Bank of Spain Says Recession Deepened After Latest Cuts
Spain’s recession deepened in the last quarter of 2012 after Prime Minister Mariano Rajoy’s government approved its fifth austerity package in a year to reduce the second-largest budget deficit in the euro area.
Gross domestic product shrank for a sixth quarter, contracting 0.6 percent from the previous three months, when it slipped 0.3 percent, the Bank of Spain said in an estimate in its monthly bulletin today. Fourth-quarter GDP matched the median forecast in a Bloomberg News survey of 26 economists.
Output may have contracted 1.3 percent in 2012 as budget cuts weighed on economic activity, the Madrid-based Bank of Spain said. While it’s not yet clear if Spain will meet its 2012 deficit target set by the European Union, satisfying this year’s goal “will require a very ambitious additional fiscal effort from the central government and the regions,” it said.
Rajoy is seeking to avoid a full bailout as a slump in the euro area’s fourth-biggest economy enters its fifth year, undermining efforts to meet EU targets. The European Central Bank’s pledge to provide support to nations struggling to bring down yields may curb borrowing costs until a recovery, he said last month.
“This is a reminder that although market pressures have eased in response to the ECB’s promised intervention, the economic picture in the country is still extremely weak,” Jonathan Loynes, chief European economist at Capital Economics Ltd. in London, said by telephone. “If anything, the contractions are getting bigger rather than smaller, the labor market remains in a dreadful condition with no signs of improvement.”
Spain’s 10-year bonds advanced today, pushing the yield down to a session low of 5.066 percent at 11:22 a.m. in Madrid. That compares with an intraday record of 7.75 percent on July 25, before ECB President Mario Draghi said he would do all it takes to save the euro. Even so, Spain still pays 3.51 percentage points more than Germany to borrow for 10 years.
“Uncertainty remains high and elements of fragility persist,” the Bank of Spain said. The country’s borrowing costs remain high and interest rates haven’t fallen for households and companies while declining revenue and income make it difficult for them to de-leverage, it said.
While Spanish lenders raised more than 8 billion euros ($10.7 billion) as they returned to bond markets this year, ECB data show they charged companies almost 5.1 percent on new loans of as much as 1 million euros in November, up from 4.9 percent a year earlier.
Domestic demand may have fallen 3.9 percent from a year earlier in 2012 after a 1.9 percent drop in 2011, the bulletin shows. Output also suffered from a slowdown in Spain’s trading partners as export growth may have eased to 3.3 percent in 2012 from 7.6 percent the previous year.
“It’s difficult to see any recovery coming,” said Sara Balina, chief economist for Spain at Madrid-based consultancy Analistas Financieros Internacionales. “More budget cuts are going to be necessary whether Spain’s deficit targets are eased or not by the EU.”
The European Commission yesterday said the nation will probably miss its 2012 deficit target even if the most recent budget cuts produce their full effect in the last quarter. It forecasts GDP contracted 1.4 percent in 2012 and will shrink as much this year, taking the shortfall to 8 percent of output last year and 6 percent in 2013. That compares with goals of respectively 6.3 percent and 4.5 percent.
Rajoy’s People’s Party government raised income and property taxes upon coming to power 13 months ago and ended last year by lowering civil servants’ wages, as part of the deepest budget cuts in the nation’s three-decade democratic history.
Some of those measures, including public-sector job cuts, are only starting to weigh on domestic demand, Balina said. Households’ net available income fell 1.6 percent from a year earlier in the third quarter as Spaniards dug into their savings, Spain’s National Statistics Institute, or INE, said Jan. 9.
The unemployment rate in the fourth quarter, due to be released tomorrow by INE, probably rose to 26 percent, according to the median of 10 estimates in a Bloomberg survey. One in three jobless in the euro region is in Spain.
Vodafone Group Plc (VOD), which has 4,300 employees in Spain, said last week it’ll scrap 900 jobs due to declines in revenue. Banks are shrinking their branch networks with thousands of firings through 2015.
“Domestic demand is likely to continue to contract, increasing the risks for Spain to reduce its budget deficit,” said Ricardo Santos, a euro-area economist at BNP Paribas SA in London. “At some stage, the market will turn to the fundamentals and the worries about growth and deficit could change the current mood.”
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