Spain Recession Deepens More Than Forecast Amid Austerity

Spain’s recession deepened more than economists forecast in the fourth quarter as the government’s struggle to rein in the euro region’s second-largest budget deficit weighed on domestic demand.

Gross domestic product fell 0.7 percent in the three months through December from the previous quarter, when it declined 0.3 percent, the Madrid-based National Statistics Institute said today. That’s more than the 0.6 percent contraction the Bank of Spain predicted on Jan. 23. GDP dropped 1.8 percent in the fourth quarter from a year earlier and 1.37 percent in the full year from 2011, INE said.

The European Commission this week signaled it may recommend easing Spain’s budget goals for the fourth time in a year as unemployment in the euro region’s fourth-largest economy rose to a record 26 percent at the end of Prime Minister Mariano Rajoy’s first year in power.

“Risks on this number are clearly on the downside,” Ruben Segura-Cayuela and Laurence Boone, London-based Bank of America Merrill Lynch economists, wrote in a note after INE released GDP data. “The recent behavior of indicators would suggest a stronger impact than anticipated of tax increases on domestic demand.”

Spreads Narrow

The yield on Spain’s 10-year benchmark rose one basis point to 5.17 percent at 10:42 a.m. in Madrid after a euro-era high of

7.75 percent in July. The spread with German borrowing costs has narrowed around 45 percent to 3.47 percentage points. Investors see bonds from so-called EU periphery countries offering even more gains than last year after European Central Bank President Mario Draghi pledged to do whatever is needed to save the 17-nation euro.

“We should be circumspect; the domestic demand contraction is severe and more of the same is likely in the first half of 2013,” said Guillaume Menuet, a senior economist at Citigroup Inc. in London. “The current market momentum is such that investors have to chase the rally, masking economic fundamentals to a large degree.”

Citigroup forecasts output will shrink 2.2 percent this year with a budget deficit at 6.3 percent of output and unemployment at an average 26.9 percent. While the government says it probably missed its goal of lowering the shortfall to

6.3 percent of GDP in 2012, it maintains its target of 4.5 percent for this year is acheivable as it sees the economy recovering in the second half.

Missed Goal

Budget Minister Cristobal Montoro told lawmakers in Madrid today he raised taxes last year to prevent the country from collapsing. The Bank of Spain said last week domestic demand may have dropped 3.9 percent from a year earlier in 2012, nearly twice as sharply as in 2011, as output suffered from five austerity rounds in less than a year. The last cut public wages and unemployment benefits while raising value-added tax.

Data show retail sales fell 10.7 percent in December from a year ago, more than economists expected, while home mortgage loans slid 32 percent in November, twice the previous monthly drop. Missed payments as a proportion of total loans at Spanish banks rose to a record 11.4 percent in November.

IMF Forecast

The International Monetary Fund last week cut its forecast for Spain’s economy and predicts a 1.5 percent contraction this year as the only drivers left weaken amid a European slowdown. The number of tourists visiting in December dropped from a year earlier, with an 11 percent decline from U.K. holidaymakers, the largest group. Exports fell in November.

Spanish retailers such as El Corte Ingles SA, Cortefiel SA and discounter DIA have reacted by lowering prices. Darty Plc is considering exiting the country while the world’s second-largest mobile-phone company, Vodafone Group Plc, and building-material producer Cementos Portland Valderrivas SA are reducing headcount. Materis Paints, Europe’s third-biggest maker of decorative paint, last month predicted sales in Spain will drop 18 percent this year.

Public-job cuts are boosting unemployment as the nation’s 17 semi-autonomous regions race to divide their combined budget deficit by five in the two years through 2013. A third of all jobless people in the euro area are in Spain.

Madrid, the second-biggest contributor to Spain’s economy after Catalonia, plans to cut spending by 1.4 billion euros ($1.9 billion) this year. It already sliced 1 billion euros from its budget in 2012, increasing public-transportation costs and university fees, cutting jobs, delaying investments and reducing health-care and social benefits.

“The balance of risks is still tilting to the downside,” said Raj Badiani, an economist at IHS Global Insight in London. “The government’s commitment to a very painful multi-year fiscal-austerity plan has deflated consumer spending and will continue to do so amid high unemployment, shrinking house equity and still-excessive debt levels.”