WRAPUP 1-Spain services plunge as property collapse spreads

By Jason Webb

MADRID, April 3 (Reuters) - A plunge in consumer confidence and services sector activity shows the collapse in the property market is fast infecting the wider Spanish economy.

Government hopes that services firms would take up the slack after the bursting of the property bubble look in vain as the contraction in March was the fastest recorded in RBS/NTC's near nine-year-old survey of the sector.

The purchasing managers' index reading of 40.9 -- far below the 50 mark separating growth from contraction -- was the lowest ever for any PMI survey of European economies, said data compilers NTC Economics on Thursday. [ID:nL01912312]

"In Spain it seems to be an all-round malaise," said NTC chief economist Chris Williamson. "It was a dreadful survey."

Coming on top of a similarly-steep slide in conditions for manufacturers published earlier this week, no sector of the economy seems safe from the fallout from the abrupt ending of the property boom.

Not only that, consumer confidence fell in March to 73.1 from 76.8 in February, the Official Credit Institute said on Thursday, close to January's all-time low of 70.9, and well below the 100 mark which separates pessimism from optimism. [ID:nMDT005058]

"Spain is a real disaster," said Marco Valli at Unicredit MIB.

"The housing downturn is spilling over very quickly to all other sectors, helped by the surge in inflation that dampens purchasing power at a time in which consumer confidence drops due to the weakening labour market and economic outlook".

Inflation rose to 4.6 percent in February.

The first hint of an end to the Spain's decade-long property boom, which saw house prices triple and propelled economic growth to an average 3.7 percent for 10 years, came only around the middle of last year when property websites reported prices began to dip.

CHEAP DEBT FUELLED BOOM

At the time, economists and officials scoffed at any suggestion of an end to exponential growth in property. But the U.S. subprime crisis and ensuing credit crunch in the second half of last year taught Spaniards the dangers of allowing household debt to reach 130 percent of annual income.

Property companies and builders are also highly indebted, leading some to file for administration. Colonial (COL.MC), not long ago Spain's biggest property company, now faces being taken over by banks as they seek to recover billions of euros.

The cause of the mess was cheap credit thanks to Spain's membership of the euro zone, long hailed here as an unalloyed blessing for an economy long accustomed to high inflation and regular devaluations.

Now, the country is experiencing the downside of the euro embrace as the more resilient French and German economies make the European Central Bank reluctant to follow the U.S. Federal Reserve or the Bank of England and cut interest rates.

"Spain will recover only after the ECB starts lowering rates, I hardly see any other way out," said Valli.

Spain's ruling Socialists were still predicting economic growth of 3 percent this year when they won re-election on March 9 but slashed their outlook a couple of days after their victory.

The government is preparing a 22 billion euro ($34.38 billion) stimulus package it hopes will enable tens of thousands of construction workers, many immigrants, who are losing their jobs to find work in other sectors such as services.

But the Bank of Spain on Tuesday forecast that unemployment would rise to 9.8 percent in 2009 from 8.6 percent in the fourth quarter of last year and just 8 percent in the third quarter despite the spending package.

It saw economic growth at 2.4 percent this year from 3.8 percent in 2007, although it admitted downside risks. Most private economists agree with the bank, although at least one expects growth to sink as low as 1.5 percent this year despite the big spending package.

The government draws confidence from a budget surplus which totalled 2.2 percent of gross domestic product last year. But falling tax revenues have already slashed that to 0.8 percent of GDP in the first two months of the year and the Bank of Spain said the surplus would virtually disappear in 2009.

"The magnitude of the slowdown is quite impressive," said Guillaume Menuet, of Merrill Lynch. But he added: "There are extreme levels of pessimism at the moment and I would not be surprised if we see a rebound in Q2."

For an analysis on the Spanish economy click on [ID:nL019465]. (Additional reporting by Joe Ortiz, Robert Hetz and Ruth Pitchford)