Spain joins European nations in recession

29th January 2009, Comments 0 comments

The economic boom comes to an close as Spain slumps into recession, joining the ranks of Britain, Germany and Italy.

MADRID — Once-booming Spain has joined a growing list of European nations including Britain, Germany and Italy hit by economic recession, estimates by the nation's central bank showed on Wednesday.

Spanish gross domestic product (GDP) shrank by 1.1 percent in the fourth quarter of 2008 compared with output in the previous quarter, when it contracted 0.2 percent, the bank said in its monthly bulletin.

The generally accepted definition of a recession is two consecutive quarters of economic contraction.

If the figures are confirmed when national statistics institute INE publishes its official estimate for fourth quarter Spanish GDP on February 12, it will mean the country is in its first recession since 1993.

Spain's once-buoyant economy, the fifth-largest in Europe, has suffered as the global financial crisis has hit the key construction sector, which was already weakened by oversupply and rising interest rates.

The government, which for a long time had predicted a slowdown in growth but no contraction, on Friday slashed its forecast for the economy to a decline of 1.6 percent this year from the growth of 1.0 percent previously forecast.

"This year is going to be difficult for everyone," Prime Minister Jose Luis Rodriguez Zapatero said Monday during an appearance on a live TV show which allowed 100 "ordinary people" to pose him questions.

Spanish GDP rose by 1.1 percent on an annual basis in 2008 but the bank said this represented a "sharp slowdown" from the annual growth of 3.7 percent observed in the previous year.

The negative "tendency" for the Spanish economy demonstrated at the beginning of the year "intensified during the fourth quarter, after the international crisis worsened," it added.

The government predicts the economy will start to show signs of improvement next year as the measures it has adopted, including a two-year stimulus package worth 11 billion euros (14.5 billion dollar), to fight the slowdown start to bear fruit.

It predicts the unemployment rate, already the highest in the 27-nation European Union, will rise to 15.9 percent in 2009 but then start to gradually decline the following year.

The European Commission, the executive arm of the EU, is more pessimistic. It sees the unemployment rate continuing to rise in Spain to 16.1 percent in 2010 and 18.7 percent the following year.

Last month the International Monetary Fund warned the Spanish economy, risks entering an extended period of stagnation unless sweeping structural reforms are carried out.

Dismissal costs must be lower to boost hiring, collective bargaining agreements need to be more flexible and the practice of indexing wages to inflation must end, the Washington-based Fund said.

At the same time, the extra government spending on stimulus measures combined with the prospect of declining tax revenues due to the economic contraction has raised concerns over the state of Spain's public finances.

Earlier this month Standard and Poor's lowered its rating on debt issued by Spain by one notch to AA-plus from AAA, the highest possible level.

The move will likely make raising money in debt markets more expensive for Spain as investors demand a higher rate of interest to compensate them for the perceived higher level of risk.

Spain, which posted a budget surplus between 2004 and 2007, expects its public deficit will climb to 5.8 percent of gross domestic product in 2009 from 3.4 percent last year.

[AFP/ Olivier Thibault/ Expatica]

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