Spain recession drags on with no aid in view

 

Spain fell deeper into recession in the third quarter and prices rose sharply in October, piling pressure on the government to revive a paralyzed economy as it stalls over requesting aid.

PM Mariano Rajoy is in no hurry to apply for a politically humiliating financial rescue that would kickstart an ECB bond-buying programme and ease financing costs. But the worsening economy, along with spreading civil unrest, may force his hand.

Numbers published on Tuesday added to evidence that the country is trapped in a 'stagflationary' spiral of shrinking growth, high inflation and high unemployment.

GDP shrank for the 5th straight quarter between July and September, dropping 0.3%, while consumer prices rose by 3.5% year-on-year in October, the two sets of National Statistics Institute data showed.

Elected just under a year ago on an austerity ticket, Rajoy has signed off on a belt-tightening programme worth over €60 billion through to the end 2014 to cut the public deficit. But the spending cuts have dented investment while tax rises have hit consumers' pockets and driven prices higher.

The cutbacks have also led to increasingly frequent protests focused on Madrid and fuelled already strong separatist sentiments, notably in the powerful northeastern province of Catalonia.

ECONOMIC 'MIRAGE'

The euro zone's 4th largest economy is at the center of the bloc's debt crisis due to concerns the government cannot control its finances. Many investors view the 2013 budget, which aims to cut the deficit to 4.5% of GDP from over 9% last year, as based on overly optimistic economic forecasts.

Q3 GDP shrank more slowly than the 0.4% rate that was expected, making end-of-year growth targets easier to hit.

But any suggestion that that marked an upturn was "a mirage," said Estefania Ponte, an economist at Madrid-based broker Cortal Consors.

"It does not mean the economy is doing better, but only shows the families have brought forward purchases ahead of the VAT hike."

Madrid enforced an across-the-board hike in sales tax on September 1 as part of the austerity programme. That contributed to the sharpest monthly fall on record in retail sales in September.

Spain's refinancing costs on international debt markets soared to euro-era highs in July but have since eased after the ECB announced its sovereign bond-buying programme for countries that ask for help.

The premium investors demand to hold Spanish ten-year debt over equivalent German paper initially fell on Tuesday's growth data before rising back to around 419 basis points, in line with Monday's close.

With debt premiums now at more manageable levels, Rajoy seems reluctant to apply for an aid programme that might bring with it deeper austerity measures that would further hobble the recovery and fuel protests.

FEWER DEMANDS ?

On an annual basis, the economy shrank 1.6%, in Q3 suggesting Spain was in line to meet its end-of-year GDP target.

But that did little to allay concerns that the government will fail to meet its deficit target.

EU-harmonized consumer prices rose by 3.5%year-on-year in October, topping a Reuters forecast of 3.4%. The figure was unchanged from September.