MercoPress. South Atlantic News Agency

Deepest austerity measures in decades stall Spanish economy recovery

Finance minister Salgado expects the economy to grow in 2011

Spain’s economy stalled in the third quarter as the deepest austerity measures in three decades, aimed at taming the Euro region’s third-biggest budget deficit, undermined the recovery from an almost two-year recession.

GDP was unchanged from the previous three months after two quarters of expansion, the National Statistics Institute in Madrid said. Spain officially exited recession when its economy grew 0.1% between January and March. In the second quarter it grew 0.2%.

Spain’s Socialist government is implementing the deepest budget cuts since at least 1980, including wage reductions and tax increases, to stem a surge in borrowing costs and slash the deficit by half in two years.

The data highlights the divergence between robust growth in Germany, Europe’s biggest economy, and a continued slump in smaller euro-region countries such as Spain. The stagnation in Spain, which has the highest unemployment rate in Europe at 20.8%, comes as German GDP is expected to expand 0.8% in the third quarter.

Spanish household spending surged 2% from a year earlier in the second quarter as consumers brought forward purchases before value-added tax rose in July. Government subsidies for car purchases also expired in the third quarter, prompting a 26.9% annual decline in new car registrations, a proxy for sales, in September. A universal tax rebate on mortgage payments expires in January in a measure aimed at encouraging home purchases this year.

Spain’s government, which expects GDP to fall 0.3% in 2010 in a second year of contraction, slashed public workers’ pay by 5% in June and raised value-added tax to 18% from 16% on July 1.

Finance Minister Elena Salgado has repeatedly ruled out any contraction in quarterly GDP this year after the economy emerged from a recession in the first quarter. The government forecasts unemployment, at 19.8% in the third quarter, will fall to 19.3% in 2011. It sees growth of 1.3% next year.