Spanish economy sees shrinkage again

MADRID - Agence France-Presse

This weekend’s photo shows Madrid demonstrators taking part in a protest against the government’s austerity reforms and the payment of bank’s debts. AFP photo

Spain’s economy wilted in the third quarter of 2011, official data showed yesterday, as the government imposed a harsh austerity program in the midst of a deep recession.

A slide in domestic demand, battered by a 25-percent jobless rate, overwhelmed a slight improvement in the trade balance, according to preliminary figures from the National Statistics Institute. Gross domestic product dropped by a quarterly rate of 0.3 percent, marginally better than the previous quarter’s 0.4-percent decline, the report showed.

But when compared to output a year ago, the economy slumped 1.6 percent in the third quarter - the sharpest annual decline since the end of 2009 during the previous recession provoked by a 2008 property crash.

The eurozone’s fourth-largest economy is hovering on the edge of a sovereign bailout, after already securing a eurozone rescue loan of up to 100 billion euros ($129 billion) for its banks.

Prime Minister Mariano Rajoy said this week that the government had not made a widely anticipated formal request for eurozone aid because it was “not essential”. Spain’s 10-year bond rates rose above 7.0 percent in mid-summer but borrowing costs tumbled after European Central Bank outlined plans in September to buy an unlimited amount of Spanish bonds to curb rates.

The drop in borrowing costs gave Madrid some breathing space although Spanish 10-year bond yields remain relatively high at 5.65 percent. But Madrid hesitates formally to ask for a eurozone bailout with ECB aid, which would mean submitting to strict economic conditions and international supervision. In the meantime, it is battling to slash its heavy public deficit alone, launching a program to squeeze out 150 billion euros in savings between 2012 and 2014, including 39 billion euros in 2013.

That same austerity program, however, acts like a brake on domestic economic activity.

The Bank of Spain warned recently that the efforts to clean up the budget deficit had a “clear impact” on the mid-year slump.