Economy minister confronts possibility of recession

10 September 2008

MADRID — Economy Minister Pedro Solbes broached for the first time the risk of the Spanish economy slipping into recession Tuesday, but insisted the government was not working under that assumption.

"The risk, the possibility of recession is there, and that’s a concern," Solbes said in an interview with national radio station Cadena Ser. "What I have always said, and I repeat this again now, is that at this moment we are not working on that hypothesis."

The Spanish economy grew only 0.1 percent in the second quarter of this year compared with the previous three months, the slowest pace of growth in 15 years.

Solbes predicted the pattern of activity in the third and fourth quarters of this year would be similar to the first half.

In July, the government cut its GDP estimate for this year to 1.6 percent from 2.3 percent and by 1.3 points to one percent for 2009 on the back of a slump in the housing market. The economy grew 3.7 percent in 2007, and has outpaced the rest of the euro zone for more than a decade.

The collapse in the housing market has had a knock-on effect on the rest of the economy.

As a result, Spain now has the highest unemployment rate in the European Union at 11 percent, according to figures for July from the EU’s statistics office Eurostat.

Solbes told Cadena Ser the rise in jobless claims would drain up to EUR 3 billion from the government’s coffers this year.

The minister said it was hard to say when the economy would start to recover but estimated in the best-case scenario that this could start next year.

Echoing Solbes’ comments, the European commissioner for economic affairs, Spaniard Joaquín Almunia, predicted the Spanish economy would start to pick up along with the rest of the euro zone from 2009 and reach full growth potential the following year.

Almunia said he plans to revise downward the Commission’s forecast for growth in the European economy on Wednesday.

"The euro area contracted by 0.2 percent in the second quarter of this year and according to the latest forecasts published by the OECD and the ECB the prospects for the second half of 2008 and the beginning of 2009 are not very good," Almunia said in a speech in Frankfurt.

"Tomorrow I will present our updated forecasts for this year and unfortunately I don’t expect to convey a different message," he added.

The European Central Bank recently cut its forecast for growth in the euro zone for 2008 to 1.4 percent from 1.8 percent previously and for 2009 to 1.2 percent from 1.5 percent.

The Organisation for Economic Cooperation and Development also recently lowered its growth estimates for the single-currency bloc.

[El Pais / A Sim / Expatica]