It News: Spanish Recession Deepens

August 28, 2012

Spanish Recession Deepens

By DAVID ROMÁN
202/8/28

MADRID—Spain's economic recession deepened in the second quarter amid the country's largest-ever bank failure and a steep downturn in domestic spending that could sharpen as the government raises sales taxes starting next month.

Fresh figures Tuesday from the statistics institute INE for the second-quarter and 2011 suggest "the economy is much weaker than previously thought," said Tullia Bucco, an economist at UniCredit Research. "This risks weighing on the government's capacity to reach the fiscal targets set for this year and the next."

The euro zone's fourth-largest economy contracted 0.4% from the first quarter and by 1.3% compared with the second quarter of last year, INE said. The quarterly reading is in line with preliminary INE estimates released last month, but the annual reading is worse than the previous estimate of a 1% contraction.

INE added it now estimates the economy contracted 0.6% on an annual basis in the first quarter, compared with a previously estimated 0.4% contraction. It confirmed the economy shrank 0.3% on a quarterly basis. An economy is deemed to be in recession after two consecutive quarters of contraction. The finance ministry said the second-quarter figures are consistent with the government's full-year economic projections.

"We're in the moment of the deepest decline" in gross domestic product, Spanish Deputy Finance Minister Fernando Jiménez Latorre said. He added that he expected a "correction" of the Spanish economy to begin in the first quarters of 2013. A spokeswoman for the Finance Ministry said Mr. Jimenez Latorre's statement doesn't conflict with the government's forecast of a 0.5% contraction next year.

The INE data reflect an economy undergoing a rapid deleveraging process after a decade of debt-fuelled expansion, with government spending unable to offset the loss of private activity due to an austerity drive designed to sharply lower the government's budget deficit. Spain faced its largest-ever bank failure in the second quarter and had to secure €100 billion ($124.99 billion) in European Union aid for its banking sector.
In the second quarter, domestic demand slipped to its lowest level since the global recession of 2009, as household spending fell by 2.2% on annual basis compared with a 1.5% contraction in the first quarter. Also, government spending dropped by 3% in the second quarter, compared with 3.6% in the first quarter.

Spain plans to implement over €65 billion in spending cuts and tax increases over the next 2½ years, in order to bring its budget deficit down to 2.8% of GDP in 2014 from 8.9% of GDP last year.

Part of those tax increases includes raising the value-added tax to 21% for most goods and services from 18% previously, and many economists predict that the increase will boost inflation and further pressure household consumption.

The data come after INE said Monday that Spain's economy grew 0.4% last year, down from an earlier growth estimate of 0.7%, after a periodic review that incorporated some information from surveys and other data that were previously unavailable.

Last month, the Spanish government said it now anticipates the economy will contract not only this year but also in 2013. This contrasts with an earlier forecast for a mild recovery next year.