Central bank:Spanish recession keeps tight grip

A job-destroying recession kept a tight grip on Spain in the third quarter of 2012 when output shrank by an estimated 0.4 percent, the Bank of Spain said on Tuesday. If confirmed, the figures would mean that the Spanish recession, which has left one in four workers unemployed, is moving into a second year at a relentless pace. The eurozone's fourth-largest economy, which emerged from the last recession only at the end of 2010, began gently shrinking in mid-2011 and has slumped in every quarter since by as much as 0.5 percent. According to the Bank of Spain, available but as-yet incomplete data for the second quarter point to gross domestic product declining at a quarterly rate of 0.4 percent, the same pace as in the previous three months. "The Spanish economy continued on a path of contraction which began a year earlier," the central bank said in a monthly report. Spain has already agreed a 100-billion-euro ($125 billion) rescue loan for its banks, of which it plans to use only 40 billion euros. World markets now anticipate a broader bailout, after the European Central Bank in early September outlined plans to make unlimited bond purchases to bring down stricken states' borrowing costs. Investors are wary of betting against the European bank, which could step in as soon as Spain decides formally to request help from the eurozone's bailout fund and to submit to its conditions. Largely as a result of that threat, Spain's Treasury beat its fund-raising target in an auction of three- and six-month bills on Tuesday, raising 3.58 billion euros. Rates of return edged up for the three-month bills and eased for the six-month bills from a similar auction September 25. But signs of an enduring recession will be discouraging to Prime Minister Mariano Rajoy's right-leaning government, which has forecast an economic contraction of just 0.5 percent next year. Bank of Spain governor Luis Maria Linde this month described that forecast as "certainly optimistic" in the light of private forecasts centred on a 1.5-percent economic slump. Madrid's 2013 economic forecast, viewed with scepticism on the financial markets and by international institutions, serves as the basis for its 2013 budget promises. Spain missed last year's public deficit target by a wide margin, ending 2011 with a shortfall equal to 9.4 percent of economic output instead of the promised 6.0 percent. This year, it has promised to lower the overall deficit to 6.3 percent of output, but already Madrid has been forced to admit that the cost of a banking sector rescue will push the gap to 7.4 percent. Budget Minister Cristobal Montoro said the central government deficit, which excludes the shortfall racked up in Spain's 17 regional governments, amounted to 3.9 percent of GDP in September. That was "very close" to the 2012 central government deficit target of 4.5 percent of GDP, he told parliament. The performance of Spain's regions will thus be crucial to reaching the overall 6.3-percent target. Next year, Spain's government is targeting an even more ambitious public deficit equal to 4.5 percent of GDP. But if the economy shrinks by 1.5 percent in 2013 then the public deficit will likely miss the target by 0.3 percentage points of GDP, the central bank has warned. The Spanish government is boosting taxes and slashing spending to meet the deficit goals, provoking growing street protests and a union call for a general strike November 14. But the recession is making its task ever harder, for example by raising the cost of unemployment benefits. In its latest monthly report, the Bank of Spain said employment fell at about the same pace in the third quarter as it had in the second quarter, when jobs declined at an annual rate of 4.5 percent. The economy might have fared even worse but for a consumer spending spree on goods such as washing machines and televisions ahead of a September 1 increase in the sales tax, the bank said. But the end of that burst in spending, plus a decline in public sector salaries, could mean weaker consumer spending in the final quarter of this year, it warned. As people struggled to make ends meet, household savings rates fell to the lowest level since 2006 in the second quarter, the bank said.