Spain’s 2012 Deficit Widened to 10% as Recession Deepened

Spain’s budget deficit widened to 10 percent of output last year as the pace of economic contraction accelerated and the government bailed out the banking system.

The bank cleanup contributed 3.3 percentage points to the shortfall and the central government added 3.8 percentage points, the Madrid-based Budget Ministry said today. Gross domestic product fell 0.8 percent in the fourth quarter from the third, when it declined 0.3 percent, separate data showed.

Spain’s recession is extending into the first quarter amid weak domestic demand, the Bank of Spain said yesterday. The International Monetary Fund expects the economy to shrink about 1.5 percent this year, triple the contraction projected by Prime Minister Mariano Rajoy, who says the economy will return to growth in the second half.

“The key numbers are consistent with very weak survey data,” said Guillaume Menuet, a senior economist at Citigroup Inc. in London. “It is about time the real economy numbers match the challenged picture which has become the mark of many countries across Europe, including Spain, in the last three to six months as across-the-board austerity damages growth.”

The yield on Spain’s 10-year benchmark bond fell as much as 12 basis points to 5.11 percent today after President Mario Draghi said the European Central Bank is “far” from withdrawing monetary stimulus for the bloc. The debt traded at 5.14 percent at 1:31 p.m. in Madrid after reaching 5.59 percent this week, its highest level of the year, after Italy’s election failed to produce a clear winner.

Domestic Demand

A drop in domestic demand pared fourth-quarter output by 4.7 percent from a year earlier, the National Statistics Institute said, compared with 4 percent in the previous quarter. The impact of rising unemployment and government spending cuts was partially offset by exports, which added 2.8 percentage points.

Over the full year, output shrank 1.4 percent from 2011, when it grew 0.4 percent. Domestic demand chipped 3.9 percent from the nation’s GDP in 2012, compared with a negative impact of 1.9 percent a year earlier, while exports boosted growth by 2.5 percent, up from 2.3 percent in 2011.

“We won’t take more measures that worsen the recession, we won’t do it,” Budget Minister Cristobal Montoro said today at a press conference.

Tourism Suffers

Spain’s current-account deficit, the world’s second-biggest during its debt-fueled housing boom that ended in 2008, narrowed to 8.26 billion euros in 2012 from 37.5 billion euros a year earlier, the Bank of Spain said. It was 105 billion euros in 2008, accounting for about 10 percent of GDP.

Still, the Bank of Spain said export growth slowed in the last quarter and tourism weakened. The number of tourist visits fell 2.6 percent in January from a year earlier.

In a separate report, INE said inflation held at 2.8 percent in February. A 26 percent unemployment rate and five austerity rounds since Rajoy came to power about a year ago have crimped spending and investment. U.K. consumer goods retailer Kingfisher Plc last week said Spain faces weak consumer confidence while French carmaker Renault SA said the Spanish market will reach its lowest point in 30 years in 2013.

“This year is going to be tough,” said Maria Yolanda Fernandez Jurado, associate professor of the Faculty of Economic and Business Sciences at Madrid’s Universidad Pontificia Comillas. “Household spending simply isn’t waking up. It’s unlikely the government’s growth forecast will be met.”

Spain may apply for European aid in the second half, Justin Knight, strategist at UBS, wrote in a note today.

“We have seen the lows in Spanish yields for now,” he said. “After a harsh 2012, we expect Spain’s economic position to remain very difficult in 2013 and 2014.”

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