Spanish economy shrinks by 0.4%

23 Oct 12
Spain’s economy shrank by 0.4% in the three months to the end of September, the fifth consecutive quarter it has failed to grow, according to the Bank of Spain.

By Nick Mann | 23 October 2012

Spain’s economy shrank by 0.4% in the three months to the end of September, the fifth consecutive quarter it has failed to grow, according to the Bank of Spain.

The central bank’s bulletin, published today, said the country’s economic performance reflected continued adverse conditions in the global economy.

A ‘generalised weakening’ in external activity was still affecting Spain’s main export markets in the eurozone, while the country’s economy was also being negatively affected by a ‘persisting climate of high uncertainty’. This, the Bank explained, was linked in particular to doubts over the scope of economic and monetary reforms being carried out both in Spain and Europe as a whole.

‘These developments are hampering any pick-up in domestic demand, which has fallen back in recent months and shows a cumulative decline of somewhat over 13 percentage points since the first quarter of 2008,’ it added.

 On a year-on-year basis, the Bank’s data estimates the Spanish economy shrank by 1.7% in the third quarter compared with the same period a year earlier. This compares with a 1.3% year-on-year contraction in the second quarter. Spain’s economy last grew in the second quarter of 2011.

Public sector spending cuts had a ‘clearly contractionary’ effect on economic growth, with higher declines in public sector consumption and investment than in previous quarters. The Bank also highlighted ‘significant slippage’ in tax revenue as a result of the downturn in domestic demand.

The impact of tax increases and public sector wage cuts introduced in July had yet to filter through, the Bank said. But even when the effects of the measures are felt, Spain might miss its deficit target for this year. This might it would have to take ‘additional measures’ to meet the ‘very ambitious’ goal of reducing its deficit to 4.5% of gross domestic product next year. Meeting this target  would require assistance from Spain’s regional governments, the Bank noted.

Overnight, Moody’s downgraded the credit rating of five Spanish regions, citing ‘the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs’.

Andalucia was downgraded from Baa3 to Ba2, Castilla-La Mancha from Ba2 to Ba3, Catalunya from Ba1 to Ba3, Murcia from Ba1 to Ba3 and Extremadura from Ba1 from Baa3.

The downgrades and poor growth figures are expected to increase pressure on the Spanish government to seek a bailout of its public finances.

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