Spain Contracts More Than Forecast, Trailing Europe
Spain’s economy contracted more than forecast in the second quarter, suggesting a recovery in Germany and France has yet to reach a country that was once an engine of growth for the euro region.
Gross domestic product declined 1 percent from the previous quarter, when it shrank 1.9 percent, the Madrid-based National Statistics Institute said in an e-mailed statement today. From a year earlier, it contracted 4.1 percent. The Bank of Spain estimated on July 30 that the economy contracted 0.9 percent in the second quarter and 4 percent from a year earlier.
Spain’s recovery is lagging behind that of other European countries as data yesterday showed the German and French economies both resumed expansion in the second quarter. Battling the collapse of a domestic housing boom and Europe’s highest unemployment rate at 18 percent, Spain is using stimulus measures worth 2.3 percent of GDP to support the economy as it puts builders to work on public projects across the country.
“Until the end of 2010, we definitely see Spain continuing to under perform the rest of Europe,” said Giada Giani, an economist at Citigroup Global Markets in London.
Labor Costs
Exports, which helped revive growth in France and Germany, may not do the same for Spain. Commerzbank AG estimates that based on labor costs, Spain has become 10 percent more expensive relative to the rest of the region since the euro’s creation.
“Spain has a competitiveness problem relative to the core euro-area countries, so it’s unable to exploit the benefits of a possible recovery in international trade,” Giani said.
Even as the government has created what it says is the largest stimulus plan in Europe this year and plans further measures next year, Spain’s economy will shrink 0.9 percent in 2010 while the euro region will stagnate, the Organization for Economic Cooperation and Development forecast on June 24. That would make Spain the worst performer of the 30 OECD nations after Hungary and Ireland.
“Divergence within the euro region is a risk at the moment, especially if the other economies start to pick up,” said Martin van Vliet, senior economist at ING in Amsterdam.
Economic reports over the last two days have highlighted shifting fortunes across Europe’s largest economies. In the U.K., GDP contracted 0.8 percent in the second quarter, while Germany and France both expanded pay day loans. The Netherlands and Austria contracted, as did the economies of Romania and Hungary.
Boom to Bust
“Spain is now paying the price for the boom years when they benefited from too-low interest rates,” van Vliet said. “Now the bubble has popped and Spain would prefer to have low interest rates for a protracted period.”
Economists expect the European Central Bank to start raising rates next year, according to a Bloomberg News survey.
As well as the global crisis, Spain is suffering from the collapse of a debt-fueled construction boom that has left around 1 million newly built homes unsold. Unemployment has doubled in two years, with construction workers leading the job losses, and Spain accounts for about half of the euro region’s increase in unemployed in the last year, according to Eurostat, the European Union’s statistics office.
After running surpluses in the three years through 2007, Spain’s budget deficit will swell to 9.5 percent of GDP this year, the government forecasts. The widening deficit prompted Standard & Poor’s to cut Spain’s top AAA credit rating in January and the extra interest investors demand on Spanish bonds rather than German equivalents is more than four times what it was two years ago.
Spread Widens
The extra interest, or spread, widened today to 48.5 basis points from 46.8 basis points yesterday. A basis point is 0.01 percentage point.
Companies have cited Spanish business as a weak spot. Coca- Cola Co. said on July 21 that it saw weakness in Spain due to “significant macroeconomic challenges,” and Vodafone Group Plc said in May it had an impairment charge of 5.9 billion pounds ($9.7 billion), most of it related to Spain.
At the peak of its boom, Spain was creating about half the new jobs in euro zone, according to Eurostat. Over the decade to 2007, Spain grew at an average of 3.8 percent a year, compared with 2.3 percent in the euro region.
The economic slump has had a political cost as the ruling Socialist Party, which was reelected last year on pledges of full employment, now trails the opposition in popular support, a poll by the state-run Center for Sociological Research showed on July 27.
Filed under: money by Finance Boss