Spain Economy Shrinks, Taking It to Edge of Second Recession
January 30, 2012, 7:26 PM ESTBy Emma Ross-Thomas
(Updates with Moody’s comment in fourth paragraph, Fitch in fifth, bond yield in sixth.)
Jan. 30 (Bloomberg) -- Spain’s economy shrank in the fourth quarter, pushing the country toward its second recession since 2009 and undermining government efforts to narrow the budget deficit.
Gross domestic product fell 0.3 percent in the last three months of 2011 and rose 0.3 percent from a year earlier, the National Statistics Institute said in an e-mailed statement today in Madrid. The figures match the estimate published on Jan. 23 by the Bank of Spain.
The People’s Party government, in power since December, is trying to convince investors it can reduce the deficit by almost half this year even as the recession weighs on revenue and employment. The economy may shrink 1.5 percent, pushing the jobless rate to 23.4 percent if the government meets its austerity goals “strictly,” the Bank of Spain said last week.
“Deteriorating growth is credit-negative as it further complicates the government’s challenge of significantly reducing the fiscal deficit,” Kathrin Muehlbronner, a senior analyst at Moody’s Investors Service, said in a report today. “It will be very difficult for Spain to reach this year’s deficit target given the outlook for revenue growth.”
Fitch Ratings also cited the “deterioration in the macroeconomic outlook” when it cut Spain’s credit rating two levels to A on Jan. 27. The company, which also cut Italy and three other euro nations, said Spain will miss its deficit target this year and unemployment will remain “very high.”
Highest Unemployment
Spain’s 10-year bond yields rose to 5.043 percent today, up 8 basis points from 4.965 percent on Jan. 27, pushing the spread over German bunds of the same maturity to 322 basis points
With the highest jobless rate in the European Union, at 22.9 percent, and credit shrinking by the most on record, Spain’s economy will probably contract 1.7 percent in 2012 and 0.3 percent in 2013, according to the International Monetary Fund. That will make it impossible to reach the deficit targets of 4.4 percent of GDP this year and 3 percent in 2013, the IMF said on Jan. 24, forecasting a shortfall of 6.8 percent this year and 6.3 percent in 2013.
The PP government inherited a bigger shortfall than the previous administration had projected, it said on Dec. 30, as the gap amounted to 8 percent instead of the 6 percent target set with the EU. The goal for 2012 was made when the previous government expected the economy to grow 2.3 percent this year.
Prime Minister Mariano Rajoy, battling to rein in borrowing costs, called on European leaders to put the region’s permanent- rescue mechanism in place as soon as possible after meeting with German Chancellor Angela Merkel in Berlin on Jan. 26.
He joins EU leaders today at a summit in Brussels, where he will propose using unused EU structural funds to create jobs for young people, half of whom are out of work in Spain.
--Editors: Jeffrey Donovan, Andrew Atkinson
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
