MercoPress. South Atlantic News Agency

Strong austerity measures anticipate Spain will slip back into recession

Long queues looking for jobs in a tight market

The Spanish economy will slip back into recession in the second half of the year, a foundation supported by the country’s savings banks said in a publication released Wednesday.

Spain’s economy edged out of recession in the first quarter, with GDP growing by 0.1% on a quarter-by-quarter basis, although declining by 1.3% compared to the first quarter of 2009, the central bank said last month.

Economists said those preliminary figures mean that Spain, which had posted negative growth since the spring of 2008, is technically no longer in recession.

But the Funcas foundation forecast in the latest issue of its Economic Information Notebooks that the Spanish economy will contract 0.7% this year and grow only 0.3% in 2011 due to the impact of new austerity measures.

Funcas said it expects GDP to stagnate in this year’s second quarter due to a significant decline in public spending and a continuing downward trend in investment in construction, although the economy has also gotten some boost from consumers’ decision to make certain purchases before an increase in the value-added tax takes effect on July 1.

Funcas added that Spanish financial entities continue to focus on repairing their balance sheets and that the competitiveness lost in Spain in recent years due to increased wage costs has not been recovered.

According to Funcas, the sharp increase in savings and the reduction in core inflation indicate that economic adjustment measures are taking hold, but it stressed that high levels of accumulated imbalances were built up during the years of economic expansion and that correcting them will take more time.

With respect to the unemployment rate, the foundation predicted it will come in at 19.9% this year and rise to 20% in 2011.

Spain’s financial stability currently is under threat from high unemployment and a budget deficit that rose to 11.2% of GDP last year, and the government has responded by enacting austerity measures and approving a labour overhaul.

To that effect Spanish Prime Minister José Luis Rodríguez Zapatero admitted that the labour reform passed by the Spanish parliament is not “a definitive solution” but “one more piece” in the labour market in order to favour Spain's “productive structure.”

“Let's wait until we can see the results. I don't prejudge, so let's wait and see” Rodriguez Zapatero replied to a United Left lawmaker Gaspar Llamazares' questions during a Lower House briefing. “Then we can discuss concrete solutions,” he expressed, while pointing out that the best markets “are the ones based on flexi-security.”

Rodriguez Zapatero claimed that “there's a consensus between unions and businessmen that it's imperative to change certain things within the Spanish labour model” for which the Government has been working and discussing openly with all sectors.

“Unemployment rate is on 20% and a 30% of temporary jobs, which is normal for five or six million people,” he pointed out, while explaining that this “forced progressives to take action”.