SPAIN RAISES ECONOMIC GROWTH FORECAST FOR 2005

UNCLAS MADRID 002109

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON EU SP
SUBJECT: SPAIN RAISES ECONOMIC GROWTH FORECAST FOR 2005



1. (SBU) SUMMARY: Spain raised its growth projections for
2005 to between 3.2 and 3.4 percent. The Ministry of Economy
attributes the revision to strong performance in the first
quarter. However, methodological changes on the part of the
National Statistics Institute account for the numerical
revisions. The revised figures may further jeopardize
Spain,s attempt to maintain EU cohesion funds beyond the
current end date of 2006. END SUMMARY.


2. (U) Spain's National Statistics Institute (INE) revised
upward its growth projections for 2005 to between 3.2 percent
and 3.4 percent from the previously released projection of
2.9 percent. The OECD now forecasts Spain's growth for 2005
to be 3.0 percent, up from 2.7 percent. Minister of Economy
Pedro Solbes stated publicly that the revision comes in the
wake of strong first quarter performance. GDP climbed an
annual 3.3 percent in the first quarter of 2005, driven by
good performance in the construction sector and acceleration
in investment in capital goods.


3. (U) Notwithstanding Solbes, statement, methodological
changes were the primary reason behind the revision in the
growth forecast for 2005. The INE altered its methodology on
May 19, revising all prior growth figures after changing the
base year to 2000 from 1995. (Note: In the future, GDP
figures will be presented as a chain-linked index that will
refer to the previous year's data rather than a base
reference year.) The new figures also draw on a 2001 census,
which showed a sharp rise in the country's population as a
result of immigration. In addition, INE announced a change
in the way the contribution of bank loan deposits to GDP was
calculated.


4. (SBU) COMMENT: Spain's revised projections could
potentially harm Spain's bid for a continuation of EU
cohesion funds past the current scheduled end date of 2006.
Spain has received 11.6 billion euro in cohesion funds for
the period 2000-2006, helping to fuel rapid growth. Spain's
new projected growth contrasts sharply with the EU projection
of 1.6 percent for the Euro zone. Spain's Secretary of State
for the Economy David Vegara has acknowledged that although
the country is "richer and growing more," Spain may need to
contribute more to the EU coffers as a result. Regardless,
Spain will continue to seek support for a phase-out period
for the cohesion funds during the upcoming budget debates.
France, underpinned by Chirac, had previously supported
Spain,s position. The current uncertainty surrounding
France's position due to the no vote on the EU Constitution
may be another blow to Spain,s hopes of keeping high levels
of cohesion funds during a transition period. END COMMENT.

MANZANARES