Spanish Recession Seen Deepening Amid Crisis Contagion: Economy

Photographer: Angel Navarrete/Bloomberg

Spain has succumbed to its second recession since 2009 as Prime Minister Mariano Rajoy cuts spending and raises taxes to rein in the euro area’s third-largest budget deficit and curb borrowing costs. Close

Spain has succumbed to its second recession since 2009 as Prime Minister Mariano Rajoy... Read More

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Photographer: Angel Navarrete/Bloomberg

Spain has succumbed to its second recession since 2009 as Prime Minister Mariano Rajoy cuts spending and raises taxes to rein in the euro area’s third-largest budget deficit and curb borrowing costs.

Spain will sink deeper into a recession in the second quarter, the Bank of Spain said, as data showed retail sales fell by a record annual rate in April.

Indicators suggest output will keep falling in the quarter through June, the central bank in Madrid said in its monthly economic bulletin today. The National Statistics Institute INE said retail sales dropped 9.8 percent on a calendar-adjusted basis last month, the most since the series began in 2004.

Spain has succumbed to its second recession since 2009 as Prime Minister Mariano Rajoy cuts spending and raises taxes to rein in the euro area’s third-largest budget deficit and curb borrowing costs. The premium investors charge to hold the nation’s 10-year debt rather than the German equivalent widened to a euro-era record this week amid concern the nation’s lenders will need additional financial support.

“The intensification of the debt crisis and growing banking-sector difficulties are sapping consumer confidence,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “Consumers are postponing purchases of discretionary items and investment goods like cars.”

Rajoy’s People’s Party government forecasts domestic demand will shrink 4 percent this year, more than four times last year’s rate, as nearly a quarter of the workforce is jobless.

Budget Plans

Budget Ministry data today showed the central government’s deficit for the first four months of the year widened to 2.39 percent of gross domestic product from 1.57 percent a year earlier as tax receipts fell and the government provided more than 5 billion euros of liquidity support to Spanish regions.

Deputy Budget Minister Marta Fernandez Curras said the central government will still meet its deficit target of 3.5 percent of GDP for the full year, which is part of the overall goal approved by the European Union of 5.3 percent of GDP.

Rajoy is aiming to cut the budget gap by the equivalent of 3.6 percent of gross domestic product in one year to convince investors the nation won’t default as its borrowing costs approach the 7 percent level that heralded bailouts in Greece, Portugal and Ireland. The yield on 10-year bonds was at 6.43 percent today, up from 5.88 percent a month ago.

ECB Measures

European Central Bank Governing Council member Ewald Nowotny said today the bank isn’t considering restarting its bond-purchase program to stem rising borrowing costs for governments in the euro area.

“This for the time being is not a matter of discussion,” Nowotny told reporters in Belgrade, when asked if bond purchases are something the ECB is contemplating. ‘The ECB has done a number of measures that were very helpful and efficient for the economy. We are now in a situation where we have to see how these measures have worked in the economy, especially in long-term operations.’’

Elsewhere in Europe, German inflation calculated using a harmonized European Union method unexpectedly slowed in May to 2.1 percent from 2.2 percent. Economists forecast the rate to hold steady, the median of 19 estimates in a Bloomberg News survey showed.

U.S. consumer confidence was probably little changed in May. The Conference Board’s index rose to 69.5 from 69.2 in April, according to the median of 64 estimates in a Bloomberg News survey ahead of a report due today.

China Outlook

Separately today, a survey showed China’s rising labor costs and a deteriorating regulatory environment are prompting almost a quarter of European Union companies to consider shifting investments to other countries.

Twenty-two percent of 557 respondents said they may move investment to developing economies including those in Southeast Asia and South America, where doing business is easier, according to a survey conducted in February by the EU Chamber of Commerce in China and Roland Berger Strategy Consultants.

Those views present additional challenges to leaders of the world’s second-largest economy trying to sustain growth. China’s economy is forecast to expand 8.2 percent this year, based on the median estimate of analysts surveyed earlier this month by Bloomberg News. That would be the least since 1999.

Elsewhere in the Asia-Pacific region, Japan’s jobless rate unexpectedly rose in April and retail sales fell for a second month. Unemployment increased to 4.6 percent from 4.5 percent in March, the statistics bureau said in Tokyo. Retail sales fell 0.3 percent from March, the Trade Ministry said.

A South Korean index of manufacturers’ confidence for June fell from a nine-month high, according to the Bank of Korea.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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