Saturday, April 30, 2011
Forget the rosy Euro headlines... Spain's economy is burning
Spanish unemployment, the highest in Europe, rose more than expected as inflation accelerated and retail sales plunged, undermining the nation's recovery from its worst recession in six decades.
Joblessness rose to 21.3 percent in the first quarter, the National Statistics Institute said today in Madrid, compared with 20.3 percent in the previous three months and a median forecast of 20.7 percent in a Bloomberg News survey.
Consumer prices rose 3.5 percent in April from a year earlier, based on a European Union measure, after increasing 3.3 percent in March. Retail sales fell 8.6 percent in March from a year earlier, the steepest decline in two years, INE said.
Spain is trying to steer the economy back to growth while slashing the euro region's third-largest budget deficit with the deepest austerity measures in at least three decades. Rising interest rates and oil prices prompted the government to revise its growth and unemployment forecasts on April 6, even as it still sees growth of 1.3 percent this year, led by exports.
"In the current scenario, with rising interest rates, I'm not at all sure this is the peak" in unemployment, said Jose Luis Martinez, a strategist for Spain at Citigroup in Madrid. "The decline in employment, rising interest rates, and rising prices leave little margin for consumption to be reactivated."
'Hard to Predict'
Deputy Finance Minister Jose Manuel Campa said the first quarter is traditionally weak for employment, and the data should start to improve. Asked if the jobless rate had peaked, he told reporters in Madrid it's "hard to predict the future."
Spain has 4.9 million jobless workers, the survey showed today, compared with 3 million in Germany, a country twice its size. The Socialist government says the number of unemployed won't reach 5 million.
As companies adjust to forecasts of slower growth in Spain after a decade-long boom, Telefonica SA (TEF), the country's largest telecoms operator, said on April 14 it plans to cut its workforce in its home market by 20 percent over the next three years. London-based Burberry Group Plc closed a warehouse in Spain last year, while Diageo Plc (DGE) cited "economic weakness" on Feb. 10 when it said its Spanish whisky and vodka sales declined in the last six months of 2010.
Spain's recovery from the collapse of the debt-fueled property bubble is being undermined by spending cuts and tax increases as the government aims to narrow the deficit to 6 percent of gross domestic product this year – in line with France's projected shortfall – from 9.2 percent in 2010.
The government expects the jobless rate to fall to 19.8 percent on average this year, the Finance Ministry estimated on April 6, compared with a previous forecast of 19.3 percent. The economy will expand 1.3 percent in 2011 after two years of contraction, accelerating to 2.3 percent next year and 2.4 percent in 2013, it said.
"The market consensus is around 0.7 percent" for 2011 growth, said Martinez, adding that the government should revise its forecast "as there have been a lot of negative factors." He said he sees a jobless rate of 21 percent this year.
The European Central Bank increased its benchmark interest rate on April 7 for the first time in almost three years and policy makers have signaled more increases may follow. That risks further crimping household spending in Spain, where 97 percent of mortgages have variable interest rates.
The ECB is trying to stem inflation, which probably accelerated to 2.7 percent in the euro region in April, according to a Bloomberg News survey of 34 economists, from 2.6 percent in March. Inflation in Spain, Portugal and Greece, which are all struggling to rein in growing debt burdens and spur growth, is higher than the euro-region average.
As part of plans to raise tax revenue, the government will pass measures today to press employers to legalize underground jobs. The plan will offer "incentives" to declare unregistered workers before tougher sanctions on clandestine employment are imposed in three months time, Labor Minister Valeriano Gomez said yesterday. It also aims to toughen sanctions on those working illegally while claiming jobless benefits.