Spanish Economy Plunges Deeper into Recession in Q1

Spanish Economy in Deep Recession

The Spanish economy continued to contract in the first quarter of 2009, plunging Spain deeper into recession, according to a flash estimate released by the National Statistics Institute (INE). Real GDP declined 1.8% quarter-on-quarter (q/q) and 2.9% year-on-year (y/y), possibly the weakest performance in half a century, and down from a fall of 1.0% q/q and 0.7% y/y in the final quarter of 2008.

The economy expanded by 1.2% in 2008, the weakest performance since 1993, and down from a 3.7% rise in 2007.

Domestic Demand Slips Again

INE has yet to release a component breakdown of GDP in the first quarter of 2009, but we expect there was broad-based weakness. It is highly likely that domestic spending fell during the quarter, hurt by shrinking consumer spending, a collapse in exports and depressed investment and construction activity. Worryingly, private consumption appeared to contract briskly in the first quarter of 2009. Spending on goods continued to deteriorate alarmingly. The volume of retail spending declined by a startling 8.0% y/y in the first quarter, down from a 7.6 y/y fall in the fourth. Meanwhile, the demand for new cars has collapsed, with the average level of new registrations slumping by 43.1% y/y in the first quarter of 2009. Spending on services is also falling, highlighted by deteriorating PMI survey results from the sector. We suspect that domestic demand was also curtailed by falling fixed investment spending. Markedly weaker industrial production and falling capacity utilisation has curtailed business investment intentions. The depressed property market is likely to have resulted in yet another sharp fall in construction activity. More encouragingly, public spending appeared to rise steeply as the government continues to use extensive fiscal stimulus to prop up the economy.

No Relief from Exports

The slowdown in the industrial sector appears to suggest that exports struggled in the first quarter of 2009. Industrial output contracted by 22.8% y/y, the weakest performance since the series began in 1980. Clearly, exports are unable to pick up the baton as the main engine of growth, with consumer spending and construction activity stuttering after several years of driving the economy forward at great pace. Spanish exporters have been hit by weaker demand across the Eurozone, United Kingdom and United States.

Outlook and Implications

The Recession Will Be Deep and Prolonged

The economy is set to struggle in 2009 and 2010, resulting primarily from deep-rooted problems in the housing market and construction sectors, coupled with markedly weaker demand from key export markets in the Eurozone, United Kingdom, and the United States. In addition, the global liquidity freeze is exposing high debt levels in Spain's household and corporate sectors. The economy is now facing strong headwinds, signalled by record-low business and consumer confidence, coupled with deteriorating industrial production, retail sales, service-sector activity, and labour-market data. Overall, economic activity is projected to contract 4.4% in 2009 (revised down from a 4.3% fall) and 1.5% in 2010 after advancing 1.2% in 2008, according to the May interim forecast. The deteriorating outlook reflects the continued knock to confidence and economic activity in the wake of spiralling unemployment, plus very steep falls in industrial production, retail sales and other key indicators.

Domestic spending will lose significant momentum in the next few years. Private consumption is set to weaken as households limit their spending to consolidate the rapid debt accumulation in the face of uncertain job prospects and falling house prices. Meanwhile, residential construction activity is set to falter as the property market has been enveloped by oversupply. This is a concern given that construction investment has been an important engine of growth in the past nine years and a major source of new jobs. Meanwhile, equipment investment is set to slow from 2008 because of diminishing upgrading or replacement needs and contracting economic activity.

Exports are projected to plummet in 2009, and remain weak in 2010. Export sales improved solidly in 2006 and 2007, but should lose substantial momentum during the 2009. The demand for Spanish exports will be restrained by weak competitiveness, coupled with markedly softer domestic spending across the Eurozone and the United States.