Spain GDP stagnates, demand remains fragile

 

Spain's economy stagnated in the third quarter, pulled back by a weak construction sector and consumers resigned to austerity measures, which could leave it struggling for any serious momentum for years.

A growth rate of 0.0 percent on a quarterly basis was as expected by economists and came after growth of 0.3 percent in the previous quarter, which was revised up one tenth of a percentage point, the National Statistics Institute reported.

On a year-on-year basis the economy grew by 0.2 percent, in line with an estimate last week and with forecasts and after a revised 0.0 percent in the second quarter.

The Spanish economy crawled out of an 18-month-long recession in the first quarter on a quarterly basis, but economists warn it could slip back into contraction again late this year or in early 2011 as the full effects of austerity measures and unemployment of close to 20 percent take hold.

Spain's stuttering recovery contrasted with growth of 0.4 percent in the euro zone, and could threaten the government's optimistic forecasts for the economy to rebound and grow 1.3 percent in 2011.

That is key to its pledge to cutting its public deficit to 6 percent next year after it surged to 11.1 percent in 2009.

"The worrying thing is the negative domestic demand profile. The problem for Spain is that for recovery to gain impetus it has got to see some improvement in employment," said Stephen Webster, economist at 4Cast.

He warned of a continuation of a two-speed euro zone economy fractured between the weaker periphery countries such as Spain and Portugal, and the heavyweights to the north.

Spain gained market favour in the past two months as improving deficit data and backing for its 2011 budget helped it distance itself from fellow strugglers Ireland and Portugal. But investors are nervous Spain will be next in line should the other two economies request an EU bailout.

The data showed that national demand fell by 0.8 percent year-on-year, while exports grew by 8.7 percent year-on-year, down from a revised 11.6 percent in the second quarter. National demand was likely hit by a two percentage point rise in value-added tax that took effect from July 1 that has also seen inflation pick up.

On Wednesday the key risk premium on Spanish debt as measured by the spread between German 10-year bunds and Spanish ten-year debt was around 203 basis points, holding at high levels as markets digested Ireland's tentative steps to a rescue package.

CONSTRUCTION STRANGLE

Spain's ecnonomy grew in the first half of the year, albeit very modestly, thanks to growth in exports, but also helped by ongoing measures to stimulate demand such as benefits to trade in old cars for a new model.

As they came to an end at the mid-point of the year, and were counterbalanced by austerity measures to slash the public deficit, growth again stalled.

The construction sector, that powered a decade of strong growth before collapsing in 2007, again impeded the economy from recovering. The sector sank by 11.6 percent year-on-year in the third quarter, slightly more than the 11.4 percent seen in the previous three months.

"This is corroboration that the economy will struggle back to a full recovery. The weakness seems concentrated in the industrial and construction sectors and austerity measures mean Spain could suffer for a number of years" said Silvio Peruzzo, economist at RBS.

The statistics agency, or INE, revised on Wednesday its figure for the first quarter, saying the economy contracted 1.4 percent year-on-year. Previously it reported a contraction of 1.3 percent for the January-March period.