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Spain’s recession worsened in the second quarter as consumer spending was battered by an austerity effort that is set to triple in scope through 2014 to tackle the euro area’s third-biggest budget deficit.
Gross domestic product fell 0.4 percent from the previous quarter, when it declined 0.3 percent, the Madrid-based National Statistics Institute said today. That’s in line with an estimate of 0.4 percent on July 30, before the institute revised down yesterday data for 2010 and 2011. Consumer spending dropped 1 percent in the quarter.
Prime Minister Mariano Rajoy last month gave up on his forecast for a return to growth in 2013 as he unveiled budget cuts that will expand austerity measures to a total of 15 percent of annual GDP by 2014. The budget deficit was nearly unchanged in 2011 at 8.9 percent of output as the euro area’s fourth-biggest economy slipped back into recession.
“We’re not through the downturn and it will turn worse in the next quarters,” said Christian Schulz, an economist at Berenberg Bank in London. “There is a risk that things get out of control and Spain goes the way of Greece which would discredit the austerity strategy and be negative for getting the euro-zone crisis under control.”
The yield on Spain’s 10-year benchmark bond rose 2 basis points to 6.40 percent as of 10:07 a.m. in Madrid before a sale of three-month and six-month Treasury bills later today. The yield reached a record of 7.75 percent on July 25 as investors speculate Rajoy may request a second international bailout involving the European Central Bank. The government signed off on as much as 100 billion euros ($125 billion) of loans to shore up banks burdened with bad debt on July 24.
The Spanish GDP report showed that investment dropped 3 percent in the three months through June from the previous quarter, while exports of goods and services rose 1.6 percent. Government spending declined 0.7 percent after decreasing by 0.9 percent in the previous three months. It fell 3 percent from a year ago.
The economy grew 0.4 percent last year, down from the 0.7 percent initially stated, the statistics agency said. The 2010 contraction was 0.3 percent, more than the 0.1 percent decline first reported.
Public finance figures due Aug. 31 may show Spain is struggling to cut its deficit to 6.3 percent of GDP this year and reach the European Union limit of 3 percent of GDP in 2014. Economists project the country’s GDP to contract 1.6 percent in 2012 and 0.9 percent in 2013 according to the median forecast of 30 economists surveyed by Bloomberg News.
Support for Rajoy’s People’s Party has slipped 8 percentage points since it won 40.6 percent of votes in a landslide in November, as the premier has turned his back on campaign pledges by raising levies on income, scrapping a tax break for homeowners and cutting health care and education spending.
His fourth budget-tightening exercise in eight months will lead to an increase of the value-added tax this week and cuts in jobless benefits and civil servants’ wages before the end of the year.
The VAT increase will take place Sept. 1 after a flurry of data signaling pressure building on household finances. A report yesterday showed residential mortgages fell 25.2 percent from a year ago in June while prescription pharmaceutical spending fell close to 24 percent in July, the most on record, after the cost of drugs for patients increased.
Tax increases are seen boosting the inflation rate to an eight-month high of 2.3 percent, according to the median forecast of 10 economists in a Bloomberg News survey. Meanwhile, July retail sales figures are expected to signal weaker spending on Aug. 31, after a 5.2 percent annual decline in June.
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