Spanish Contraction Continues, Austerity Spurs Inflation

Photographer: Angel Navarrete/Bloomberg

Spain’s economy contracted for a fifth quarter, undermining efforts to plug the budget deficit that’s pushing the nation closer to a bailout, while austerity measures kept inflation at a 17-month high. Close

Spain’s economy contracted for a fifth quarter, undermining efforts to plug the budget... Read More

Close
Open
Photographer: Angel Navarrete/Bloomberg

Spain’s economy contracted for a fifth quarter, undermining efforts to plug the budget deficit that’s pushing the nation closer to a bailout, while austerity measures kept inflation at a 17-month high.

Spain’s economy contracted for a fifth quarter, undermining efforts to plug the budget deficit that’s pushing the nation closer to a bailout, while austerity measures kept inflation at a 17-month high.

Gross domestic product declined 0.3 percent in the three months through September, compared with 0.4 percent the prior quarter, the National Statistics Institute said today. That compared with the Bank of Spain’s estimate on Oct. 23 of a 0.4 percent contraction. Consumer prices, rose 3.5 percent from a year earlier, Madrid-based INE said.

The prolongation of Spain’s five-year slump, which is prompting record loan defaults at the nation’s banks and job cuts at companies including Gamesa SA (GAM), adds to pressure on Prime Minister Mariano Rajoy as he resists requesting international aid. While the tax hikes he’s implementing as part of his austerity program are depressing consumption, they are also spurring inflation, which threatens to add 3 billion euros ($3.9 billion) to the country’s pension bill.

“The real discussion should be about how protracted the recession will be and if you look at the fiscal tightening you really have to be conservative about next year,” said Martin Van Vliet, an economist at ING Bank in Amsterdam. “I’m very concerned about the size of the fiscal tightening, the fact they’re going to miss their deficit targets and the fact Rajoy is delaying the request for aid.”

Not Indispensable

Spain’s 10-year benchmark bond yield fell to 5.638 percent at 10:08 a.m. in Madrid from 5.656 percent yesterday. Even after a 176 basis point narrowing since European Central Bank President Mario Draghi first proposed buying cash-strapped nations’ debt on Aug. 2, Spain pays 417 basis points more than Germany to borrow for 10 years.

Rajoy, whose popularity has slumped as budget cuts deepen the recession while failing to tame borrowing costs, said yesterday he would trigger the bailout mechanism when it was in Spaniards’ best interests, and such a move isn’t “indispensable” at the moment.

The government is battling a 25 percent unemployment rate, Europe’s joint-highest with Greece, and a slump in consumption that prompted a record 11 percent annual decline in retail sales in September. Value-added tax rose in September as part of the government’s 100 billion-euro austerity program, pushing up prices.

VAT Impact

The VAT hike on Sept. 1 encouraged consumers to bring forward spending, the Bank of Spain said last week, as it forecast domestic demand would fall faster in the last three months of the year. GDP will decline more deeply in the fourth quarter than in the previous three months, Van Vliet forecast.

At 3.5 percent, inflation compared with a 3.6 percent median estimate of seven economists surveyed by Bloomberg. That was unchanged from the September rate, which was the fastest since April 2011.

That poses a new dilemma for Rajoy: he can blow the budget by compensating pensioners for higher-than-forecast inflation or change the social-security law and break one of the few election pledges he has kept since coming to power in December.

The Budget Ministry is due to publish data today on the central government’s budget deficit through September. In the first eight months, the central government’s shortfall of 4.77 percent of GDP was already wider than its full-year target. Spain may miss its 6.3 percent goal for the overall deficit, which also includes the regions’ books and the social security system, according to a Bloomberg survey of economists, which points to a shortfall of 6.5 percent of GDP.

Economists also forecast a worse economic outlook for next year than the government, which aims to cut the deficit to 4.5 percent in 2013. Spanish GDP is seen shrinking 1.4 percent, according to a Bloomberg survey, compared with the government’s 0.5 percent prediction. Economists expect unemployment to rise above 27 percent by 2014, while the government sees joblessness starting to fall.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.