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Business News/ Politics / News/  Spanish recession set to deepen as austerity bites
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Spanish recession set to deepen as austerity bites

Spanish recession set to deepen as austerity bites

Spain’s Prime Minister Mariano Rajoy (R) talks to European Council President Herman Van Rompuy at the start of their joint news conference after their meeting at Moncloa Palace in Madrid . Photo ReutePremium

Spain’s Prime Minister Mariano Rajoy (R) talks to European Council President Herman Van Rompuy at the start of their joint news conference after their meeting at Moncloa Palace in Madrid . Photo Reute

Madrid:The Spanish economy is falling deeper into recession and depositors are pulling their money out of the banks, figures published on Tuesday showed, as the government moves closer to seeking a European rescue package.

The recession grew stronger in the second quarter of the year and is expected to get worse as austerity measures introduced in response to the euro zone debt crisis cut into demand for goods and services.

Meanwhile, the debt-struck Catalonia region announced on Tuesday it is requesting a €5 billion rescue from the central government.

Spain’s Prime Minister Mariano Rajoy (R) talks to European Council President Herman Van Rompuy at the start of their joint news conference after their meeting at Moncloa Palace in Madrid . Photo Reuters

“The government has decided to request participation in the liquidity fund," Catalan government spokesman Francesc Homs told a news conference.

A rush by consumers and firms to withdraw their money from Spanish banks intensified in July, with private sector deposits falling almost 5%, to €1.509 trillion at end-July from €1.583 trillion a month earlier.

Analysts believe it is inevitable that Spain will soon have to call for a European rescue package to help bring its debt costs down as austerity measures designed to slash the public deficit push the economy deeper into recession.

Against this background, Prime Minister Mariano Rajoy will meet European Council president Herman Van Rompuy in Madrid later on Tuesday, a week before the European Central Bank discusses new measures to help debt costs in European nations hardest-hit by the crisis. The ECB meeting on 6 September also coincides with a visit by German Chancellor Angela Merkel to the Spanish capital and a key longer-term bond auction.

“With much more fiscal austerity in the pipeline and unemployment at astronomic highs, the risks are clearly tilted towards a more protracted recession," said Martin van Vliet, an economist at ING.

He expected Spain to formally request additional external financing in mid-September or October. Spain has already negotiated up to €100 billion in aid for its ailing banks.

Gross domestic product fell by 0.4% in the second quarter of the year, according to final figures that confirmed a preliminary reading. But on an annual basis it dropped by 1.3%, worse than initial estimates of 1%.

Spain’s economy fell back into recession in the first quarter of the year, when output fell 0.3%, and government estimates show GDP will probably fall this year and next.

The data came a day after Spain said its economy performed worse than expected in both of the last two years.

Economists said the outlook could test Spain’s ability to slash its deficit this year to 6.3% from 8.9% in 2011.

“The economy is much weaker than previously thought and this could make it more challenging for the government to achieve the ambitious fiscal targets," said Tullia Bucco, an economist at UniCredit.

Clare Kane and AFP contributed to this story.

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Published: 28 Aug 2012, 08:06 PM IST
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