovered in 1995 and the first three quarters of 1996, as a narrowing of net interest margins was more than offset by an increase in income from financial transactions, a reduction in operating expenses, and a diminished need for write-downs and allowances to special reserves (see below). The difficulties affecting Banesto in 1994 did not have a systemic impact on the system, in part because Spanish banks have traditionally been highly capitalized. Since that time, Banesto has been restructured under the tutelage of Banco Santander and has returned to profitability.

D. The External Sector

The current account and its components

31. The boost to exports of goods and services stemming from the sharp devaluation of 1993-94, combined with the weakening of domestic demand after 1992, resulted in a marked turnaround in the external current account, which shifted from a deficit of 3.7 percent of GDP in 1992 to surpluses of 0.2 percent of GDP in 1995 and 0.5 percent of GDP in 1996 (Table 32). Exports of goods and services performed strongly throughout the period, particularly tourism whose surplus is large enough to offset the deficits in merchandise trade and in other services (see also Table 34).

32. The trade deficit shrank from 3.2 percent of GDP in 1995 to 2.3 percent of GDP in 1996, the lowest in many years, as merchandise exports grew by 13 percent, considerably faster than the growth of Spain’s markets, repeating the experience of every year since the major devaluation of the peseta in 1993. All types of exports grew strongly (Table 36) with car components (28.5 percent) and investment goods (20 percent) the fastest growing sectors. Higher exports of food products (11.0 percent) reflected the recovery in agricultural output after the drought.

33. Merchandise imports reached 20 percent of GDP in 1996, a level slightly higher than in 1995, with food imports contracting as the drought came to an end, and a significant slowdown in imports of intermediate goods, while imports of investment goods, certain consumer durables (such as cars and motorcycles) and energy products grew strongly (Table 36).

34. The geographic distribution of trade has undergone some significant changes since 1992 (Table 37). The share of exports to industrialized countries has slowly decreased, while the share of exports to developing countries, particularly Latin America, has increased. The share of export to the EU, after a sizable drop in 1993, has almost recovered its pre-devaluation level, with higher shares of exports going to Germany and Italy. The geographical distribution of imports remained fairly stable, with the only noteworthy feature an increase of imports from Latin America from 2.8 percent of the total in 1992 to 3.2 percent in 1996.

35. In 1996 the surplus on services increased to 3.4 percent of GDP, an outcome largely attributable to the tourist sector—which accounts for about 3/5 of total service earnings—where receipts increased by 4.5 percent. The deficit in factor income deteriorated sharply in 1996 to 1 percent of GDP from 0.7 percent in 1995, with both the government and the nonfinancial private sector experiencing declines. Current transfers had been exceptionally high in 1995 because of a catch up of some delayed official transfers from the EU, but dropped by 40 percent in 1996 to around their long term average (Table 32).

The capital and financial accounts

36. Large inflows of private capital, attracted by relatively high interest rates in Spain, led to a considerable increase in central bank foreign exchange reserves during 1996, as the Bank maintained the peseta at close to the central rate under the EMU. In contrast to 1995 when direct investment inflows greatly exceeded outflows, direct investment flows were almost offsetting in 1996. Financial investment inflows almost tripled with respect to 1995 while Spanish financial investment abroad decreased slightly after a large outflow registered in 1995.

Competitiveness and the real exchange rate

37. The devaluations in 1993-94 led to a sizable improvement in external competitiveness: the real effective exchange rate index, based on ULC relative to the industrialized countries (Table 38), increased by a cumulative 26 percent over the period 1993-95, although in the first half of 1996 this index was virtually flat. Reflecting this pattern, Spain’s market share expanded by a cumulative 32 percent in 1993-94, and by a further 2.4 percent in the first half of 1996 (Table 38). The market penetration achieved in the aftermath of the devaluation appears to be permanent, as the Spanish export sector has been expanding its market shares despite sluggish demand growth in its main trading partner countries.

1

Table numbers in Chapter I refer to Statistical Appendix Tables.

2

According to the unemployment survey. Registered unemployment reached 17 percent in 1994, and declined to below 14 percent in the last quarter of 1996 (Chart I.1-I.2). While the discrepancy between survey-based and registered unemployment raises questions about the exact magnitude of the problem, it is clear that unemployment in Spain is still well above that of any other industrial country.

3

In interpreting the employment figures reported in the tables it is necessary to bear in mind that INE has revised the sample weighting in its labor force survey to bring it in line with the results of the 1991 census. These revisions were phased in over 6 quarterly rounds of the survey, ending in the second quarter of 1996. INE has estimated that the revisions resulted in an increase in reported employment of 25,000 per round, or a cumulative 1½ percent.

4

The defeat of the budget occurred because the minority Socialist government had lost the support of regional parties, leading to general elections which were held in March 1996.