Spain's double-dip recession worsened at the end of last year as the eurozone's fourth-largest economy shrank dramatically in the final quarter, raising doubts over a government-heralded recovery for the end of this year.
The country's national statistics office reported on Wednesday that the economy contracted by 0.7% as frightened and increasingly hard-up consumers continued to cut spending. It was the worst quarterly decline since the second quarter of 2009, when Spain was still in the middle of the first downturn in its double-dip.
Further government austerity and an unemployment rate of 26% both presentmajor obstacles to a return to growth predicted for this year by Mariano Rajoy's government. The economy is now contracting at an annual rate of 1.8% and the Funcas thinktank on Wednesday estimated last year's budget deficit at 7.3% of GDP – compared with a European Union-set target of 6.3% – before money spent on rescuing troubled banks is included. Overspending regional governments and the country's strained social security system were to blame for the overrun, according to Funcas.
Consumer-spending, meanwhile, continues to nosedive – with retail sales falling by10% in December compared with the same month a year earlier. A VAT hike in September was partly to blame as prices rose on many goods. Rajoy's government is trying to make the country's economy more competitive via wagecuts, with a new law allowing companies with falling sales to offer its workers a stark choice between wage reduction and the sack. On Tuesday trade unions at Nissan's Barcelona car factory agreed that new employees could be taken on at pay rates 20% below those now enjoyed by new workers.
The government has also announced measures to stimulate the creation of new businesses and to iron out regulatory controls erected by the country's 17 regional governments that prevent some businesses from operating in parts of Spain. Rajoy's hopes of engineering a recoverythis year will depend, in part, on how much public spending is cut again in 2013.
Angel Laborda,chief economist at Funcas, warned: "If we push too hard then this will have an excessively high restrictive impact on growth in aggregate demand and employment with negative consequences for the current process of cleaning up the financial sector and, in the long-term, on fiscal consolidation itself." .
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