Spain Contracts More Than Estimated, Spending Slumps

By Emma Ross-Thomas

May 20 (Bloomberg) -- Spain’s economy shrank more than initially estimated in the first quarter as consumer spending extended its slump and unemployment soared toward 20 percent.

Gross domestic product contracted 1.9 percent from the previous quarter, when it shrank 1 percent, the National Statistics Institute in Madrid said today. From the previous year, the economy shrank 3 percent, the most since at least 1970. In an initial report on May 14, the institute estimated GDP fell 1.8 percent on the quarter and 2.9 percent on the year.

Spain, whose construction boom made it a motor of job creation in Europe, now has 4 million people out of work, accounting for almost 70 percent of the annual increase in euro- area unemployment over the last year. About a million new homes remain unsold and the European Commission expects Spain to continue to contract next year even after other economies in the region start to recover.

“Three percent is not going to be the floor,” said Jose Luis Martinez, strategist at Citigroup Inc in Madrid. “Unemployment is going to keep rising, we’re looking at a range of 20 to 22 percent in the next 12 months.”

Household spending fell 4.1 percent from a year earlier, almost double the decline in the previous quarter. Investment fell 13.1 percent, with investment in capital goods falling 18.6 percent from a year earlier, the report showed. The decline in capital goods was particularly bad news and it was difficult to say when it will ease, Martinez said.

Second-Quarter Prediction

Deputy Finance Minister Jose Manuel Campa said some indicators suggested the second quarter would not be as weak as the first. He cited unemployment data showing the rate of increase had slowed, as well as interest rates, credit conditions and stock markets. Still, he also told reporters in Madrid today that it was too early to predict when Spain would return to growth rates of 1.5 percent to 2 percent.

Burberry Group Plc, Britain’s largest luxury-goods company, said yesterday it wrote off the value of its business in Spain and cut jobs in the country, where retail sales have been falling for more than a year. Kesa Electricals Plc has said that its Spanish outlets had “extremely weak” results in the four months through April.

Spain’s unemployment rate rose to 17.4 percent in the first quarter, double the European Union average, government data show.

Rising Joblessness

Joblessness will reach 20.5 percent in 2010 after the economy contracts 3.2 percent this year, the commission has forecast. More than a million Spanish households have no one in work, and a million unemployed people no longer receive government benefits, according to government data.

As the economy slumps, bad loans have more than tripled, according to the central bank. The collapse of the debt-fueled building boom and the squeeze on credit pushed 475 construction and real-estate companies into bankruptcy proceedings in the first quarter.

The crisis is taking a political toll on Prime Minister Jose Luis Rodriguez Zapatero, who was re-elected last year after pledges of full employment. A poll of 2,500 people by the state- run Sociological Research Center in April showed the prime minister’s Socialist Party would have won 40.8 percent of the vote if elections were held then, against 40 percent for the opposition People’s Party. In last year’s election, the Socialists won 43.9 percent of the vote, against the People’s Party’s 39.9 percent.

Zapatero proposed new incentives last week to encourage people to buy homes and cars, on top of measures already announced that the government says amount to 2.3 percent of GDP, more than any other country in Europe. Extra spending and rising unemployment will swell the budget deficit to 8.3 percent of output this year, according to the Bank of Spain, almost three times the EU limit.

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