Retail sales fall in January as consumers feel the pinch

13 March 2008

MADRID – Retail sales fell in January for the second month in a row as the Spanish economy started to go off the boil.

The National Statistics Institute (INE) said Wednesday sales at constant prices in the first month of the year dropped 1.6 percent in the first month of the year after a fall of 2.3 percent in December. Factoring out calendar effects the decrease was 2.4 percent.

The figures were released as the newly re-elected Socialist government pledged to make good its electoral promise of an across-the-board tax rebate of EUR 400 as soon as it was sworn in.

Consumer spending and the construction pillar have helped drive growth in activity in Spain for over a decade at levels above the average in Europe. Households, however, appear now to be reining in spending due to higher borrowing costs, while a decade-long housing boom came to an end last year.

Spain’s GDP was up 3.8 percent in 2007, but growth slowed to 3.5 percent in the last three months of the year.

In its monthly economic bulletin for February, released last month, the Bank of Spain said the slowdown in the domestic economy seen toward the end of last year had become more "pronounced" at the start of this year as the credit crunch unleashed by the US subprime crisis made itself felt.

The report pointed to a prolonged slump in consumer confidence to levels in January last seen in May 1994. It also highlighted a 25.8-percent drop in building permits for homes as a result of a marked slowdown in the property sector and an increase in the number of jobless claims in the construction sector and a fall in cement consumption.

The INE said sales of food items in February were flat while other items were down 2.4 percent, with sales of household goods down 5.8 percent.

Pedro Solbes, who will stay on board as economy minister in the new administration, said the tax cut would be approved at the first Cabinet meeting of the government.

He said the move would give an immediate boost to the economy by increasing households’ disposable income, thereby helping them meet higher mortgage payments.

The minister suggested that mortgage rates have hit a ceiling as the European Central Bank is unlikely to further tighten its monetary policy.