Spanish Recession Deepens as Austerity Damps Outlook: Economy

Spain’s recession worsened in the second quarter as the government’s austerity push to reduce the euro area’s third-biggest budget deficit and a slump in consumer spending offset growth in exports.

Gross domestic product fell 0.4 percent from the previous quarter, when it declined 0.3 percent, the Madrid-based National Statistics Institute said today. That’s in line with an estimate published July 30. Separately, Spain’s borrowing costs fell to the lowest in three months at an auction today after the nation’s bonds rallied this month on optimism the European Central Bank will agree on a plan to help peripheral nations.

Prime Minister Mariano Rajoy last month gave up on his forecast for a return to growth in 2013 as he unveiled budget cuts that will expand austerity measures to a total of 15 percent of annual GDP by 2014. He is due to host European Union President Herman Van Rompuy today for the first in a series of meetings aimed at solving the nation’s funding issues.

“We fear that things are likely to get worse before they get better,” said Martin van Vliet, an economist at ING Bank in Amsterdam, who expects Spain will seek additional financial aid as early as next month. “With much more fiscal austerity in the pipeline and unemployment at astronomic highs, the risks are clearly tilted toward a more protracted recession.”

Separate data today from the ECB showed that private-sector deposits at Spanish banks fell by a record in July, dropping 74.2 billion euros ($93 billion), or 4.7 percent, to 1.51 trillion euros. That’s the biggest decline since at least 1997, when the ECB’s data series started.

Domestic Demand

The Spanish GDP report showed that consumer spending dropped 1 percent in the second quarter, investment dropped 3 percent and government spending declined 0.7 percent. Exports of goods and services rose 1.6 percent. The economy grew 0.4 percent last year, less than the 0.7 percent initially stated, the statistics agency said. The 2010 contraction was 0.3 percent, revised from 0.1 percent.

Deputy Economy Minister Fernando Jimenez Latorre said it is too early to tell whether the revision will impact the nation’s deficit goals. He also said the economy is in its worst phase.

“We are in the moment of steepest fall and it will surely continue in the second half of this year,” he said. “We will see a correction starting in the first quarters of next year.”

Debt Auction

The yield on Spain’s 10-year benchmark bond rose 2 basis points to 6.41 percent as of 11:55 a.m. in Madrid. The yield has fallen since reaching a record of 7.75 percent on July 25 after ECB President Mario Draghi said the central bank may intervene to curb governments’ borrowing costs and win them time to implement fiscal changes.

The ECB said today that Draghi has canceled his trip to the annual Jackson Hole economic symposium later this week due to his busy workload.

Spain’s Treasury sold 3.6 billion euros ($4.5 billion) of bills, more than the 3.5 billion euros sought. The yield for three-month bills fell to 0.946 percent from 2.434 percent at the last sale on July 24. That’s the least paid for three month bills at auction since May 22. The rate on the six-month bills fell to 2.026 percent from 3.691 percent last month.

Italy also saw its borrowing costs drop at an auction today when it sold zero-coupon and inflation-linked bonds.

Public finance figures due Aug. 31 may show Spain is struggling to cut its deficit to 6.3 percent of GDP this year and reach the EU limit of 3 percent of GDP in 2014. Economists forecast that the economy will shrink 1.6 percent this year and 0.9 percent in 2013 according to the median forecast of 30 economists surveyed by Bloomberg News.

Euro-Area Lending

In the euro area, the ECB said lending to households and companies in the 17-nation currency zone increased for the first time in three months in July. Loans to the private sector rose 0.1 percent from a year earlier after dropping an annual 0.2 percent in June. Lending increased 0.3 percent from June, the first gain since January.

In Asia, Japan’s government downgraded its assessment of the economy for the first time in 10 months, citing risks including a “further slowing down of overseas economies and sharp fluctuations in the financial and capital markets.” The Cabinet Office cut its view on personal consumption, home- building, exports, imports and industrial production, while raising its assessment of the labor market in a monthly report released in Tokyo.

Australian Home Sales

Australian sales of newly built homes dropped to the second-lowest level on record in July, undermining the central bank’s view that interest-rate cuts were helping stabilize the housing market. Sales fell 5.6 percent from June, when they gained 2.8 percent, the Housing Industry Association said in Canberra, citing a survey of builders.

The Reserve Bank of Australia cut the benchmark borrowing cost by 50 basis points late last year and a further 75 points in May and June as inflation remained contained and the savings rate stayed above 9 percent. At 3.5 percent, the rate is still the highest among major developed economies.

Confidence among U.S. consumers probably rose this month, economists said before a report later today. The Conference Board’s index increased to 66 from 65.9 in July, according to the median forecast in a Bloomberg News survey. The S&P/Case- Shiller index of housing prices in 20 U.S. cities was probably little changed in June from a year earlier, the first time since September 2010 that it hasn’t shown a significant decline, according to a separate survey.

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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