Spanish Economy To Stay In Recession In Q3: Bank Of Spain

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The Spanish economy remained in recession in the third quarter weighed down by a high unemployment and weak consumption.

In its quarterly report on the Spanish economy, the Bank of Spain said the economy likely contracted 0.4% sequentially in the third quarter after a sharp 1.1% shrinkage in the previous three months. In the first quarter, the economy had shrunk 1.6%. This would be the fifth straight quarter of contraction after a flat reading in second quarter of 2008.

The central bank noted that the contraction in the third quarter is the least pronounced since the recession began. However, this more favourable performance is linked in part to public measures with temporary effects, the bank added.

"The easing in the quarter-on-quarter path of decline was extensive to the main components of domestic expenditure, although more markedly so in household consumption, where the direct aid for car purchases was influential, and in public investment, where there was headway in the roll-out of Local Investment Fund projects," the report said.

Year-on-year, the gross domestic product dropped 4.1% in the third quarter after a 4.2% decline in the previous three months. The National Statistics Institute is set to release the preliminary third quarter GDP data on November 12.

The Spanish government had one of the largest stimulus packages. Despite this, economy was hit hard by a construction industry slump and high unemployment. The jobless rate stood at 17.9% in the third quarter, while employment declined by 7.3%.

Inflation has eased while the core inflation that excludes energy and unprocessed food prices stood at a record low of 0.1% at the end of the third quarter, the central bank noted. Data released by the statistical agency on Thursday showed that Spain's harmonized index of consumer prices declined for the eighth straight month in October.

The HICP slipped 0.6% year-on-year in October, slower than the 1% fall in the preceding month and the record 1.4% decline in July. Economists had expected the index to fall 0.7%.

In March, the HICP declined on an annual basis for the first time since the series began in January 1997. The index has maintained the declining trend afterwards. In September, the index dropped 0.2% from August. The statistical office is scheduled to release the final HICP data on November 13.

"Penalised by the sharp increase in the unemployment rate and the slump in lending, private consumption has continued to fall, resulting in a deceleration in core prices," Philippe Sabuco, an economist at BNP Paribas wrote in a note. "As no marked recovery is expected in the short term, this trend should continue in the coming quarters." All in all, Spanish inflation will underperform the eurozone, the economist wrote.

The Spanish central bank expects Eurozone to return to growth in the third quarter, "boosted by the improvement in international trade and the aggregate demand stimulus and financial system support policies that have helped stabilise markets". Further, the bank expects positive inflation rates to resume towards the end of the year and does not see inflationary pressures in the region. Most economists' expect the Eurozone to exit recession the third quarter.

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