Spain Underperformer in Euro Zone

Spain's economy contracted for the first time since 1993 in the third quarter, official data showed on this week, and analysts were surprised by how fast a housing slump is sapping consumer spending.

For a decade the euro zone's star, Spain could now turn into its underperformer as it faces a drawn-out recession in which it is punished for its long over-reliance on construction and debt-happy consumer spending, analysts said.

Overall the euro zone's fourth-largest economy contracted 0.2 percent in the third quarter, in line with a preliminary estimate and compared with 0.1 percent growth in the second quarter, the National Statistics Institute reported.

"The figures are worse than we had expected. The consumer slowdown is faster than expected and also the contraction in investment is worse than expected, and points to a faster rate of decline in the fourth quarter," said Jose Luis Martinez, of Citigroup.

Construction investment fell for the second quarter running, tumbling 6.4 percent after a 2.3 percent decline between April and June.

A decline in household spending growth to just 0.1 percent also dragged down GDP. This compared with rates of 1.1 percent in the second quarter and 3 percent a year earlier.

"You can see that there is a sharp decrease in the growth rate of spending by households, which was expected, but it was still positive, whereas the big negative is in investment and in particular in construction," said Giovanni Zanni, analyst at CSFB. "We have a slightly worse forecast for Spain than for the rest of the euro area."

The International Monetary Fund forecast earlier this month that Spanish economic growth would fall to 1.4 percent in 2008 from 3.7 percent last year and that the economy would shrink 0.7 percent next year.

Household spending has been hit by rising unemployment, which has jumped by 800,000 in a year to 2.8 million, and increasing reluctance of banks to lend during the credit crunch.

Bank of Spain Governor Miguel Angel Fernandez Ordonez said a fall in housing investment would intensify with an abrupt halt in housing starts in 2009.

"The most recent information suggests a process in the same direction in the final months of the year and a prolongation of the slowdown in 2009," Ordonez said during a briefing to the Spanish Senate's budget commission.

There was a chink of light in trade data, which showed that export growth of 1.5 percent in the quarter easily outweighed a 1.1 percent contraction in imports. This suggested that the country was on its way towards correcting its gaping current account deficit and reliance on foreign financing.

Spain has the world's second-largest current account deficit in nominal terms, exceeded only by that of the United States and equal to roughly 10 percent of gross domestic product.

The headline GDP figure would have been worse had it not been for 5.9 percent growth in spending by the government, which has announced 40 billion euros in fiscal stimulus to fight the crisis.

Spain's public sector is likely to sink deep into deficit this year after reporting a surplus of more than 2 percent of GDP in 2007, the last year of its housing boom.

In year-on-year terms, Spanish GDP grew 0.9 percent year-on-year, compared with 1.8 percent in the second quarter, in line with the November 14 estimate, and marking a 15-year low.

Story from Reuters