Bloomberg News

Spain Industry and Services Drop, Signaling Economy to Contract

December 06, 2011

Dec. 5 (Bloomberg) -- Spanish industry and services declined the most since 2009, adding to evidence the economy may contract in the fourth quarter, just as the newly elected government is set to deepen austerity measures.

Industrial production fell 4 percent from a year earlier in October, the most since November 2009, after a revised 1.4 percent drop the previous month, the National Statistics Institute in Madrid said today.

A purchasing managers index of Spain’s services industry index dropped to 36.8 in November from 41.8 the prior month, signaling the sharpest decline since March 2009, Markit Economics said. Spain is “highly likely” to contract in the fourth quarter, the research company forecast.

Spanish Prime Minister-elect Mariano Rajoy inherits a shrinking economy and a 22.8 percent jobless rate when he takes office on Dec. 21 with a mandate to slash the euro region’s third-largest budget deficit. The economy stagnated in the third quarter and probably weakened further in the last three months of the year as the debt crisis escalated, the Bank of Spain said on Nov. 30.

“We expect a contraction of 0.9 percent in 2012,” said Luigi Speranza, an economist at BNP Paribas in London. “You have further fiscal correction, ongoing deleveraging and the situation in the euro zone that’s not helping, so you have a slowdown in exports and domestic demand continuing to fall.”

Spain is fighting to reduce borrowing costs that surged to euro-era records last month as contagion from the debt turmoil moved closer to the currency core. The extra yield on Spanish yields compared with equivalent German securities narrowed to 337 basis points today, from 355 basis points on Dec. 2 and a euro-era closing level high of 469 basis points on Nov. 22.

Ratings Pledge

Rajoy, the leader of the People’s Party that won its biggest ever majority on Nov. 20, made a campaign pledge to restore the AAA credit rating that Spain lost in 2009. He hasn’t said where he will cut spending, while promising to restore the purchasing power of pensions, which accounted for 112 billion euros ($151 billion) in this year’s budget.

Rajoy has said he won’t stray “under any circumstances” from Spain’s target of cutting the deficit to 4.4 percent of gross domestic product next year from the 6.6 percent estimated for 2011 by the European Commission.

As he prepares to take over from Socialist Prime Minister Jose Luis Rodriguez Zapatero, Rajoy has started talks with unions and business leaders about changes to labor-market rules that aim to spur job creation. The PP wants to change rules on collective wage-bargaining to give companies more flexibility, it said on the campaign.

“It will take time and 2012 will show soft growth, but besides austerity measures I’m quite confident the new government will try to work harder on structural reforms,” said Tullia Bucco, an economist at Unicredit Global Research in Milan.

--Editors: Andrew Atkinson, James Hertling

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Angeline Benoit in Madrid at abenoit4@bloomberg.net

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


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