Spain's GDP Contracts Slightly Less Than Estimated But Austerity Measures Keep Inflation At 17-Month High

Tuesday, October 30, 2012 06:26
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Spain's GDP Contracts Slightly Less Than Estimated But Austerity Measures Keep Inflation At 17-Month High

Tags: European crisis | outlook | world economy

Data this week will reveal just how bad things have become in Spain from one year ago.

 

In September of 2011, retail sales fell 11%. Data on public finances, consumer prices, and gross domestic product (GDP) are likely to confirm Spain’s economy is deteriorating amid the toughest austerity in its democratic history.

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The data will extend scrutiny of the country’s situation after unemployment data released last week showed fully one quarter of Spain’s working citizens are unemployed.
 
The added scrutiny will also likely renew pressures for the country to seek aid from the European Central Bank (ECB) under its new bailout program.
 
GDP for Spain indeed declined .3%, slightly less than the .4% estimate. This was the fifth consecutive quarterly decline while imposed austerity has kept inflation at a 17-month high.

 

Consumer prices rose 3.5% in comparisons to 2011. Politically, the new data puts Prime Minister Mariano Rajoy in an even more precarious position.

 

He now faces the choice of either overcompensating workers by adjusting pension benefits based on the new inflation data or breaking one of his promises by changing the social security law.

 
Spain has been resisting pressure to seek a line of credit from the European Stability Mechanism’s (ESM) bailout fund. The line of credit would enable the ECB to buy Spanish bonds on the secondary market and lower the country’s borrowing costs.
 
The ESM program would be in addition to the €100 billion bailout received in July for Spain’s banks. Economists surveyed by Bloomberg have lowered their estimates for Spain’s economic growth to 1.4% for next year.
 
Unemployment is expected to rise to 27% by 2014 although Rajoy expects unemployment to begin falling next year.
 
Spain will miss its deficit reduction target this year and that will make it extremely difficult to meet next year’s goal.
 
Balance of payment data from August will show the condition of Spain’s investment portfolio after the accelerated seven-month flight of capital through the month of July.

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