Clouds loom on economic horizon

1 April 2008

MADRID – Inflation hit record highs in March, while the Bank of Spain on Monday predicted a sharp slowdown in the pace of economic activity this year and the next.

The National Statistics Institute (INE) estimated that the harmonised index of consumer prices, which is used for comparative purposes with the rest of Europe, surged to an annual 4.6 percent, its highest level since the series for the index began in 1997.

Analysts had been expecting inflation in March to remain steady at February’s level of 4.4 percent, but record oil prices and rising food costs put paid to that hope. The INE is due to provide a breakdown of the figure on April 11.

Inflation in March in the euro zone also rose, to 3.5 percent from 3.3 percent, which would seem to all but rule out an interest-rate cut by the European Central Bank when households are already starting to feel the pinch from higher borrowing costs in the wake of the credit crunch sparked by the US subprime crisis.

The ECB’s medium-term target for inflation is 2 percent.

Economists reckoned the unexpected spike in March might be explained by calendar effects. The Easter holiday period, when prices in restaurants and hotels traditionally pick up, was in March this year rather than April as is normally the case.

The secretary of state for the economy, David Vegara, also bought the early Easter explanation for the spike in prices. He said he was confident inflation would start to ease in April, "oil price trends provided."

Meanwhile, the governor of the central bank, Miguel Ángel Fernández Ordóñez, sided with economists predicting GDP growth would slow this year to 2.5 percent from 3.8 percent last year and to 2.1 percent in 2009.

The government’s official forecasts are for growth of 3.1 percent this year and 3.0 percent in 2009 as assumed in the state budget. Fernández Ordóñez urged economic players not to take an "alarmist" view of the slowdown so as not to
cause undue harm.

Vegara yesterday acknowledged the risks to the Spanish economy were clearly on the downside, but said there were no plans to adjust the government’s budget assumptions until a review of these in July.

Miguel Arias, the economic spokesman for the opposition Popular Party urged Prime Minister José Luis Rodríguez Zapatero to stop making economic forecasts. "Every time he opens his mouth, things get worse."