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Spain expected to see a 2nd recession by year's end

Fri 27th Aug 2010

GDP in Spain grew by just 0.2% for the second quarter of the year, and a further recession has been predicated by the end of the year amongst austere monetary conditions and plummeting consumer demand.

"Spain's potential growth rate has plunged to zero from an average of 3% in eight years to 2008" commented Diana Choyleva, economist at Lombard Street Research.

As soon as GDP drops to zero, even normal fluctuations of the business cycle can result in recessions.

While the economy increased moderately over Q2 as a result of growth in consumer demand, this support is likely to slump in Q3 leading the economy into another recession, said Ms. Choyleva in a report.

"With net wealth unlikely to perk up soon and consumer confidence slumping yet again in recent months, it is unlikely that the revival of consumer spending will be maintained."

Real employee compensation fell by 0.8% in the quarter, an improvement on the 1.4% decline in first quarter, and investment in machinery and equipment also rose. But it could not outweigh the drag from plummeting construction.

Companies cash reserves are low compared to their outstanding debt and capital expenditure is unlikely to be a major source of growth, said the report.

"To make matter worse Spain has embarked on a fiscal retrenchment amid extremely tight monetary conditions," Ms. Choyvela said. "It could be argued that the tightening of fiscal policy was premature given low debt levels. But in terms of the need to boost investor confidence to avoid cost spiraling out of control, maybe Spain could not avoid it."

"The seemingly unstoppable decline of broad money is a significant threat to the outlook for the economy over the next year and a half" she added.

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