The Spanish economy Spain, as I said earlier, has been one of the euro area economies that has continued to post high growth rates, compared with the relative slackness of the area as a whole. The new base-year 2000 National Accounts estimates for Spain, released a few weeks ago, indicate that its GDP grew in 2004 at a significantly higher rate than the previous estimate (3.1% against 2.7%), albeit with a more unbalanced composition. Moreover, the growth rate has remained on a mildly accelerating path, which has continued into 2005 Q1, when output stood at 3.3% compared with the same period in 2004. As indicated in the Annual Report, it has not yet been possible to analyse in depth the new National Accounts series, although the first comparisons with previous estimates indicate that both datasets offer a fundamentally similar diagnosis of the economy’s performance. In particular, the higher growth the new figures - available so far from 2000 - show has confirmed the continuity of the long expansionary phase in train since the mid-nineties. The expansion has been the result of the notable momentum of domestic demand combined with high employment-generating capacity and the extension of the supply side of the economy, two mutually reinforcing phenomena over these years which have provided a sound base for growth. Spanish euro area membership lay at the root of the significant expansionary impulses experienced by household and corporate expenditure.
However, experiences show that it may take time before exchange rate changes have an impact on foreign trade. In the short term, the value of imports adapts in that import prices in kronor rise as a result of the weaker exchange rates. The initial effect of a weaker exchange rate on net exports can thus be negative. However, in the slightly longer term producers and consumers adapt and export and import volumes are affected. When the exchange rate weakens, exports increase while imports decline, as domestically-produced goods and services become relatively cheaper. The effect of a weakening in the exchange rate can thus be that net exports follow what is known as a J curve; first they weaken and then they improve. 12 In the long term one can thus expect a weaker exchange rate to lead to increased net exports, which in turn has a positive effect on total production (GDP). Overall view is important Although it may be informative to reflect on the isolated effects of exchange rate changes on the economy, it is difficult to know what causes what. At the same times as the krona weakened in connection with the financial crisis, production fell substantially, partly as a result of a large fall in the demand for exports. It is difficult in this type of scenario to isolate the effects of the weaker krona from the effects of other changes.