Spanish Economy Slows in Q2 2007

From Bloomberg this morning:


Spanish Economic Growth Slows as Construction Cools

By Ben Sills

Aug. 29 (Bloomberg) -- Economic growth in Spain, where housing prices have doubled in six years, slowed in the second quarter as rising interest rates damped construction.

The economy, Europe's fifth-largest, expanded 0.9 percent from the previous quarter, when it grew 1.1 percent, the National Statistics Institute said on its Web site today. That was more than the initial 0.8 percent estimate published Aug. 14. The economy grew 4 percent from a year earlier.

Construction expanded at the slowest pace in more than two years as the doubling of interest rates by the European Central Bank made mortgages more expensive. Fallout from the subprime mortgage crisis in the U.S. may lead banks to tighten credit, further hurting building, which accounts for 18 percent of the economy, almost twice that of the 13-nation euro region.

``There is a risk that credit will be made more difficult in Spain and this would have a much bigger impact on GDP,'' Stephane Deo, chief European economist at UBS AG in London, said. ``We'd like to know what banks are doing now and how investment and consumption are reacting.''

Spain's benchmark stock index fell 0.3 percent to 14,089.90 at 10:44 a.m. in Madrid, with shares in Actividades de Construccion y Servicios SA, Spain's largest builder, losing as much as 2.1 percent to trade at 39.20, their lowest level since July 2006.

Growth Forecasts

Last month, the government predicted the Spanish economy would grow 3.8 percent this year from 3.9 percent last year. Deo forecasts that growth will ease to 2.5 percent next year, which would be the slowest pace in more than a decade.

Investment spending sustained its 6.6 percent growth pace in the second quarter while investment in factory equipment surged 13 percent on the year, close to the 13.3 percent increase posted in the first quarter.

``The Spanish economy has to investment in improving its competitiveness,'' Diego Fernandez, an economist at Fortis Bank in Madrid, said. ``Investment in factory equipment is offsetting to a certain extent the slow down in construction and that is very important for us.''

Home starts in Spain plunged more than 20 percent in May as developers reacted to the drop-off in demand caused by rising borrowing costs. The slowdown has hit shares of real estate companies.

Astroc Shares

Metrovacesa, Spain's biggest real-estate company, has lost 37 percent in Spanish trading this year. Astroc shares lost 87 percent from their Feb. 26 peak and today traded at 9.45 euros at 9:50 a.m. in Madrid.

The European Central Bank has increased interest rates eight times in the past two years and may raise borrowing costs for a ninth time before the end of the year. The benchmark rate for the 13 euro region countries is 4 percent, twice the level of November 2005.

Construction increased 4.6 percent from the year earlier period, down from 5.2 percent in the first quarter, today's report showed.

Rate increases have a more direct immediate effect on Spanish families because 96 percent of mortgages in Spain have variable rates, compared with about 20 percent in the U.K. and 12 percent in the U.S.

Slowing construction is also weighing on employment growth, economists said.

``Employment growth has also moderated as construction slows down,'' Giulia Faggio, an economist at Citigroup Inc. in London, said. ``We expect a gradual slowdown of the Spanish economy.''