UPDATE 2-Spain recession drags on with no aid in view

Tue Oct 30, 2012 8:06am EDT

Related Topics

* Spain quarterly GDP falls, but less than forecast

* Consumer prices jump 3.5 pct in October

* 'Stagflationary' spiral adds pressure on Spain to request aid

* Any hint of upturn is 'a mirage', says economist

By Paul Day

MADRID, Oct 30 (Reuters) - Spain fell deeper into recession in the third quarter and prices rose sharply in October, piling pressure on the government to revive a paralysed economy as it stalls over requesting aid.

Prime Minister Mariano Rajoy is in no hurry to apply for a politically humiliating financial rescue that would kickstart an ECB bond-buying programme and ease financing costs. But the worsening economy, along with spreading civil unrest, may force his hand.

Numbers published on Tuesday added to evidence that the country is trapped in a 'stagflationary' spiral of shrinking growth, high inflation and high unemployment.

Gross domestic product shrank for the fifth straight quarter between July and September, dropping 0.3 percent, while consumer prices rose by 3.5 percent year-on-year in October, the two sets of National Statistics Institute data showed.

Elected just under a year ago on an austerity ticket, Rajoy has signed off on a belt-tightening programme worth over 60 billion euros through to the end 2014 to cut the public deficit. But the spending cuts have dented investment while tax rises have hit consumers' pockets and driven prices higher.

The cutbacks have also led to increasingly frequent protests focused on Madrid and fuelled already strong separatist sentiments, notably in the powerful northeastern province of Catalonia.

ECONOMIC 'MIRAGE'

The euro zone's fourth largest economy is at the centre of the bloc's debt crisis due to concerns the government cannot control its finances. Many investors view the 2013 budget, which aims to cut the deficit to 4.5 percent of GDP from over 9 percent last year, as based on overly optimistic economic forecasts.

Third quarter GDP shrank more slowly than the 0.4 percent rate that was expected, making end-of-year growth targets easier to hit.

But any suggestion that that marked an upturn was "a mirage," said Estefania Ponte, an economist at Madrid-based broker Cortal Consors.

"It does not mean the economy is doing better, but only shows the families have brought forward purchases ahead of the VAT hike."

Madrid enforced an across-the-board hike in sales tax on Sept. 1 as part of the austerity programme. That contributed to the sharpest monthly fall on record in retail sales in September.

Spain's refinancing costs on international debt markets soared to euro-era highs in July but have since eased after the European Central Bank announced its sovereign bond-buying programme for countries that ask for help.

The premium investors demand to hold Spanish ten-year debt over equivalent German paper initially fell on Tuesday's growth data before rising back to around 419 basis points, in line with Monday's close.

With debt premiums now at more manageable levels, Rajoy seems reluctant to apply for an aid programme that might bring with it deeper austerity measures that would further hobble the recovery and fuel protests.

FEWER DEMANDS?

On Monday Rajoy met with Italian Prime Minister Mario Monti, and in a news conference afterward maintained his ambivalence over an aid application. But he omitted previous demands to know more details of the bond-buying plan before making up his mind.

On an annual basis, the economy shrank 1.6 percent, in the third quarter suggesting Spain was in line to meet its end-of-year GDP target.

But that did little to allay concerns that the government will fail to meet its deficit target.

"If they can't hit deficit goals when meeting growth targets, what's the shortfall going to look like next year? This calls for more realistic, looser fiscal targets," economist at Deutsche Bank Gilles Moec said.

"Naturally, this type of manoeuvre would be easier to implement under the (European aid mechanism) ESM/ECB umbrella."

Parliament will invite ECB chief Mario Draghi to a meeting with lawmakers to discuss the bank's bond-buying programme, a spokeswoman at the lower house said on Tuesday.

EU-harmonised consumer prices rose by 3.5 percent year-on-year in October, topping a Reuters forecast of 3.4 percent. The figure was unchanged from September.

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