Spain out of recession in Q1, but outlook tough

SPAIN emerged from recession in the first quarter of the year thanks to improving global demand, breaking a run of seven straight quarters of contraction, according to a Bank of Spain estimate yesterday.

Spain's battered stock market, down 22 percent this due to fears Spain could follow Greece into a debt crisis, celebrated the news, rising 2 percent at midday after falling as much as 2 percent before the data was revealed.

The central bank said in its quarterly report that the economy grew by 0.1 percent quarter-on-quarter while contracting in annual terms by 1.3 percent.
The forecast is often in line with the official GDP number due for release on May 12.

POSITIVE
The spread between Spanish government bonds and benchmark German bunds also improved after the release, easing to 171 basis points from 180 earlier, although still around its highest level since the inception of the euro zone.

But analysts warned positive sentiment could soon pass.
With unemployment at 20 percent putting a heavy drag on demand as well as a drain on government finances, and a heavy load of private sector debt, any recovery is likely to be weak, they said.

Spain needs healthy economic growth if it is to meet its targets to cut back its fiscal deficit to an EU guideline of 3 percent in 2013 from 11.2 percent in 2009.

But economists have scoffed at the government's forecasts for growth to close in on 3 percent a year by the end of that period. “The information available indicates a return to weak growth in the first quarter in an environment characterised by a progressive recovery in the global economy,” the Bank of report said.

The report also said first quarter growth was aided by a gradual improvement in consumer demand albeit from low levels and indicators showed it would continue in the second quarter.

Economists welcomed the news, but suggested the market wanted to see more from the government, which has promised to reform its labour markets, and has yet to announce many concrete measures to cut its deficit. “It's good news today and the markets have picked up on that. But markets are not really looking at data ... policy, credibility is what is important,” said Jose Garcia Zarate at consultancy 4Cast. “The problem for Spain remains high unemployment. It's still going to weigh on the economic outlook. The hangover for Spain from the crisis will be unemployment.” The government forecasts the economy to grow in each quarter this year, but to contract for the year in full by 0.3 percent. In 2011 it forecasts growth of 1.8 percent, and close to 3 percent in 2012, figures questioned by the European Commission and International Monetary Fund.

OUTLOOK PAINFUL
The Bank of Spain said the first quarter had seen a stabilisation in housing sales and mortgage data.
Spain's property sector drove a decade-long boom in the country before it slumped in 2008. The central bank saw some improvement in the sector as homebuyers sought to take advantage of low interest rates and avoid a planned rise in value-added tax rise in July. However, economists did not see good times ahead for Spain. “While today's GDP estimate by the Bank of Spain brings very good news, the growth outlook remains severely dampened by the ongoing process of the private sector's deleveraging, and the needed reallocation of resources associated with the downsizing of the construction sector,” said Tullia Bucco, economist at UniCredit.