Spain on brink of recession as GDP shrinks

Spanish economic output shrunk in the third quarter, according to provisional data, suggesting the country is on the brink of recession.

The Bank of Spain on Friday estimated that growth in gross domestic product in the three months to end-September was a negative 0.2 per cent compared with the second quarter. If confirmed, it would be the first quarterly contraction in GDP in 15 years.

Year-on-year growth slowed to 0.9 per cent from 1.8 per cent in the second quarter, according to the bank’s estimates.

It attributed the slowdown mainly to an “intense correction” in construction activity and a fall in the value of manufactured goods. Growth in domestic demand, an important component of GDP, slowed to 0.3 per cent year-on-year.

The Bank’s estimates are the latest confirmation that Spain, among the fastest-growing European economies in the last decade, has been battered by the impact of the global credit squeeze on an already-weakened construction sector.

The country’s residential housing market collapsed last year amid oversupply and climbing interest rates. Heavily indebted property and construction groups have since had to contend with tighter credit conditions, which has driven up defaults and bankruptcies.

“The persistence of instability in international financial markets… has aggravated a correction which began in preceding quarters, and has contributed to putting the brakes on growth in activity,” the Bank said.

Most economists expect Spain to enter technical recession – defined as two consecutive quarters of negative growth – this quarter, as unemployment rises and households continue to cut spending.

New car registrations in September, for example, fell 32 per cent year-on-year, while industrial output in August declined an adjusted 7 per cent. El Corte Inglés, the country’s biggest department store group, this week warned it might suffer its first annual sales drop.

Joblessness in the country has already surged by about three percentage points this year, to 11.3 per cent, and is expected by some to reach 15 per cent next year. Many expect GDP to contract by at least 1 per cent in 2009.

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