Solbes Says Spain Faces Deepest Recession in 50 Years

By Ben Sills

Jan. 16 (Bloomberg) -- Finance Minister Pedro Solbes said Spain faces its deepest recession in half a century.

Spain’s economy will contract 1.6 percent this year, Solbes said today. That compares with a median forecast of minus 1.8 percent in a Bloomberg News survey of 21 economists. In July, the minister predicted a 1 percent expansion.

“Problems are still appearing and they are getting more and more serious,” said Antonio Argandona, a professor at Iese business school in Madrid. “The recovery plan may be much more expensive than they think and it may not even work.”

Solbes has pledged some 90 billion euros ($120 billion) of stimulus measures in a battle to hold the economy together as the fallout from the housing crash and the credit crunch rips through its manufacturing and service industries. A year ago, Solbes was preparing to report the biggest budget surplus in Spanish history; now the government may be about to have its debt rating cut by Standard & Poor’s.

“The financial crisis that exists at the moment at the global level has changed the scenario very drastically,” Solbes said. In 2009, “we’re going to live through the most difficult moments of the crisis.”

Activity in services contracted at the fastest pace on record in November, while manufacturing posted its biggest monthly decline in December, according to surveys of purchasing managers. The number of jobless claimants jumped by almost a million last year, sending unemployment to 13.4 percent by November, compared with Solbes’s July forecast for 10.4 percent.

Government Debt

Solbes said the economy shrank during the second half of 2008, confirming the country is already in a recession. With tax revenue plummeting, S&P this week said it may cut Spain’s AAA rating for long-term government debt.

Spain’s budget deficit will peak at 5.8 percent of gross domestic product this year and then narrow to 3.9 percent in 2011, Solbes said. Unemployment this year will reach 15.9 percent before falling to 14.9 percent in 2011.

Solbes faced criticism from political opponents in Spain for pushing through a budget based on the 1 percent forecast even as he admitted it was out of date. In December 2007, he said that the economy would grow by 3 percent this year, even as the U.S. mortgage meltdown shut off the flood of credit that fueled Spain’s home-building splurge.

“They’ve been pretty optimistic,” said Ben May, an economist at Capital Economics Ltd. in London who forecasts a 3 percent contraction this year. “You eventually lose face a bit.”

Spain’s economy will return to growth next year, expanding 1.2 percent, Solbes says. It will grow 2.6 percent in 2011.

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