Rajoy Sees Reprieve as Spanish Recession Evidence Mounts
Spain will probably secure two more years to tame the largest budget deficit in the European Union as first-quarter data show the effects of the toughest austerity measures in its democratic history.
The European Commission will decide tomorrow whether to grant Spain until 2016 to bring its deficit back within the EU limit of 3 percent of gross domestic product. Its verdict is due as a series of releases this week including mortgage lending, gross domestic product and inflation may underline that the construction slump that triggered the nation’s economic crisis in 2008 is far from over.
Prime Minister Mariano Rajoy is struggling to reorder public finances and haul the fourth-largest economy in the euro region out of recession as EU leaders back off austerity-first policies without embracing funded stimulus. Rajoy himself has ruled out lowering taxes.
“It’s not enough just to ease back on austerity,” Jonathan Loynes, chief European economist at Capital Economics Ltd. in London, said in a telephone interview. “There needs to be more stimulus, part of which can be done on a national level through structural reforms and some of which has to be done at the euro-zone level in terms of monetary policy.”
European stocks advanced for a second day, with the Stoxx Europe 600 Index climbing 1.6 percent at 4:12 p.m. in Madrid, as U.S. and U.K. markets reopen following a holiday. The euro fell against the dollar, trading at $1.2898.
Spain’s national statistics institute INE is due to release full first-quarter GDP data on May 30, a month after estimating it fell 0.5 percent, compared with a 0.8 percent decline in the previous quarter. It will also publish May inflation that the median of 15 economists in a Bloomberg survey forecast will accelerate to 1.7 percent after the rate last month dropped to the lowest since February 2010.
“Indicators are still very much pointing to a continued recession,” Loynes said. “The government can try to improve its structural performance, but it’ll take time.”
The number of mortgages granted on Spanish homes posted an annual drop of 34 percent in March, the biggest decline in a year, after the government eliminated tax breaks for home buyers at the end of 2012, INE said today. The total value of mortgage lending in the month was 3.1 billion euros ($4 billion), a decline of 90 percent from the peak of the credit boom in January 2007, it said.
Elsewhere in Europe, French consumer confidence unexpectedly dropped in May, matching the record low set in July 2008, before the collapse of Lehman Brothers Holdings Inc., when oil prices were at a record high, sapping purchasing power.
Household sentiment in France fell to 79 in May from a revised 83 in April, national statistics office Insee said. Economists expected a reading of 85 according to the median of 11 estimates gathered by Bloomberg.
French President Francois Hollande’s tax increases have hurt purchasing power and the economy returned to recession in the first quarter.
“Today the European consumer is worried,” Renault SA Chief Executive Officer Carlos Ghosn said on France Inter radio today. “He can’t see when the economy will turn around.”
Spain’s central government’s budget deficit for the first four months of the year widened to 2.38 percent of GDP from the same period in 2012, according to data released today by the Budget Ministry. The ministry will publish next month the first-quarter balance for all levels of government except town halls after the nation’s total budget deficit last year soared to 10.6 percent of GDP. Retail sales, current account, housing permits and the Bank of Spain’s monthly bulletin also are scheduled for this week.
Still, Rajoy is profiting from Spain’s funding costs, which are the lowest since 2010 thanks to the European Central Bank’s July pledge to backstop the euro. Investors are undeterred even as the recession and the cost of European aid to bail out a banking sector have undermined Rajoy’s efforts to reorder public finances.
The yield on Spain’s 10-year benchmark bonds was at 4.27 percent at 4:13 p.m. in Madrid after falling below 4 percent this month for the first time since 2010. That compares with a euro-era record of 7.75 percent on July 25, before ECB president Mario Draghi first said he’d do what it takes to hold the euro together.
Rajoy is taking for granted that Spain will get extra time from the EU to reduce its deficit as unemployment soared to 27 percent in the first quarter, the highest in more than three decades.
“The commission has taken a decision that is fair and balanced with a country that is making an effort,” Rajoy told reporters on May 22, preempting approval by the European Commission, while EU Economic and Monetary Affairs Commissioner Olli Rehn has said the request for more time is “reasonable.”
The delay will enable Rajoy to avoid increasing taxes and deepening spending cuts after the “difficult” and “painful” measures adopted since his People’s Party came to power in December 2011, Rajoy said, adding he doesn’t expect the EU to recommend additional reforms or measures.
“Delaying much needed efficiency improvement and spending cuts is not a good idea,” said Georg Grodzki, head of credit research at Legal & General Investment Management in London. “The government should think of spending cuts much more than tax increases; in fact, it should consider tax cuts to stimulate hiring and investment.”
At a summit of EU leaders in Brussels last week, Rajoy refused to comment on calls by former Prime Minister Jose Maria Aznar to cut taxes. Aznar nominated Rajoy as the head of the PP in 2004. At the same time, his EU counterparts rejected outright stimulus to end a sixth quarter of recession in the euro area.
“It’s not a matter of money,” German Chancellor Angela Merkel said. “It’s a matter of looking at how to spend this money most productively.”
The “conditions in Spain are extremely tough and will remain so for some time,” said Robert Wood, an economist at Berenberg Bank in London. “Spain is making impressive progress but some of these reforms are very hard to do, which is why you end up getting some backtracking, it’s wishful thinking to imagine you can turn an economy around within a few years of a crisis erupting.”
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