Consumers doubt economy as stocks tumble

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Confidence at lowest ever level amid fears of sharper slowdown

6 February 2008

MADRID - Spanish consumer confidence fell for the ninth straight month in January, plunging to its lowest level since records began amid a barrage of negative data that sent the stock market tumbling and heightened fears that the current economic slowdown may be worse than expected.

Coming on the back of the largest rise in unemployment in the month of January in a quarter of a century, the Official Credit Institute (ICO) consumer confidence index yesterday showed a fall of 1.4 points last month to 70.9 points. The January fall, the ninth drop in confidence in as many months, situates the index 19.7 points below the level it was a year ago.

The figures, combined with negative data out of the United States, pushed the Madrid stock market to its second biggest one day loss this year with the select Ibex 35 index falling 5.19 percent - the sharpest decline of any European market.

Industrial production data, also released yesterday, provided a further insight into the bleak outlook for the Spanish economy. The Industrial Production Index for December experienced its sharpest fall in five and a half years as inflation, running at a 12-year high, hit demand for Spanish goods abroad and the end of a housing boom and tighter lending conditions cut domestic demand. In line with the trend, the headline Purchasing Managers' Index (PMI) fell in January at its fastest pace since the 11 September  2001 attacks on the United States, led by the sharpest decline ever recorded in the services sector, which makes up more than 70 percent of Spain's economy.

"I'm amazed. I've never seen anything like this and I would think the economy is in for a very tough ride on the basis of these figures," José Zarate, an analyst with the firm 4Cast, told the Reuters news agency in London.

Other analysts concurred, seeing yesterday's data and Monday's record unemployment figures as confirmation that the Spanish economy is probably slowing faster than most people expected.

Some observers are starting to consider the possibility of a recession that would impact growth across the whole of Europe.

"At this point the risk of a recession is significant," argued Veronique Riches-Flores at Société Générale. "The Spanish situation is beginning to have an increasing influence on the euro zone and the European Central Bank, reinforcing our forecast that the ECB will have to ease its policy in coming months," she continued.

Spain is the euro zone's fourth largest economy, accounting for more than a tenth of the monetary union's economic growth and, since 2004, around half of its  growth in terms of jobs.

But with economies slowing worldwide and fears mounting over a possible recession in the United States, Spain risks being particularly hard hit due to a combination of high household debts and sweeping job losses in a construction sector bloated by a decade-long property boom.

However, the Socialist government, facing a general election on 9 March, has argued that the economy will slow only slightly this year and will still manage to steam along at a robust 3.1 percent rate of growth. David Vegara, the secretary of state for the economy, said yesterday that the government currently sees no reason to change its forecasts.

"We already foresaw this tendency," Vegara said, indicating that the government will probably not revise growth forecasts again until the middle of the year.

However, many independent analysts are calling for steps to be taken now to stimulate growth, not just in Spain but across the whole of Europe,  arguing that the European Central Bank may soon have to cut interest rates if it wants to stop the slowdown turning into a continent-wide recession.

[Copyright EL PAÍS / A. EATWELL 2008]

Subject: Spanish news

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