MercoPress. South Atlantic News Agency

Spanish economy continues to contract with no short term expectations of change

Banco de España said an improvement in spending was in anticipation of the VAT increase

Spain’s economy contracted 0.4% in the third quarter and continues to face strong headwinds, the central bank said on Tuesday. Adverse financial conditions eased “somewhat” and the decline in domestic demand was 1.2%, an improvement over the 1.4% fall in the second quarter.

However the additional consumer spending in the July-September period can be explained by households’ deciding to move up planned purchases of durable goods ahead of a coming increase in value added tax. The effect is likely to vanish in the fourth quarter, anticipates the Banco de España in its latest report.

With unemployment approaching 25%, the drop in real incomes and continued debt-de-leveraging by households will continue to combine against more robust consumer spending, said the Banco de España.

The fall in public-sector expenditure intensified in the third quarter and exports, while still strong, contributed less to GDP, that during the April-June period, according to the report.

The Spanish economy remains hampered by the fallout from the collapse of the real estate and house-building bubble, which left many banks over exposed plus a surplus of unsold homes.

Weak domestic demand and a slowing global economy have made Spanish businesses reluctant to invest in expanding or new ventures, the bank said.

Median annual household income in Spain fell 1.9% this year to 24,609 Euros, according to the latest national survey on living conditions.

With Spain mired in recession for the second time in four years, 12.7% of families said they struggle to make money last until the end of the month, compared with 9.8% last year.