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Spanish Industry Shrinks as Austerity Dents Recovery

Spanish industrial production shrank the most in eight months in October as the deepest austerity measures in three decades undermined the recovery from a recession.

Output at factories, refineries and mines declined 1.9 percent from a year earlier, adjusting for the number of working days, after contracting a revised 1.6 percent in September, the National Statistics Institute said today in an e-mailed statement in Madrid.

Spain’s economy stagnated in the third quarter as budget cuts aimed at taming a surge in borrowing costs to euro-era highs undermined the recovery from the worst recession in six decades. The government, which plans to deepen its austerity program today with the scrapping of a year-old jobless benefit, is trying to slice the euro region’s third-largest deficit in half over two years, even as unemployment remains the highest in Europe at more than 20 percent.

“This was an exceedingly poor outcome given that industrial output had fallen by 9.1 percent year-on-year in October 2009,” said Raj Badiani, an economist at IHS Global Insight in London. The data “support other key indicators which signal that the economy is failing to generate any recovery momentum after stalling in the third quarter.”

Consumer Durables

Production of consumer durables fell 11.5 percent and capital goods manufacturing declined 7.5 percent. As part of its austerity program, the government increased value-added tax to 18 percent in July from 16 percent, prompting consumers to bring forward purchases to the first half of the year, according to the Bank of Spain. Incentives for car purchases expired in the third quarter, and vehicle production fell 1.1 percent from a year earlier in October, today’s report showed.

The Bank of Spain said available data point to a spending recovery in the fourth quarter. “Data are scarce but some of the data suggest that spending will return to a path of smooth recovery after the large oscillations in the last quarters linked to the impact of transitory measures,” the central bank said in its monthly bulletin.

The Socialist government, which lags behind the opposition People’s Party in the polls, said on Dec. 1 it will approve additional measures today aimed at stemming a surge in the extra yield on its bonds. The Spanish spread, which reached a euro-era record of 298 basis points on Nov. 30, eased to 222 basis points.

Asset Sales

Prime Minister Jose Luis Rodriguez Zapatero’s Cabinet is due to approve partial privatizations of the national lottery and airport operator Aena in asset sales that may raise 14 billion euros ($18.5 billion) and allow Spain to issue less debt next year. It also plans to pass tax cuts for small companies while scrapping the jobless subsidy that was introduced in 2009 for people who have run through their contributions-based benefits.

Zapatero’s Socialist party was defeated in regional elections in Catalonia on Nov. 28 and nationwide the opposition PP has a 7.5 percentage point lead over the ruling group, according to a poll published by Cadena Ser on Nov. 2.

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