Spain’s spluttering recovery ran out of fuel in the third quarter, according to estimates released on Thursday, as government and household austerity and tight credit conditions curbed investment, spending and output.

The country’s National Statistics Institute said gross domestic product was unchanged in the three months to the end of September compared with the previous quarter, and rose only 0.2 per cent year-on-year.

The zero per cent growth rate, although slightly ahead of expectations, followed two quarters of mild expansion, in which GDP grew 0.1 per cent and 0.2 per cent, respectively.

This weak first-half recovery had been helped by a consumer rush ahead of a hike in value added tax in July, and before the end of a car scrappage schemes. Exports, mainly to other eurozone country, had also started to pick up amid weak recovery in demand.

However, early indicators point to a flat fourth quarter, meaning year-on-year contraction of about 0.3 per cent, according to several economists.

“The third-quarter GDP performance reduces the risk that the economy is set to endure a double-dip technical recession,” said Raj Badiani from IHS Global Insight in London.

“Nevertheless, Spain is still flirting with recession, with the economy weighed down by faltering consumer spending as a result of poor household confidence, the rise in VAT and the end of the car scrappage scheme.”

After more than a decade as a star EU performer, Spain dived into recession at the end of 2008 as the credit crunch and oversupply popped a housing bubble, leading to high unemployment, consumer weakness and fears about its financial system.

The government response – a labour intensive public works programme aimed at keeping unskilled workers off the dole – helped push the budget deficit to above 11 per cent of GDP.

This, in turn, drove up borrowing costs and undermined confidence in the sustainability of the euro in Spain and other peripheral EU economies such as Ireland, Portugal and Greece. Madrid was forced to announce sharp cuts in public spending as part of a broader austerity drive aimed to cutting the deficit to 6 per cent by the end of next year.

A €110bn EU and International Monetary Fund rescue package for Greece, followed by a €440bn financial stability facility for the other troubled economies also helped calm bond market jitters over the European summer.

However, fears for the euro have resurged in recent weeks as governments struggle to meet growth forecasts and tame spending, and export demand falters.

“Spain may avoid technical recession, “ said Mr Badiani, “but by any other measure the economy is being overwhelmed by recessionary conditions – contracting employment, a prolonged real estate slump and still rising unemployment when compared with a year ago.”


Source: Financial Times.