Spanish data this week will reveal the extent of damage wrought on the euro-area’s fourth-biggest economy as the government fights to cap a swelling deficit that is propelling the country toward requiring international aid.
Retail sales fell 11 percent in September from a year ago, the National Statistics Institute said today. Figures on public finances, consumer prices, and gross domestic product tomorrow may confirm a deteriorating economy and debt profile amid the toughest austerity in its democratic history. The Bank of Spain estimated last week that GDP fell for a fifth quarter.
The Spanish statistics onslaught will extend scrutiny by investors on the country after unemployment data last week showed a record with one in four workers jobless. The prospect of a worsening growth profile threatens to defy the government’s forecast for an easing in a slump that has now extended for five years, adding pressure on the country to apply for help.
“What we see now is that the economy is worsening,” said Yannick Naud, a London-based portfolio manager at Glendevon King Ltd. who helps oversee $163 million in assets. “We have seen a sharp reduction of the 10-year bond yield which is not warranted by the economic situation, it has only occurred because of the threat of intervention by the European Central Bank.”
Spanish 10-year benchmark bonds, which have fallen more than 200 basis points from their euro-era high of 7.75 percent on July 25, had their worst week since August last week after third-quarter unemployment rose the highest since at least 1976. Yields rose to 5.64 percent at 3:03 p.m. in Madrid from 5.59 percent on Oct. 26. The Stoxx Europe 600 Index slid 0.4 percent to 268.85 at 2:03 p.m. in London.
Spanish consumer prices probably rose 3.6 percent in October from a year earlier as sales tax climbed, a Bloomberg survey of seven economists showed. That follows a 3.5 percent increase in September and would be the most since October 2008. GDP fell 0.4 percent in the third quarter, according to the median estimate of 10 economists surveyed by Bloomberg, matching both the contraction in the second quarter, and the Bank of Spain’s Oct. 23 estimate.
Those data will all come tomorrow, the same day as central government figures showing the deficit for September. They will show if the shortfall for the year to date widened from 4.77 percent of GDP, at 50 billion euros ($64 billion.) That’s already beyond the government’s target for the full year.
Spain is resisting international pressure to seek a credit line from the European Stability Mechanism rescue fund. That would enable the ECB to buy Spanish debt on the secondary market, a prospect that helped lower the nation’s borrowing costs.
Any ESM help would be on top of a 100 billion-euro bailout for the country’s banks, agreed upon in July. The Bank of Spain’s deputy governor, Fernando Restoy, will set out plans for establishing a bad bank, ordered by the European Union as a condition of the rescue, at 5 p.m. today in Madrid.
“The sooner Spain gets a program and therefore closer monitoring, the sooner the credibility of its fiscal targets will improve,” said Ricardo Santos, an economist at BNP Paribas SA in London said in a telephone interview. “The monitoring will be tighter than this year and with the participation of the European Commission and International Monetary Fund, corrective measures will be implemented in more timely way.”
Economists surveyed by Bloomberg News forecast the economy will shrink 1.4 percent next year, compared with the government’s 0.5 percent prediction. Unemployment is seen rising above 27 percent by 2014, while Prime Minister Mariano Rajoy expects joblessness to start falling next year.
“I can’t really see Spanish growth being strong enough to get them in to a sustainable position any time soon,” said Arif Husain, the London-based director of European fixed-income at AllianceBernstein Ltd., which oversees $419 billion. AllianceBernstein is “underweight” on Spanish debt, Husain said, meaning its funds hold fewer securities than the benchmark used to track performance.
Concern about the nation’s creditworthiness, rated one level above junk by Standard and Poor’s and two levels higher by Fitch Ratings, may increase as a surge in inflation pressures public finances.
The government next month has to decide whether to apply a law indexing pensions to inflation, which rose to 3.5 percent last month. Bank of Spain Governor Luis Maria Linde said Oct. 4 the pledge would cost around 3 billion euros when corrective budget measures are already necessary to meet deficit targets.
“Spain is going to miss on its deficit target this year making next year’s goal very unlikely to be achieved,” Justin Knight, a European rate strategist at UBS AG in London, said in a telephone interview. “Spain is eating into its cash reserves and is probably not going to be able to continue to fund itself in 2013 as it has done this year.”
Knight said the nation will need to step up issuance going into 2013 while its investor base has shrunk. Even after an increase in September, foreign investors’ share of Spanish debt was 35.4 percent in September compared with 50 percent in December.
August balance of payment data on Oct. 31 will show the state of Spanish portfolio investment after capital flight accelerated in the seven months through July. Non-residents withdrew 95.7 billion euros of stock and bond investments, compared with 21.9 billion euros a year earlier.
“The current data set is having a very large influence on market sentiment,” said Harvinder Sian, a fixed income strategist at RBS in London. “Medium-term to long-term, the growth outlook is absolutely critical.”
Elsewhere in Europe, inflation in Germany, Europe’s largest economy, unexpectedly remained unchanged at 2.1 percent in October as declining energy costs were offset by higher food prices. Economists had predicted it would drop to 2 percent, according to the median of 18 estimates in a Bloomberg survey.
U.K. house prices fell for a fourth month in October and a property-market recovery is unlikely without sustained economic growth, according to Hometrack Ltd., a London-based researcher. Prices declined 0.1 percent from September and 0.4 percent from a year earlier, the smallest annual decline in two years. Mortgage approvals rose to a four-month high in September, the Bank of England said in a separate report.
In Asia, China’s government spent more than planned in the first nine months of the year, and revenue gains moderated, leaving little room for public outlays to stoke the economy this quarter without an expansion of the budget. Japan’s retail sales rose less than forecast in September as the expiration of government subsidies for car purchases sapped consumer demand. South Korean manufacturers’ confidence fell for the second straight month as slowing economic growth weighed on sentiment.
In the U.S. consumer spending climbed more than forecast in September as incomes grew, a sign the biggest part of the economy was picking up as the quarter drew to a close. Household purchases rose 0.8 percent, the most since February, after a 0.5 percent gain the prior month, a Commerce Department report showed today in Washington. The median estimate in a Bloomberg survey of 71 economists called for a 0.6 percent rise.
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