The Spanish Prime Minister insisted that all the measures being taken by the Government of Spain are with a view to economic recovery and added that he anticipates being able to lower taxes in 2014. He also expressed his confidence that employment and growth forecasts contained in the General State Budget for this year will improve and insisted that “2013 will be better. We still may not have reached the lowest point but we will start to see improvement, especially in the latter half of the year, and the economy will start to grow again in 2014″.
In an interview with Cadena Cope earlier this week, Mariano Rajoy said that “reducing the public deficit is our top priority”. It must be lowered to 6.3% this year “at a time of economic recession and a shortage of financing, which is why we have raised taxes and cut spending”. In spite of that, he stressed that no further tax increases are on the cards. “What I want, because I believe in it, is to lower taxes and I hope to do so in 2014″. He also rejected the idea of lowering public sector wages in 2013.
The President of the Government argued that the difficult decisions taken until now have all been “aimed at enabling economic recovery”. The labour reform, the financial restructuring and the reform of public administration services, which he said “we’ve been talking about for 30 years and will now finally be carried out”, are some of those steps, the true effectiveness of which will be revealed when economic activity returns. Rajoy added that, for the time being, Spain is going through a debt reduction process and said “it is very difficult during any process of debt repayment to ensure that money is available for investment and consumption. But this process is essential because otherwise nobody will finance us”.
The Spanish Government newsletter, La Moncloa, reported that when questioned over whether Spain should request aid from the European Union or not, Rajoy reiterated that this decision has yet to be taken. The Government of Spain will eventually make that decision, he explained, and it “will be solely and exclusively aimed at guaranteeing the general interest of every Spanish citizen. I have not discarded the possibility of going down that path; it is an option that remains open to us”.
Up to 221,188 people were affected in the first half of the year by the Government labour reform (ERE), with termination or temporary suspension, or by having to adopt a reduction in their working hours, a 48.6% increase over the same period of 2011. The number of affected in June increased by 33% over the same month last year, with a total of 45,103 workers affected.
The Ministry of Employment and Social Security, which has published the data accumulated up to the end of June, says this increase is “somewhat consistent with the recession situation in which we find the Spanish economy.”
According to data from the National Statistics Institute, in 2009, the first year of recession in this crisis, 326,496 workers were affected. However at that time there were 18.9 million people employed compared to the 17.4 million people registered as employed in the second quarter of this year.
The Government labour reform, to introduce more flexibility in the labour market and lower the cost of dismissal, was approved by Congress on 28th June last year, but only came into force in February, when it was approved by Decree.
The Ministry of Employment’s analysis points to “a deepening of the tendency to use more intensive internal flexibility measures as an alternative to dismissal.” Dismissal measures have dropped, from affecting 19.7% of all workers subject to layoff procedures in the first half of 2011, to 16.2% in 2012, confirming the trend with a reduction of three and a half percentage points.
El Mundo reported that the reduction in working hours has gained prominence affecting more temporary EREs. In the first half of last year 4% of the total were affected by this measure, a percentage that rose to 21% this year.
According to the Government, this year’s data “imply a better functioning of the Spanish labour market, which slows the loss of jobs in a recessionary environment through the use of temporary lay-offs or reduced working hours.”
As the crisis continues to pull Spain further into debt more and more companies are taking steps to reduce their exposure to the struggling country.
Financial services group ING Groep NV reported a 22% fall in second-quarter net profit as it took a hit to cut it’s exposure in Spain.
Separately, Swedish security services group Securitas AB said it may take steps to terminate more contracts in Spain following significant cuts to unprofitable contracts in the first quarter, and fears that some Spanish customers may be unable to pay their bills.
There is already much speculation surrounding where the Spanish economy is going and if Spain will require further financial aid from Europe and steps such as these will only intensify concern.
Securitas and ING are not the first to cite Spain as a “risk” or to distance themselves from the country. Last week the International Consolidated Airlines Group, which owns British Airways and Iberia, said it has already started taking steps to prepare for the possibility that Spain could leave the Euro entirely.
ING said they reduced their exposure to Spain in response to the worsening crisis to “reduce the funding mismatch in that country.” Last month the company cut it’s total exposure from 41.1 billion euros to 34.9 billion through selling covered bonds and residential mortgage-backed securities. As a result of this ING said they made a loss of 234 million euros.
Spain “is going through a massive reduction in government spending, which is having an impact on the economy at large,” ING Chief Executive Jan Hommen said in a statement.
According to the latest figures released by the National Institute of Statistics Spain’s GDP contracted for a third consecutive quarter confirming the country is still in recession. A technical recession is commonly defined as two consecutive quarters of economic contraction.
Gross Domestic Product (GDP) generated by the Spanish economy registered a real variation of –0.4%, one tenth lower than the previous quarter.
The interannual GDP variation was –1.0%, as compared with 0.4%, for the first quarter. This behaviour was due to the more negative contribution by domestic demand, partly compensated by the positive contribution of foreign demand and order similar to that recorded in the previous quarter.
Euro group leader Jean-Claude Juncker has called on the ECB to step in to help cut Spain’s debt costs.
“We will work in close agreement with the ECB, and we will, as ECB President Mario Draghi said, see results,” Mr Juncker said speaking to press.
“I don’t want to drive expectations, but I must say, we have reached a decisive phase.”
Spain’s consumer price index also increased with an increase of 2.2%, year-on-year. The increase was higher than expectations due to the increase in medicine costs put in place by the government to save money and reduce the deficit.
Economists warned price hikes, and especially a 3% rise in sales tax due, would distort consumer prices while the deepening recession reflected slower domestic demand.
Ratings Agency Fitch has downgraded Spain’s credit rating down from ‘A’ to ‘BBB’ with a negative outlook.
Fitch said the three-notch downgrade was a due to mistakes at a European level had allowed the debt crisis to escalate and the ballooning cost of bailing out Spain’s struggling banks. ‘BBB’ is considered to be just above junk bond status.
“Spain is forecast to remain in recession through the remainder of this year and 2013 compared to Fitch’s previous expectation that the economy would benefit from a mild recovery in 2013,” the agency said.
Fitch also gave a stark warning to the British Chancellor, George Osborne, that the UK faced losing its AAA status if the double-dip recession intensified.
Statement from Fitch Ratings
The dramatic erosion of Spain’s sovereign credit profile and ratings over the last year in part reflects policy missteps at the European level that in Fitch’s opinion have aggravated the economic and financial challenges facing Spain as it seeks to rebalance and restructure the economy. The intensification of the eurozone crisis in the latter half of last year pushed the region and Spain back into recession, exacerbating concerns over sovereign and bank solvency. The absence of a credible vision of a reformed EMU and financial ‘firewall’ has rendered Spain and other so-called peripheral nations vulnerable to capital flight and undercut their access to affordable fiscal funding. Spain has been especially vulnerable to a worsening of the eurozone crisis because of the high level of net foreign indebtedness (around 90% of GDP) and fragile confidence in its capacity to implement fiscal consolidation and bank restructuring in a timely fashion.
Spain’s investment grade status remains supported by a relatively high value-added and diverse economy as well as political and social stability despite very high unemployment. Competitiveness and export performance are improving and the trade balance on goods and services is expected to post a surplus this year. The rating is also supported by the Spanish government’s commitment to wide-ranging structural reform to improve the efficiency of public services and strengthen the budgetary and fiscal framework; enhance the flexibility of the labour market; and foster competitiveness and the growth potential of the economy. Moreover, securing public debt sustainability is within reach if the government is successful in reducing its budget deficit to 3% of GDP by 2014 and in light of the economy’s long-run growth potential of between 1.5% and 2% or higher if the structural reform agenda continues to be pursued.
Spain’s investment grade rating is premised on EMU remaining intact and Fitch’s judgment that the ECB, EFSF/ESM, and IMF, will, in extremis, provide financial support to prevent a fiscal funding crisis. Moreover, Spain’s ‘BBB’ rating incorporates Fitch’s expectation that Spain will secure financial support from its European partners for the restructuring and recapitalisation of the Spanish banking sector, though not necessarily a full-fledged policy-conditional external funding programme.
Since Fitch’s last formal review of Spain’s sovereign ratings in January, the 2011 outturn for the general government budget deficit has twice been revised upwards to 8.9% from 8% of GDP. Local and regional governments accounted for around two-thirds of the overshoot relative to the 2011 budget deficit target of 6% and remain a source of fiscal risk. Fitch recently downgraded eight regional governments in light of the expected increase in regional indebtedness and worsening economic and financing environment.
The settlement of outstanding payment arrears incurred by sub-national administrations and other ‘one-off’ operations will increase GGGD by 5.5% of GDP in 2012. Fitch expects that bank recapitalisation will add a further 6% of GDP to government debt during 2012 and 2013. Combined with a worsened outlook for the economy and higher interest payments, GGGD/GDP is projected by Fitch to peak at 95% in 2015 compared to the agency’s previous projection of a peak of 82% in 2013 (the latter broadly corresponds to the government’s current forecasts). Under a scenario whereby the recession is more severe than forecast (-2.7% and -1.5% contraction in real GDP in 2012 and 2013 respectively compared to -1.9% and -0.5% assumed in Fitch’s baseline projections), deficit reduction less rapid (3% primary budget deficit in 2013 compared to 1.4% assumed in the baseline) and bank recap costs are higher (9% of GDP rather than 6%), government debt would peak above 100% of GDP by 2014. Nonetheless, even under this negative scenario, government debt would stabilise reflecting Fitch’s analysis and judgment that public debt sustainability is within reach, albeit at a high level of indebtedness that offers very limited fiscal space to absorb further negative shocks.
Spain, with the fourth largest economy in the euro zone, will not come out of recession this year, or next, according to the Organization for Economic Cooperation and Development (OECD).
Spain’s GDP will contract 0.8% in 2013 following a 1.6% contraction in 2012, the OECD said in a report released yesterday. This is in sharp contrast to numbers from the International Monetary Fund (IMF) which forecast 0.1% growth in 2013 and 1.8% contraction in 2012.
In March Prime Minister Mariano Rajoy announced that Spain was unlikely to meet it’s 2012 deficit target and as a result Spain’s borrowing costs have been steadily increasing and are fast approaching 7%, the level that marked the beginning of the end for Greece, Ireland and Portugal.
“A further increase in the risk premium on yields of Spanish government bonds would raise private-sector funding costs and deepen the recession,” the report said.
The report goes on to predict that private consumption will contract 1.8% in 2013 and government consumption by 4.5%, partly due to the conservative governments austerity measures.
With unemployment already at record levels (24.4%), and following Rajoy’s comments that it would get worse this year, the report predicts unemployment will rise to 25.3%.
Overall, the report suggests that Spain will miss it’s deficit target of 5.3% of GDP by 0.1 point and will miss it’s 2013 target of 3% by0.3 percentage points. The total national debt will rise to 81.1% of GDP this year and rise to 84.1% in 2013, the report said.
The Bank of Spain has today confirmed that Spain is technically in a recession after the economy shrank by 0.4% in the first quarter of 2012, further evidence that the downturn is continuing in Spain.
Following a decline of 0.3% in the fourth quarter of 2011 a second consecutive month of economic contraction is technically a recession.
The government already knew this as they have said the economy is still shrinking and predict it will shrinnk by a futher 1.7% this year.
To try and slow the contraction they have approved labor market reforms, new banking regulations and employment law but still Mariano Rajoy’s government are warning Spain to prepare for a rough patch as things are likely to get worse before they get better. Worse than 24% unemployment? Worse than 50%+ youth unemployment? Worse than 50 billion euros of cuts? Maybe it’s time to leave Spain.
The figures released by the central bank are preliminary figures with the official GDP results due to be released by the National Statistics Institute later this month. I will of course bring you details.
According to the Bank of Spain’s economic bulletin for March, the country has already slipped back into recession, as the year started with more job losses and a slow down in economic output.
“The most recent information relating to the beginning of 2012 confirms a continuation of the contraction of activity in the first quarter of this year,” the report said.
Although the bank did not give exact figures the report said the contraction was mainly due to a decline in private consumption in January and February, falling to levels not seen since 2010. New car registrations and retail sales were both down in the first few months of the year. Export growth also slowed registering an increase, but 5.4% lower than that of Q4, 2011.
Following a drop of 0.3% in the fourth quarter of 2011, and the fall in Q1 this year, Spain is, technically, already in a second recession. Two consecutive quarters of economic contraction is considered to be a recession.
After a small, but noticeable increase in output towards the end of 2011 it looked like we might miss the second recession but the poor start to this year has changed that, putting Spain back where it was this time in 2010.
This country needs some serious change to get it out of this financial battle and 27 billion in spending cuts is not the way. Where are the new jobs coming from? Where is the incentive for business investment?
Changes announced in Friday’s budget include freezing public sector workers’ salaries and reducing departmental budgets by 16.9%. That’s a good idea for saving money but is it going to help public sector workers who are currently struggling to live? With some of the highest petrol prices in Europe (on Friday I paid 150.41€ for a litre of unleaded 95) and increasing costs across the board I don’t think this will help anyone.
Deputy Prime Minister Soraya Saenz de Santamaria said the nation was in an “extreme situation” and that “Our top priority is to clean up public accounts.”
Well, there is the problem. It seems to me that the governments top priority is to look better amongst it’s EU friends, rather than helping it’s people who are losing their jobs and their homes right across this failing nation.
The National Statistics Institute has released figures showing that 5.3 million people were out of work in Spain at the end of December 2011, up from 4.9 million at the end of the third quarter.
This sets a 17 year high for unemployment in Spain with 22.8% of the population out of work. This is more than double the average across the 17 members of the Euro zone, which stood at 10.3% in November, according to the report.
Furthermore, the figures show an alarming rate of unemployment for the younger generation with almost half of all 16-24 year-olds being jobless – 48.6% now, compared with 45.8% in December.
Men are faring slightly better than their female counterparts with male unemployment increasing to 22.46%, whilst 23.32% of females are unemployed.
Some sectors did show a decrease in unemployment. In Agriculture, for example, there were 42,300 fewer unemployed and, surprisingly, the construction industry also saw a small decrease with 2,900 fewer people losing their jobs.
New conservative prime minister Mariano Rajoy has pledged action from his government to improve the job market but he isn’t working fast enough for some people. A number of public service employees held a series of demonstrations across Spain earlier this week to protest against unemployment and the governments austerity measures.
The situation with rising unemployment is a bit of a catch-22 for Mariano Rajoy’s administration. As more people register to receive benefits the governments bill increases and fewer people in work means fewer people paying income tax, so less revenue is generated. Add this to the fact that fewer earners means fewer spenders and the economy seems sure to head back into recession.