Spanish Economy Continued to Shrink in Q3

MADRID (AP) — Spain's economy continued to shrink in the third quarter, contracting by 0.4 percent compared with the previous three months, according to central bank estimates Tuesday that will increase pressure on Prime Minister Mariano Rajoy to seek financial help from Europe.

This is the fifth quarter in a row that Spain's economic output has contracted. The economy also shrank by 0.4 percent in the second quarter and 0.3 percent in the first quarter and is forecast to show a 1.5 percent fall this year and 0.5 percent in 2013.

Earlier this month, the International Monetary Fund forecast that Spain's economy would contract 1.3 percent next year, more than double the government's prediction.

The central bank's figure is an estimate. Official figures are due to be released by the National Statistics Institute on Oct. 30.

The bank said consumer demand fell by 1.2 percent — although the decline eased a little in the third quarter because of increased spending ahead of a sales tax increase on Sept. 1.

Spain is in its second recession in three years with near 25 percent unemployment. The country is one of the focal points in Europe's financial crisis: If Spain defaults on its debts or needs a full-blown bailout, the finances — and credibility— of the 17-country group that uses the euro could be stretched to breaking point.

In September, the European Central Bank said it was prepared to buy unlimited amounts of bonds in countries struggling with their debts. This has helped the country by pushing its borrowing costs lower. But Rajoy has held off triggering the actual purchases.

The government has introduced austerity measures and financial and labor reforms to convince investors it is getting a grip on its accounts. The measures have led to many strikes and protests and the country faces its second general strike in a year Nov. 14.

Several thousand people took part in a demonstration Tuesday evening outside the Parliament building in Madrid where lawmakers were debating budget spending cuts for 2013. Dozens of people were arrested and injured when similar "Surround Parliament" protests turned ugly last month, but no violence was reported Tuesday as the demonstration got under way amid a heavy police presence.

More protests outside Parliament are planned for Thursday and Saturday.

Speaking at the start of the debate, Finance Minister Cristobal Montoro said the draft budget "aimed to combat the crisis," adding that it was a budget that would make "2013 the last year of recession for Spain."

The government is battling to reduce its bloated deficit to from 8.9 percent of GDP last year to 6.3 percent in 2012 and 4.5 percent next year.

Montoro said that under the 2012 budget, the central government's deficit through September was 3.9 percent of GDP, very close to the targeted 4.5 percent demanded by the European Union for the year.

When counting the heavy debts of the regional governments, Spain's overall target is for a deficit of 6.3 percent of GDP. To achieve that, the regions must aim for a deficit of 1.5 percent of their economic output this year.

However, the Bank of Spain warned Tuesday that although many of the government's measures have yet to have an effect on the deficit, more austerity may be needed to reach the year-end target.

Earlier in the day, the Treasury sold €3.53 billion ($4.61 billion) in three- and six-month bills as investors continued to express their concern over Spain's ability to manage its finances.

The Treasury sold €967 million in three-month bills with the average interest rate at 1.42 percent, up from 1.20 percent in the last such auction Sept. 25.

It sold €2.56 billion in six-month bills on a yield of 2.02 percent, down from 2.21 percent Sept. 25.

Demand was more than four times the amount offered in the three-month category and almost double in the longer-term bills.

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  • Report this Comment On October 23, 2012, at 3:34 PM, drillerjim101 wrote:

    I have a brother who has lived in Spain for 30 years and enjoyed it's socialistic ways by providing him with free heart surgery, free inguinal hernia surgery, after care, and drugs. He often brags of how superior the Spanish way of healthcare is over that of the US. I have warned him that there is no free lunch. It appears the chickens are coming home to roost. It would behoove our country to observe Spain's economy closely. It has taken 40 years for socialism to bankrupt Spain....and it has gotten truly ugly with protests and some violence. Would that we all would learn a valuable lesson.

    James Fregia, DDS

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