Spain's Economy Posts First Contraction Since 1993

By Ben Sills

Oct. 31 (Bloomberg) -- Spain's economy shrank for the first time since 1993 in the third quarter, the Bank of Spain said.

The economy contracted 0.2 percent compared with a 0.1 percent expansion in the previous quarter, the central bank said in its monthly bulletin published on its Web site today. From a year earlier, the economy grew 0.9 percent, it said. Spain's statistics institute will publish the first official estimate of economic growth on Nov. 13.

Spain may be heading for its worst recession in as many as 40 years as the global financial crisis strikes an economy already struggling with the end of a 10-year housing boom, economists at BNP Paribas say. The collapse in construction investment is fueling a surge in unemployment just as the global slowdown drags down manufacturers.

``In every area where you might hope to get growth there are impediments,'' Dominic Bryant, an economist at BNP Paribas in London, said. ``What Spain needs more than anything is strong export growth. It's not going to get it from the euro region and it doesn't look like it's going to come from Latin America.''

Spain's benchmark stock index, the Ibex 35, fell 13 percent last week on concern that the global financial crisis may drag down economic growth in Latin America where Spanish companies have made a string of acquisitions. The Ibex is down 42 percent this year, while manufacturing in Spain declined for a 10th month in September as global growth slowed, a survey of purchasing managers said.

Debt Payments

Repsol YPF SA, the Spanish oil company, which has 38 percent of its assets in Argentina, Brazil and Bolivia, posted its biggest decline since it started trading in January 1990 after Argentina proposed a takeover of pension funds. The last time the government sought to tap workers' savings to help finance debt payments was in 2001, just before it stopped servicing $95 billion of obligations.

``The deterioration in the financial situation from the second half of September, after more than a year of persistent instability, set off a serious crisis of confidence and began to reach emerging economies,'' the bulletin said.

The global slowdown is exacerbating Spain's domestic adjustment as the construction industry works out a surplus of around a million unsold homes. Unemployment jumped to 11.3 percent, the highest in the European Union, as home-building activity collapsed.

Housing Slowdown

The number of building permits issued fell by two thirds in August from the previous year while the number of home sales fell by a third as rising interest rates and tighter loan conditions curbed the supply of credit.

Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain's two biggest banks, saw default rates in their home market triple in the third quarter from the year-earlier period while their loan books shrank.

With economic growth slowing across the euro region and inflation easing, the European Central Bank may reduce interest rates for a second month when it meets in Frankfurt next week, Bank of Spain governor Miguel Angel Fernandez Ordonez said yesterday.

``As regards prices, upward pressures are easing in line with the decline seen in commodity prices since the middle of July,'' the bulletin said today. ``This situation, and the weakening in activity, has led to a downward revision in inflation expectations.''

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net