The economy of the A.C. of the Basque Country registered 3.5% inter-annual growth in the second quarter of the present year, with regard to the same period in 2004, according to EUSTAT data. If we compare the economic evolution of the second quarter with the first this year, once corrected for seasonal effects, inter-quarterly growth of the GDP came to 1.4%.

Inter-annual growth of the GDP of the A.C. of the Basque Country is point one percent higher than the Spanish economy (3.4%) and much higher than that estimated for the European Union 25 (1.3%), European Union-15 (1.2%) and the euro zone (1.1%), all of which are in our neighbouring economic zone.

From a supply perspective, the sectors that have grown above the inter-annual rate for the economic aggregate were Agro-fisheries (7.4%) and Construction (5.8%). However, the former shows a downward inter-quarterly profile, while the latter maintained an inter-annual rate that was point five percent above the preceding quarter.

The industrial sector, although it did not reach the inter-annual growth rates of other sectors, shows sympthoms of a clear upturn both in its inter-annual evolution and its inter-quarterly performance. An inter-annual rate of 2.3% was reached, compared with 1.4% in the first quarter, in addition to 1.8% inter-quarterly growth.

Market services obtained an identical inter-annual growth rate to the GDP (3.5%), when in the first quarter of the year it had been 3.2%. The inter-quarterly evolution also showed 1.3% progression. As the balance of non market services was slightly lower, services as a whole presented more discrete registers of 3.2% inter-annual rate and 1.2% inter-quarterly growth.

From a demand perspective, internal Demand accumulated 3.5% inter-annual growth in the second quarter of 2005, matching the rate of total GDP. The foreign balance, variation between imports and exports, therefore, did not contribute either positively or negatively in the evolution of the GDP; both total exports and total imports registered 1.9% inter-annual growth.

Expenditure on consumption in households improved inter-annual results rising from 2.9% in the first quarter to 3.2% in the second, but shows a slight inter-quarterly slowdown.

Expenditure on public consumption followed a moderate pattern in its inter-annual evolution, rising 2.7%, compared to 2.6% in the first quarter. However, its inter-quaeterly progression improved.

As occurred in the first quarter of the year, the most active element in demand was, without doubt, Gross Formation of Capital in the second quarter of 2005, i.e. Investment, which registered 5.2% inter-annual growth, point two percent higher than the inter-annual rate for the first quarter (5.0%). Construction and purchases of capital goods were behind this performance in productive investment.

Personnel employed also improved, the inter-annual register rising by point four percent in the first quarter of 2005, coming to 2.4% in the second quarter of 2005.

The definitive data for 2003 and 2004 estimations of the GDP of the A.C. of the Basque Country reflect, once the methodological changes proposed by the EUROSTAT have been introduced, growth of 3.1% and 3.3%, respectively.

METHODOLOGY NOTE

The Quarterly Accounts for the second quarter of 2005 and, in parallel, the Economic Accounts corresponding to definitive data for 2003 and the data summary for 2004 presented by Eustat, contain a series of methodological changes. They were necessary, to a large extent, due to decisions adopted by the European Commission, which affect the estimation of both the data presented today and the series, which have been re-estimated since 1980 for the main macro-economic aggregates.

The changes are the following:

1. Incorporation of a new method to measure volume, which substitutes the fixed basis values in constant prices which had been used to date

2. Distribution of the Indirectly Measured Financial Intermediation Services (FISIM) among the user sectors

3. Changes in the estimation of the Public Administration institutional sector.

New method to measure volume: chaining economic series (1)

This methodological change is adopted in accordance with Commission Decision number 98/715/CE, which urges its introduction by member European Union States from the year 2005.

To date supply and demand aggregates were presented in real or constant terms referring to a base year with regard to which they were deflated, eliminating the price component. With the new volume measurement, growth is not referred to a base year (e.g. in our case the year 2000), but the reference will be the preceding year, i.e. we move from a system with a fixed basis to one with a mobile basis. These measurements of prices in relation to the preceding year are named links, and the product of the links enables us to obtain a time series of volume measurements linked which are presented in the form of index numbers with regard to a reference year, which is the same as100.

With this new method we obtain more up to date and accurate estimations as the structure is taken into account not of the base year but of the preceding year in the measurement of different aggregates. In the presentation in the form of index numbers the reference taken is the year 2000, giving an index of 100 for this year.

For quarterly accounts, the calculation of the links is made using the price structure of the previous year to assess the amounts, similar to annual accounts, and the chaining or overlapping method used is named annual overlapping, which links the four links calculated multiplied by the chained annual index of the preceding year, which guarantees coherence between the quarterly and annual accounts.

Distribution of Financial Intermediation Services Indirectly Measured (FISIM)(2)

FISIM are defined as the indirect payment which financial institutions receive from loan and deposit transactions. To date, and in accordance with the European Accounts System ESA-95, the treatment of FISIM consisted of assigning them as a product of the “Banking” activity and intermediate consumption of a fictitious branch that had zero production. The GDP were not influenced by the assessment of FISIM.

Regulations 448/98 and 1889/2002 by the Council modify Regulation ESA-95 and establish 2005 as the year when FISIM should be distributed among users of financial services and, therefore, the fictitious branch must disappear. Thus, the different activity branches will have FISIM intermediate consumption, and dwellings, Non-profit making institutions and Public Administrations will have FISIM final consumption. Similarly, there will be FISIM imports and exports. In this way, the GDP of the economy will now be affected, and experience an increase.

Changes in the estimation of the Public Administration institutional sector

The existence of other methodological changes that require the Economic Accounts series to be re-estimated has led at the same time to the incorporation of changes in the estimation of the Public Administration institutional sector, as follows:

1.New definition of the Public Administration sector, with the inclusion of new units that previously did not make up the sector and following the criteria determined by the ESA and Eurostat.

2.New estimation of the subsector Regionalised Central Administration.

Altogether, the new estimation of the Public Administrations sector has represented an increase in public consumption in relation to the previous GDP.

Quantifying these changes

The new method to measure the linking in volume has little effect in the short term with regard to the previous base year method, but if we observe a long series, for example, from 1980 to 2000 for the GDP of the A.C. of the Basque Country, the estimation of growth over this 20 year period with the new method would be 76.94% in volume and 72.97% with the old method, i.e. a difference of almost four percent more using the new method, which annually shows a repercussion of only a few hundredths of a percent in growth in GDP.

With regard to the level of GDP and taking as a reference the last year with definitive estimations of GDP, 2002, the three changes introduced together represent a 3.48% increase in the GDP of the A.C. of the Basque Country.

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(1) See www.eustat.eus Section Economic and quarterly accounts and GDP and its distribution, Methodology “Linking series of economic accounts”

(2) See www.eustat.eus Section economic quarterly accounts and GDP and distribution, section Methodology Treatment of Financial Intermediation Services Indirectly Measured

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