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Higher Spain Inflation Undermines Rajoy Export-Led Recovery Plan

Higher Spanish inflation and persisting retail-sales declines may jeopardize the government’s bet that an export boom will end almost two years of recession.

Inflation in May, measured by EU criteria, accelerated to 2.2 percent in June from 1.8 percent in May, Spain’s Madrid-based National Statistics Institute said today in a statement. That is more than a 2 percent median of 13 estimates in a Bloomberg survey. Retail sales dropped 4.5 percent in May, the agency said in a separate release.

The government is counting on overseas sales to foster growth in the third quarter and end the worst recession in Spain’s democratic history. Cuts in the European Union’s widest budget deficit have undermined the home market of the world’s biggest clothing retailer Inditex SA, which reported the slowest first-quarter income growth in four years this month.

“In the short term, exports can at least contribute to weak growth as domestic demand will remain as depressed this year as last year,” said Sara Balina, chief economist for Spain at Madrid-based consultancy Analistas Financieros Internacionales. Retail sales are on course to complete three years of straight monthly declines in June.

Spain, the euro area’s fourth-largest economy, “is benefiting from the diversification of its exports, not only to emerging countries such as China but also less obvious smaller ones with very high growth rates,” Balina said.

The Bank of Spain yesterday said data for April and May indicate the recession is softening and “underscore the vigor of foreign sales.” Exports rose to a record last year, while the country in March posted its first trade surplus since at least 1971. Current account data for April will be released tomorrow.

While the government is counting on inflation to fall below 1 percent this year and make Spanish products more competitive while boosting households’ revenue, producer prices jumped 0.8 percent in May from a year earlier due to energy prices, after falling 0.6 percent in April, INE said on June 25.

The Health Ministry said earlier this week that pharmaceutical spending fell 12.1 percent in May from a year ago, extending a series of declines since July 2012. That’s when the government reduced funding for prescriptions provided by the tax-funded health care system, forcing patients to pay more out of pocket. Drug industry group Farmaindustria last week said it expects sales in Spanish pharmacies to drop to 2002 levels in three years.

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