Bloomberg News

Spain May Contract in Final Quarter, Central Bank Estimates

November 30, 2011

(Updates with background starting in third paragraph, comment in fourth. For more on debt crisis, see {EXT4 <GO}.)

Nov. 30 (Bloomberg) -- Spain’s economy, which stagnated in the third quarter, weakened further in the last months of the year as Europe’s debt crisis deepened, the Bank of Spain said.

“The very preliminary available information indicates that in the last months of the year the weakness of demand and activity has been accentuated,” the Madrid-based central bank said in its monthly report, citing worsening “financial tensions because of the aggravation of the sovereign-debt crisis.”

Spain’s economy stagnated in the third quarter as its borrowing costs rose to euro-era records, helping push the unemployment rate to 22.6 percent in September. Spain pays about 6.5 percent to borrow for 10 years, and as financing costs rise, the nation’s banks are squeezing lending by the most on record.

“We expect Spain and the euro zone as a whole to be deep in recession for at least the next two years,” said Ben May, a European economist at Capital Economics in London.

The extra yield on Spanish 10-year bonds compared with German equivalents widened to 417 basis points today from 406 basis points yesterday as investors demanded 6.47 percent to lend to Spain for a decade. Spain auctions bonds tomorrow, after being forced to pay more than Greece and Portugal to sell three- month bills on Nov. 22.

Economic Targets

A slowing economy will make it harder for the new government to rein in the euro region’s third-largest budget gap. Prime Minister-elect Mariano Rajoy, who takes over on Dec. 22, has pledged to meet the outgoing administration’s deficit target for 2012 of 4.4 percent of gross domestic product, even as the economy is expected to fall short of a 2.3 percent growth forecast.

The Organization for Economic Cooperation and Development cut its forecast for Spain’s 2012 growth to 0.3 percent on Nov. 28 from the 1.6 percent it estimated in May. It sees growth of 0.7 percent this year, in line with the government’s revised forecast of about 0.8 percent, and predicts unemployment will rise to 22.9 percent next year.

As part of his efforts to bring down that jobless rate, Rajoy meets union and business leaders today to discuss changes to labor-market rules. Rajoy made a campaign pledge to overhaul laws on collective wage-bargaining and to encourage the use of open-ended contracts instead of temporary arrangements.

The People’s Party leader, who won the biggest majority of any Spanish party since 1982 on Nov. 20, is holding the talks before taking over from Prime Minister Jose Luis Rodriguez Zapatero. Parliament doesn’t reconvene until Dec. 13 and the new government’s first Cabinet is due to be held on Dec. 23, PP deputy leader Maria Dolores de Cospedal said on Nov. 28.

--Editor: Jeffrey Donovan, Craig Stirling

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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