The Return of Negative External Demand: A Wake-Up Call or Investment Dynamism?
Recent data from the National Accounting reports by the INE paints a picture that might stir old ghosts of the Spanish economy. Following a post-pandemic recovery largely supported by external demand, which accounted for 78% of GDP growth at the end of 2022, the dynamics have shifted. In recent quarters, the engine of growth has rotated: internal demand (consumption and investment) has taken the reins. Year-on-year, GDP grew by 2.8% in the third quarter, but external demand contributed negatively by 0.8 points. We find ourselves importing more than we export, while also investing more than we save.
Understanding the Shift
In the context of significant disturbances to international trade, it’s still too early to determine how enduring this imbalance will be. However, the change in external demand’s contribution (measured in volume) has started to reduce the current account balance surplus (determined in value), as export and import prices do not offset the volume changes with an improvement in terms of trade.
For those accustomed to interpreting external deficits as indicators of losing competitiveness, this shift may appear ominous. Yet, in economics, both context and composition are paramount. A chronic deficit financing lavish consumption can be just as dangerous as a sterile structural surplus that fails to seize future opportunities for national activity.
The Savings Paradox
To grasp this cyclical change, we must refer to a basic accounting identity: the current account balance is the difference between national savings and domestic investment. A country with a positive contribution from external demand (like Germany or the Netherlands for many years) saves more than it invests. This essentially means it is “exporting” its savings to the world, financing consumption or investment elsewhere.
Conversely, a country with a negative contribution—like Spain—starts to “import” foreign savings to meet investment needs or consumption that exceed its internal saving capacity. The pivotal question is not whether the balance is positive or negative, but rather why that balance exists, whether it is transitory or structural, and how it is utilized.
Evaluating the External Deficit
If the current external deficit emerges because we are importing advanced technology and services to boost productivity, modernize production, and transition towards more affluent societies, we might label it a “virtuous deficit.” In this scenario, we would be importing external savings to enhance our future productivity, akin to the U.S. model, where the economy attracts global savings to finance robust growth.
However, history serves as a cautionary tale. If the current deficit is solely driven by excessive consumption or a bubble in unproductive real estate, we could be repeating the narrative preceding the Great Recession. Various studies, such as those by Gopinath and co-authors, highlight that imbalances led to inefficient resource allocation, productivity divergence, and competitiveness loss, making us vulnerable to a “triple crisis” of payments, sovereign debt, and financial instability.
The Role of Investment in Productivity
As highlighted by the analyses of Mario Draghi and Enrico Letta, the European Union faces a paradox: while overflowing with savings, it suffers from a drought in productive investment. The EU needs to facilitate, incentivize, and eliminate barriers to massive investments in order not to lag behind global competitors like the U.S. and China.
If Spain mobilizes private capital to spearhead this investment process, it is likely that our external balance will temporarily decline. We would be doing precisely what Europe needs: ceasing to export savings and beginning to utilize them to bolster productivity.
Conclusion: Focusing on Quality over Quantity
It is imperative not to fixate on the signs of the current account balance in the short term, but rather on the quality of underlying flows and their efficient use. A surplus is meaningless if it leads to the depreciation of our physical and human capital. Conversely, a deficit can be tolerable, or even desirable, if it reflects a country attractive to international capital engaged in more intense technological and productive transformations than others.
The challenge for Spanish economic policy lies not in suppressing internal demand to force an artificial surplus, but in ensuring that every euro of imported foreign savings goes toward projects that enhance productivity. Only then will today’s growth translate into tomorrow’s prosperity, and the current deficit will simply be the investment necessary to achieve it. Hence, our primary concern should be that, at this moment, the negative contribution from external demand does not coincide with an intense improvement in productivity.
*Rafael Doménech is a professor at the University of Valencia and head of economic analysis at BBVA Research.