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Spain's growth forecasts look optimistic

Source: Reuters - Mon 6th Dec 2010

Spain's recovery plan hangs on growth forecasts fuelled by an export boom and a private consumption turnaround, but with crippling debt-financing costs and massive welfare payments, the outlook is unrealistic.

After multi-billion euro bailouts for Greece and Ireland, and markets expecting Portugal to apply soon, investors have turned their focus on the Spanish economy which is larger than those three countries combined.

A growth shortfall would put further pressure on Spain's budget, although analysts said that wouldn't be enough on its own to force Spain to seek international assistance.

Two thirds of Spanish exports, worth 26 percent of GDP, are sent within the 27-member bloc. A return to growth in France and Germany, which top the list, has helped lift Spain's sales abroad, but it might not be enough.

"Spain's relying a lot on Europe propping them up in this respect, but this smacks a little of desperation. Tough austerity measures have dampened domestic demand and so relying on the external base might be optimistic" 4Cast economist Jo Tomkins said.

Spain is a long way down the World Economic Forum's Global Competitiveness Index at number 33. Investment is on the back burner while the government struggles to pay welfare for over 4 million unemployed and service its debts and yawning deficit.


There is rising concern the Spanish economy will not bounce back to growth levels seen before the financial crisis began. And even with improving data, which support official forecasts, doubts linger.

Better than expected central and regional government deficits barely registered for investors who are convinced Spain is condemned to years of stagnation.

"It may take several more painful years before all the imbalances that were built up prior to the bubble bursting fully unwind and we see a convincing, sustainable recovery" Jefferies' economist David Owen said.

Spain crawled out of recession in the first quarter, lifted largely by stronger foreign demand. But its GDP tipped to be flat in the third quarter after cuts to civil service wages, consumer tax rises and welfare payment freezes took hold.

The government expects the economy to grow by 1.3 percent next year and 2.5 percent by 2012, the cornerstone to slashing the deficit to 3 percent of GDP by 2013 from 11.1 percent in 2009.

By comparison, the International Monetary Fund forecasts growth of just 0.7 percent next year.

The government's optimism extends to private consumption, which accounts for over half of GDP.

The official forecast is for consumption to grow 1.8 percent next year, after a forecast rise of 0.5 percent this year, making it a key part of meeting its deficit targets.

The trouble for the government is that even if exports continue to grow, shrinking domestic demand has a greater negative effect on growth.

Stubbornly-high unemployment, a hike in value added tax rates, wage cuts, slashed welfare payments and a credit drought have all taken their toll on consumer confidence.

"It's a dream to think that private consumption is going to provide a decent source of growth. May be it's the easiest thing to sell to the public, but the hard thing is to accept that new sources of growth and reforms are needed" economist at Carlos III University in Madrid Emiliano Carluccio, said.


The biggest immediate problem facing the Socialist government is likely to be the rising cost of servicing Spain's debt. The risk premium over Germany doubled to euro-lifetime records of over 300 basis points at the end of November.

Spain had outstanding debt of 532 billion euros at the of October. Some 45 billion of this matures in 2011, which at current rates will cost the country significantly more than budgeted for to refinance.

The yield on the most recent bond issue of 3-years leapt 120 basis points from two months earlier.

"This isn't just nerves. This is a correction" a Madrid-based bond trader said.

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