Saturday, 18 August 2012

Current account adjustment in Southern Europe: not too shabby

I know that the adjustments that several European nations are undertaking right now are a touchy and controversial issue but I want to zero in on facts tonight.

The current account adjustment is progressing quite fast in Southern Europe, admittedly not the first place that springs to mind when thinking of successful current account adjustments right now.

Of course I’m talking about Spain and Portugal, whose current account deficits were quite sizable during the run-up to the current depression. Currently though, their external sectors performance seems stellar.

source: Eurostat

Goods exports’ growth for both of them steadily outperformed the Euro-Area (EA) average after the great trade collapse (i.e. 2009). There are two things that I want to highlight. Firstly, Portuguese goods exports seem to buck the declining growth trend prevailing in most EA countries. I do not know whether this will continue to be the case if the slowdown deepens but their current performance is not something that one should ignore. Secondly, Spanish goods exports seem to slightly underperform the EA average now that things appear to slow down (Again I do not know whether this is of significance).

When it comes to services’ exports, both countries outperformed the EA average again, with Spain being the one that managed to buck the trend here, until Q1 2012 that is, when it succumbed and joined the bandwagon.  

source: Eurostat

If we look at quarterly data for the current account balance then the improvement becomes very much apparent.

source: Eurostat

Of course, both countries' external sectors are not as large as Ireland's to take up the slack from crumbling domestic demand but you got to start from somewhere and this is definitely a step in the right direction for these countries in their respective efforts to find a more sustainable footing. Admittedly, if the slowdown deepens then the brunt of the adjustment would have to come from the imports side and this would make it much more painful…

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