Spanish unemployment rose to the highest on record after Prime Minister Mariano Rajoy made it easier to fire workers while implementing the steepest budget cuts in the country’s recent democratic history.
Unemployment, already the highest in the European Union, rose to 24.6 percent in the second quarter from 24.4 percent in the prior three months, the National Statistics Institute said in Madrid today. That was the largest proportion since at least 1976, the year after dictator Francisco Franco died, prompting the transition to democracy. The median forecast in a Bloomberg survey of nine economists was 24.7 percent.
The Bank of Spain said this week that the nation’s recession deepened in the second quarter as the government intensified efforts to reduce a budget deficit almost as large as Greece’s. Spanish ministers are focusing on reducing the nation’s debt burden while arguing that the euro area’s monetary policy isn’t helping them to revive its fourth-largest economy.
“We are pessimistic,” said Jose Antonio Herce, a Madrid-based economist at Analistas Financieros Internacionales. “There is every reason to believe activity will contract 2 percent this year and push unemployment to 26 percent.”
Rajoy’s seven-month-old People’s Party government last week gave up on its forecast for the economy to return to expansion next year, replacing a 0.2 percent growth estimate with a prediction for a 0.5 percent contraction. Officials anticipate the economy will shrink 1.5 percent this year while unemployment will peak at 24.6 percent.
Today’s jobs data were in line with government forecasts, Deputy Economy Minister Fernando Jimenez Latorre said in Parliament.
More than 50 percent of under 25 year-olds are already jobless in Spain and overall unemployment is as high as 33.9 percent in the southern region of Andalusia, the third-biggest contributor to the nation’s gross domestic product. The number of homes with all breadwinners unemployed has reached 1.7 million, up 27 percent from a year ago.
“The prospect of further employment losses and the end of the tourism season is likely to push the unemployment rate above 25 percent,” Raj Badiani, an economist at IHS Global Insight in London, said in an e-mailed note. “This presents a significant obstacle to any recovery impetus as Spain is set for a deep and prolonged recession.”
Room for Maneuver
Ministers have bemoaned Spain’s lack of room for manoeuver within the single currency to fight its second recession since 2009. The country is experiencing its first major crisis without being able to devalue or increase the amount of money circulating, Economy Minister Luis de Guindos said July 17.
Budget Minister Cristobal Montoro said yesterday the European Central Bank lacked commitment to the monetary union even as its president, Mario Draghi, pledged to do whatever is necessary to defend it. The yield on Spain’s 10-year benchmark bond dropped after the comments and fell further today. It was down 23 basis points at 6.7 percent at 1:32 p.m. in Madrid.
Support for the ruling PP has declined in opinion polls amid spending cuts. A 65 billion-euro ($80 billion) austerity package announced this month, the PP’s fourth since coming to power, has increased to 10 percent of annual GDP the total amount of tax increases and spending cuts the government is trying to implement through 2014.
A labor rule overhaul approved in February made it easier and cheaper to fire workers, leading companies including fashion retailer Adolfo Dominguez SA and cement-maker Cementos Portland SA to shed staff. The government needs to step up such measures to overhaul the economy as key energy or public administration reforms have not yet been tackled, Herce said.
“They should’ve been ready to be implemented from day one,” he said. “The PP knew for more than one year before the election that it would come to power.”
Elsewhere today, Japan’s consumer prices unexpectedly fell and retail sales missed analysts’ forecasts, adding to evidence that the economy’s expansion is faltering as gains in the yen and austerity measures in Europe hit exports. In Thailand, industrial output shrank more than economists anticipated in June, sliding 9.6 percent from a year earlier.
The U.S. Commerce Department will release growth figures later today. The data may show that the economy expanded in the second quarter at the slowest pace in ayear. GDP rose at a 1.4 percent annual rate after a 1.9 percent gain in the prior quarter, according to the median forecast of economists surveyed by Bloomberg News.