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Spain retail sales decimated by VAT hike
October 29, 2012 / 9:31 AM / 5 years ago

Spain retail sales decimated by VAT hike

MADRID (Reuters) - Spanish retail sales fell at their fastest pace on record in September as already battered consumer confidence took another hit from a hike in value added tax, driving many shoppers to trade down to cheaper products.

Sales fell 10.9 percent year on year, Monday’s National Statistics Institute data showed, reflecting an economy struggling through its second recession in three years and plagued by chronically high unemployment.

The drop was the biggest in calendar-adjusted terms since current records began in January 2004, and marked the 27th monthly decline in a row.

Spain has been in recession since the first quarter of the year and is not likely to grow again until late in 2013, according to official estimates that many economists consider optimistic.

The country had the highest unemployment rate in the European Union in August - 25.1 percent - according to EU data.

That figure is expected to rise further as a large public deficit forces the government to implement deeper spending cuts and further tax hikes to persuade markets it can control its finances. It increased sales tax on September 1.

“It’s clear there are no signs the crisis is abating,” economist at Nomura Silvio Peruzzo said.

“The headline (retail) figures show a sharp drop and indicate that domestic demand is not going to be anywhere near what the government is anticipating.”

The retail slump is good news for some firms as Spaniards seek out cheaper options along the high street.

Discount supermarket chain Dia (DIDA.MC) said on Monday it almost tripled its nine-month net profit from a year earlier. The chain said the impact of the VAT hike on like-for-like third quarter sales was negligible.

DEBT DILEMMA

The euro zone’s fourth largest economy has moved to the forefront of the bloc’s fiscal crisis on concern that mounting debts owed by its regional administrations could make public finances unsustainable.

Worried over the potential effect of stricter budget conditions on growth, the government is wary of applying for international aid that would kickstart a European Central Bank plan to buy sovereign debt and ease its refinancing costs.

Spain’s economy is expected to have shrunk 0.4 percent quarter on quarter between June and September, according to forecasts of preliminary data due on Tuesday, with sliding domestic demand a major factor.

Prime Minister Mariano Rajoy has already introduced austerity measures worth over 60 billion euros ($77.6 billion) to the end of 2014 to try to deflate the deficit to below 3 percent of GDP from 9 percent last year.

But rising social security costs, unemployment benefits and interest payments on public debt are undermining his cost-saving measures.

($1 = 0.7733 euros)

Reporting by Paul Day; Additional reporting by Sarah Morris; Editing by Fiona Ortiz, John Stonestreet

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