Spain's recovery gains pace but remains hard sell at home

MADRID Wed Apr 30, 2014 9:14am EDT

1 of 3. A woman (2nd R) holds a bunch of bananas and a piece of watermelon while waiting in line to pay in a greengrocers' shop in downtown Ronda, near Malaga April 30, 2014.

Credit: Reuters/Jon Nazca

MADRID (Reuters) - The Spanish government raised its 2014 economic growth forecast on Wednesday following a robust start to the year, but is still struggling to persuade voters that a solid recovery is underway as job creation and consumer spending remain anemic.

Spain's economy grew at its fastest quarterly pace in six years at the start of 2014, data showed earlier in the day.

Gross domestic product rose 0.4 percent from January to March as the nation gradually pulled away from its second recession since a property bubble burst in 2008, gutting the banks and sending the jobless rate to the highest in the euro zone after Greece.

"This year will mark a 'before and after' in the Spanish economy; we're going to have growth in employment, in GDP, in income and, over this (legislative term), we will have reduced the total number of unemployed," Economy Minister Luis de Guindos said.

The government updated its forecasts for this year to growth of 1.2 percent, up from a previous projection of 0.7 percent and last year's contraction of 1.2 percent. The economy will grow 1.8 percent next year and 2.3 percent by 2016, it predicted.

However, the economic improvement has yet to filter down to many Spanish families and support for the ruling People's Party is flagging. Opinion polls show the center-right party will suffer its worst showing in a European Parliament election in 25 years when voters go to the polls on May 25.

Some economists do not expect the kind of sharp upturn which the government needs to combat its budget deficit.

"It's hard to see how the economy is going to grow much more than 0.3 percent on average in the coming quarters, and in that situation many questions remain such as how you're going to get substantial increase in revenues to fix fiscal finances and how you're going to get a large increase in employment" said Bank of America Merrill Lynch economist Ruben Segura-Cayuela.

Union leaders met Prime Minister Mariano Rajoy on Wednesday, with a warning that many new jobs in Spain were part-time or on very low salaries. Many workers who had not lost their jobs in waves of layoffs over recent years have had their pay drastically reduced.

"A salary is no longer a guarantee you can escape poverty," Candido Mendez, secretary general of the UGT labour federation told Spanish state television before meeting Rajoy.

Spain has been in, or near, recession since the decade-long property boom ended in 2008 and lengthening unemployment lines have put a massive strain on public finances.

The country emerged from its latest two-year recession in the second half of 2013. The government has been keen to announce the end of Spain's worst economic crisis since the transition to democracy in the mid-1970s.

The banks, which have been through a grueling restructuring process, and taken over 40 billion euros ($55 billion) of European aid over the last two years, are also calling an end to the crisis, citing improving bad loans data and a leveling out in house price falls.

Foreign investment is pouring into Spain, driving up the IBEX blue-chip stocks index .IBEX by 5.5 percent so far this year. The country's debt office has already raised 43 percent of its total borrowing target for the year at record low rates.

However, unemployment rose in the first quarter to 25.9 percent, the public deficit remains one of the largest in the single currency and domestic spending continues to drag.

Low consumer price rises are also a concern, with the European Central Bank forced to study extraordinary measures as inflation across the euro zone is way below its target.

Spanish EU-harmonized inflation was 0.3 percent year-on-year in April, marking eight months below 0.5 percent and 10 months below the ECB's target rate of near to, but below 2 percent.

BANKING ON RECOVERY

Ratings agency Standard & Poor's said on Tuesday that Spanish banks have recognized most of the losses incurred from the property crash and were poised for better performance due to reduced economic risks.

"We are seeing a moderate resumption in economic activity, after a long, deep recession. We therefore expect banks' credit provisions to decline in 2014 and 2015 and to approach more-normalized levels by 2016," S&P said.

However, the banks' recovery is not universal, with even the country's two biggest lenders seeing mixed performance in their home market in the first quarter.

Spain's No. 2 bank, BBVA, on Wednesday reported first-quarter results, saying bad loans had stabilized in its home market but its net interest income - the difference between interest paid on deposits and interest charged on loans - fell in the first quarter in Spain.

Top bank Santander said on Tuesday its bad debts as a percentage of total credit edged up in Spain in the first three months of the year, although profit improved from a year ago.

An improvement in domestic demand, worth around two thirds of total economic output, is also likely to be patchy. Retail sales fell 0.5 percent in March, the largest drop since December. Sales have grown for only three out of the last 43 months.

"Retail sales were very weak, and that's a little worrying," said economist at Citi Jose Luis Martinez. "They may reflect the continuing weakness of domestic demand, and suggest that the second quarter will growth less than in the first. We'll have to wait until GDP breakdown to see what happened." ($1 = 0.7237 Euros)

(Editing by Fiona Ortiz and David Stamp)

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