SPANISH COMMERCIAL ACTIVITY REVIVES.

Spains internal consumption proved to be surprisingly resilient throughout the 2002-2003 European economic slump, and 2004 promises to be the year when sustainable growth in private sector spending emerges again.

Spains purchasing power parity per capita of US$19,850 paints a mixed picture of discretionary income. In the Madrid metropolitan area, the cost of housing has shot up in recent years, leaving the average consumer with less leeway for discretionary spending than those in other regions.

Generally speaking, Spanish consumers have less disposable income than their counterparts in other eurozone nations, yet their willingness to spend is greater. Consumer confidence slipped during 2003 as unemployment peaked at nearly 11.5 percent.

The jobless rate should begin to drop by mid-2004 and that will contribute to sustainable improvement in consumer confidence. Household expenditure on durable goods should experience year-on-year growth approaching 4 percent in the second quarter of this year and peak at over 5 percent during the second half.

Demand for imported goods will be particularly strong, with year-on-year sales growth periodically moving into the double-digit range through the first half of this year. The roughly 25 percent appreciation of the euro against the U.S. dollar from the second quarter of 2002 to the fourth quarter of 2003 will give a cost competitive edge to goods and services originating outside the eurozone.

Demographic factors portend slow growth in household demand for non-durable and semi-durable goods for the foreseeable future. PRB statistics reveal that Spains rate of natural population increase stood at 0.1 percent during 2003. The population growth rate will slip slightly into the negative range by mid-century, giving Spain a consumer base equal in size to todays base.

Expenditure on household services is on the rise and the upward trend should hold throughout 2004. Strong growth in orders will be noted in the sectors of telecommunications and home entertainment. Increased programming options should contribute to double-digit growth in spending on specialized programming.

The pace of growth in industrial sector spending picked up during the second half of 2003 and that upward momentum should be sustainable through most, if not all, of this year. Orders for industrial equipment and intermediate goods should show growth ranging from 5 to 10 percent through the first half of 2004, with peaks over 10 percent later in the year.

Most Spanish manufacturers are still operating at well below installed capacity. As a result, orders for fixtures, materials, and services required for plant expansion will remain slack through most of this year. Fixed asset spending should pick up in 2005.