Spain fights recession, deficit and market doubts

24 Oct

Spain’s fight against a job-destroying recession is entering a second year, a central bank report showed Tuesday, even as Madrid struggles to curb a bloated public deficit.

The economy shrank at a quarterly rate of 0.4 percent in the third quarter, the same pace as in the previous three months, the Bank of Spain said, citing provisional data.

“The Spanish economy continued on a path of contraction which began a year earlier,” it said.

If confirmed, the figures would mean that the Spanish recession, which has left one in four workers unemployed, is moving into a second year at a relentless pace.

The eurozone’s fourth-largest economy, which emerged from the previous recession only at the end of 2010, began gently shrinking in mid-2011 and has slumped in every quarter since by as much as 0.5 percent.

Spain has agreed a 100-billion-euro ($125 billion) rescue loan for its banks, of which it plans to use only 40 billion euros.

But world markets now anticipate a broader sovereign bailout, after the European Central Bank in early September outlined plans to make unlimited bond purchases to bring down stricken states’ borrowing costs.

Investors are wary of betting against the European bank, which could step in whenever Spain decides formally to request help from the eurozone’s bailout fund and to submit to its conditions.

That threat helped Spain’s Treasury to beat its fund-raising target in an auction of three- and six-month bills on Tuesday, raising 3.58 billion euros. The interest rate edged up for the three-month bills and eased for the six-month bills from a similar auction September 25.

Prime Minister Mariano Rajoy’s right-leaning government has issued a 2013 budget based on a forecast of economic contraction of just 0.5 percent next year, a figure widely seen as overly optimistic.

Budget Minister Cristobal Montoro told parliament, however, that the budget would help make next year “the last year of recession”.

Moreover, the central government was “very close” to meeting it 2012 deficit target of 4.5 percent of GDP, recording a shortfall of 3.9 percent of GDP for the year to September, he said.

The performance of Spain’s 17 regional governments will thus be crucial to reaching the overall 6.3-percent public deficit target, and regaining some trust after a public deficit blow-out in 2011.

Next year, Spain’s government is targeting an even more ambitious public deficit equal to 4.5 percent of GDP.

But if the economy shrinks by 1.5 percent in 2013, as many private economists expect, then Spain will likely miss its public deficit goal yet again, unless it takes further steps, the central bank has warned.

The Spanish government is already boosting taxes and slashing spending to meet its deficit goals, provoking growing street protests and a union call for a general strike November 14.

But the recession is making its task ever harder, for example by raising the cost of unemployment benefits.

The economy might have fared even worse in the third quarter but for a consumer spending spree on goods such as washing machines and televisions ahead of a September 1 increase in the sales tax, the central bank said.

But the end of that burst in spending, plus a decline in public sector salaries, could mean weaker consumer spending in the final quarter of this year, it warned.

As people struggled to make ends meet, household savings rates fell to the lowest level since 2006 in the second quarter, the bank said.

Christian Schulz, an analyst at Berenberg bank, judged the third-quarter growth estimate “reassuring” overall, even though it indicated a serious recession.

“The rate of decline is not accelerating and remains reasonably moderate at minus 0.4 percent quarter-on-quarter,” he wrote.

“Given ever-harsher austerity, capital flight from the country, a credit crunch and slowing export markets, this performance is quite remarkable,” he added.

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