MercoPress. South Atlantic News Agency

Spain’s economy contacted 3.6% in 2009, the most in decades

Miguel Fernandez Ordoñez, Bank of Spain governor

First the bad news: Spain's economy contracted by 3.6% in 2009, the most in decades, as domestic demand plummeted according to a Bank of Spain estimate that was in line with government forecasts.

The encouraging news is that the rate of decline in gross domestic product eased in the final quarter to 0.1%, in quarterly terms, the Bank of Spain said in a report. This compared to a decline of 0.3% in the third quarter.

The estimates came ahead of preliminary government GDP data for the fourth quarter due on February 11. The Bank of Spain's estimate is usually very close to or the same as the official data. The fall in GDP was softened by a decline in Spain's huge current account deficit, as the easy credit which fed a decade-long property boom evaporated, the Bank said.

“GDP declined 3.6% during 2009, the biggest fall in recent decades and in line with the severe contraction tendencies affecting the world economy in recent quarters, although in Spain's case the imbalances accumulated during the preceding expansive phase also contributed to the decline in activity” said the Bank.
Records provided by the government's Institute of Statistics, which only go back until 1971, showed the previous worse contraction as 1.1% in 1993. In 2008, the economy had grown by 0.9%.

Spain is now paying the price for years of running inflation higher than the Euro zone average and accumulating high levels of private sector debt. With unemployment closing in on 20%, some investors are beginning to fear the country will struggle to cut a budget deficit which reached 11.4% of GDP in 2009.

The Bank of Spain said that it was vital for the government to reform the pension system and the labour market, and that Spanish inflation needed to remain lower than the Euro zone average in order for the country to regain competitiveness.

Besides the global downturn, Spain’s real estate and construction speculation have created a glut of unsold housing estimated in anywhere between 1.5 and 2 million houses.