Spain's economy shrinks again

The pain in Spain shows no signs of letting up as official figures reveal a contraction of 0.4% in the three months to June.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

It’s the third consecutive quarter of economic decline for Spain, the fourth biggest nation in the eurozone. During April and June, the economy shrunk by 0.4%, according to the country’s Instituto Nacional de Estadistica, up from 0.3% in the previous three months. 

This is bad news for the eurozone and its surrounding nations – i.e. us. If Spain’s economy keeps shrinking at this rate, it will have contracted by 1.3% in 2012 as a whole. Germany’s recession-busting 0.3% Q2 growth can’t be relied on to counteract that kind of economic drag. Without stable, consistent growth in GDP across the bloc, the eurozone will be unable to wrestle itself free from the grip of recession.

Spain’s economy hasn’t reached the incredible shrinking levels reached by Greece, however. Data from Athens puts its second quarter contraction at 6.2%. In fact, Spain’s economic situation isn’t quite as bad as it looks. While the INE revised down its 2010 growth figures, 2011 was actually a positive year for Spain in terms of overall growth.

Spain has been doing everything it can to get back on track. A €100bn bail-out for its beleaguered banking sector is currently being finalised, and Madrid’s austerity drive has already slashed €65bn from its public outgoings. But will that be enough to stave off economic collapse and a full-scale bailout?

The Spaniards don’t seem to think so. They have been withdrawing funds from Spanish banks at an alarming rate. Private sector deposits are down by almost 5% in July to €1.509tn. International investors seem to be more stoic. Demand for three-year bonds at Spain’s debt auction this morning was pretty strong; the country sold €1.67bn-worth of debt at average yields of 0.946%. This is less than half the 0.434% rate it had to pay at a similar auction in July.

Perhaps the markets have been soothed by the sweet nothings whispered by the European Central Bank. It has reiterated that it is determined to find a way to help the eurozone countries. The could mean that it will buy Spanish debt to push down the cost of borrowing but, as usual, nothing has been set in stone.

Meanwhile Spain’s Prime Minister Mariano Rajoy has said he is willing to do whatever he can to help the ECB find a solution that’s ‘best for the Spanish people’. But with the interest rates on Spain longer-term borrowing still painfully high, it’s going to be a long and bumpy road to recovery for Spain.

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