Spain’s Economy Shrinks Most in More Than 15 Years

By Emma Ross-Thomas

Feb. 12 (Bloomberg) -- Spain’s economy shrank by the most in more than 15 years in the fourth quarter, as what may be the worst recession in half a century pushed the unemployment rate to the highest in Europe.

The economy contracted 1 percent from the previous three months, the National Statistics Institute said today, compared with a median forecast of 1.1 percent in a Bloomberg News survey. The economy entered its first recession since 1993 after shrinking a revised 0.3 percent in the third quarter. From a year earlier the economy contracted 0.7 percent.

Growth in Spain, which outpaced the euro region for more than a decade on a debt-fueled construction boom, will contract 2 percent this year as the budget deficit swells to more than twice the European Union limit of 3 percent, according to the European Commission. Once the motor of job creation in the euro region, Spain now accounts for almost all the increase in joblessness. Its 14 percent unemployment rate is almost double the EU average.

“Everything points to the fact that this is only going to get worse,” said Jose Luis Martinez, strategist for Spain at Citigroup Inc. in Madrid. “We’ll see the floor in the first half, but the recovery will be very slow,” he said. The bank forecasts Spain’s economy will shrink 3 percent this year, sending the unemployment rate to 18 percent in 2010.

Spain’s auto industry, which contributed about 5 percent of gross domestic product, accounts for part of the jump in unemployment as car sales plunge and export demand weakens. Nissan Motor Co. said it would cut 38 percent of workers at a Spanish factory and Renault SA won approval to temporarily lay off as many as 10,311.

The global credit crisis hit Spain just as the construction boom was coming to an end, turning what was expected to be a “soft landing” into a deeper crisis for the heavily indebted economy. The number of companies starting bankruptcy proceedings almost quadrupled in the fourth quarter from a year earlier and loan arrears have more than tripled.

Spain had its top AAA credit rating cut by Standard & Poor’s on Jan. 19 in its first downgrade by the rating company. S&P cited concerns about public finances after the government pledged some 90 billion euros ($116 billion) in stimulus measures for 2008 and 2009. Moody’s Investors Service said today that Spain and Ireland were at the most risk of downgrade among the 18 countries that carry the company’s top rating.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net