Spain's Rajoy tries stimulus as recession deepens

MADRID Wed Jan 30, 2013 9:31am EST

Spanish Prime Minister Mariano Rajoy arrives at Parliament to attend a government's control session in Madrid January 30, 2013. REUTER/Sergio Perez

Spanish Prime Minister Mariano Rajoy arrives at Parliament to attend a government's control session in Madrid January 30, 2013. REUTER/Sergio Perez

MADRID (Reuters) - Prime Minister Mariano Rajoy promised Spain a small dose of economic stimulus on Wednesday, leavening a strict diet of austerity for the first time as figures showed the country's recession had deepened.

Economic output fell 0.7 percent in the fourth quarter of last year from the third, its steepest contraction in a year as households hit by state spending cuts and stubbornly high unemployment slashed spending.

The data from statistics institute INE suggests that, notwithstanding improved conditions in the debt market, the government faces an uphill battle to put public finances back on a sustainable footing as the economic outlook remains gloomy.

"The bleak GDP data is a reminder of the growing disconnect between market sentiment and economic reality in Spain and southern Europe," Nicholas Spiro of Spiro Sovereign Strategy said.

Reflecting the scale of the task, Rajoy told parliament he was planning a package of stimulus measures that would include tax breaks for entrepreneurs.

While the announcement marked a departure from the rigorous pro-austerity policies that his government has stuck with since taking office in December 2011, economists doubted the measures would be game-changing as Spain sticks to planned budget cuts.

"The missing ingredient is still growth. The government is caught between a rock and a hard place and has very little room for fiscal maneuvering (...) even if it is cut some more fiscal slack," Spiro said.

Spain has already been given an extra year, until 2014, to meet Europe-agreed goals of cutting its public deficit to 3 percent of gross domestic product.

On Monday, the European Union's Economic and Monetary Affairs Commissioner Olli Rehn said fiscal targets could be extended further if the economy was found to have worsened.


A buoyant bond market to which yield-hungry foreign investors have returned in droves has helped Spain get a testing 2013 debt issuance program off to a flying start.

Italy has also benefited from increased investor appetite for peripheral economies' debt despite these countries' poor economic prospects, selling 3.5 billion euros of 10-year bonds on Wednesday at lower yields.

But that bright beginning - which has eased pressure on Rajoy to request an international bailout - contrasts starkly with the economic gloom that looks likely to dominate the mood in Spain for the foreseeable future.

The Bank of Spain says the return of international investors to its debt market had not translated into the real economy.

Analysts say that, however well Spain's bonds are selling, the country will struggle to get out from under a still-growing debt pile that has put it at the centre of the euro zone crisis.

A significant part of that burden comes from bills racked up by the country's 17 autonomous regions, which control their own healthcare and education budgets.

The government stumped up 17 billion euros in June to clear this debt with service providers up to the end of 2011.

But public hospitals owed drug companies a further 3.2 billion euros ($4.3 billion) by the end of 2012, lobby group Farmaindustria said on Wednesday.

Spain's economy fell back into recession in the final quarter of 2011 due to the fall-out from a burst property bubble, and it has struggled to gain traction since against a backdrop of heavy public and private spending cuts and unemployment that has risen steadily to 26 percent.

The government expects the economy to grow again before the end of this year, but many economists say this is optimistic.

"The recession deepened in the final quarter of 2012, and we expect the economy to endure a similarly punishing first quarter of 2013," said Rah Badiani of IHS Global Insight.

"The outlook for the remainder of 2013 and 2014 is no better. The main impediments to any recovery prospects remain the fallout of the ongoing financial crisis hanging over Spain, coupled with still-punishing employment losses," he added.

The preliminary GDP data on Wednesday undercut analysts' forecasts for a drop of 0.6 percent. It was also worse than Bank of Spain figures released last week, which showed the economy contracted by 0.6 percent in the fourth quarter from the third and 1.7 percent on the year.

On an annual basis, GDP shrank 1.8 percent in the fourth quarter after a 1.6 percent decline in the third, INE said, worse than economists' forecasts for a 1.7 percent contraction.

(Additional reporting by Manuel Maria Ruiz and Clare Kane; editing by John Stonestreet)

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Comments (1)
dareconomics wrote:
A fall in economic output of 0.7% from quarter to quarter is a huge drop, 2.8% on an annualized basis. Spain is caught in the classic debt trap where attempts to cut debt paradoxically create more debt. Budget cuts are decreasing GDP while tax increases sap the spending power of consumers.

Rajoy is in a tenuous political position. He must continue austerity to appease his Eurozone and ECB overlords, but at the same time he must be responsive to his constituents so that he may retain power.

In an attempt to balance the conflicting demands of these groups, he has crafted a stimulus plan. The unemployed are a very important constituency because they comprise over 26% of the electorate. To garner their support, the plan includes a provision to extend long-term benefits until the unemployment rate falls under 20%.

Auto manufacturing is the largest industry in Spain. All of the major European automakers have operations in Spain, and they have increased production in Spanish plants to take advantage of cheaper labor costs. To ensure that they continue to do so, Rajoy offers financial assistance for new car purchases. This is also a giveaway to the rich who are the only people who can afford to purchase new cars.

Youth unemployment has reached stratospheric levels, so it is important that Rajoy at least give the perception that he is doing something about it. The third element of the stimulus plan allows people under 30 to pay only €50 a month for social security, a savings of €200 from the minimum contribution.

The first portion of this package is a good idea. People have paid social security contributions for all of their working lives, and it is important that these benefits are delivered during this time of severe economic distress.

The next two parts of the plans are window-dressing and pork. Subsidies for new car purchases merely give those who were planning on buying a car anyway a taxpayer funded discount. This is exactly what happened during the American cash for clunkers program. Purchases were brought forward causing a spike in sales followed by the inevitable crash.

The last part of the plan made me chuckle and shows why Spain needs to drastically reform its economy if it is to have any hope of leaving its depression. If you start a new business in Spain, you have to pay €250 a month in social security taxes whether or not the business in making any money. In addition to start up costs and supporting yourself, there is an additional €3000 ($4000) a year in taxes courtesy of the Kingdom of Spain.

Certainly, cutting this tax is a step in the right direction, but eliminating it entirely would spur more people to open new businesses. Could you imagine what the state of Silicon Valley would be if we charged Americans $4k a year to be entreprenuers?

While Spain slowly suffocates, it seems like it is politics as usual. One of these days, one of these politicians will offer an alternative, which will include leaving the Eurozone, and the people will start listening. In the meantime, expect more perception plays and more austerity.

Jan 30, 2013 12:30pm EST  --  Report as abuse
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