Spain's Economy Shrinks At A 7.2% Annual Rate In The First Three Months Of 2009

According to preliminary estimates from the Spanish National Statistics Office published today, GDP contracted by 1.8% in the first three months of 2009 when compared with the last quarter on 2008. This follows a 1.0% drop in Q4 2008. This is equivalent to a 7.2% annualised rate of contraction, which is, of course, sharp.



Over the first quarter of 2008 (that is year on year) GDP decreased by 2.9%, the sharpest decline recorded in almost 40 years. In fact you would need to go back to 1945 to find a year in which the Spanish economy contracted as strongly as it is likely to this year.

The contraction was mainly caused by a very large slump in private domestic demand, a factor which was partially offset by a surge in government spending, and partly by the positive contribution of external trade, which (ironically) since imports fell more rapidly than exports as the current account deficit closes meant that less demand "leaked out". Of course, such declines in imports also reflect declines in living standards for the population at large.

Basically, even if the output were to remain stationary for the remaining three quarters of the year (which it obviosuly won't), GDP would still fall by 2.6% over the year. However, since the economy will obviously still continue to contract, it is much more realistic to anticipate a fall in GDP of between 5% and 7% for the year as a whole.



The current recession is likely to be a long one. The current financial crisis, which, as I explained in my last post, has simply served to bring into focus the inherent unsustainability of the previous growth model: deep housing crisis, high indebtedness of the private sector, weak price competitiveness, very high unemployment… S0 as I say, ECB and EU Commission help will need to be on their way, and massive structural reforms now seem inevitable.

Despite some recent positive development (decrease in interest rates and prices, fiscal stimulus measures, slight improvement in confidence, ECB purchase of cédulas hipotecarias…), Spain will not recover even as other economies begin to breathe again. The worst year undoubtedly could be 2011, and the unemployment rate by that stage could reach anywhere between 25% and 30% of the labour force if you accept the March 17.5% number as good.

Bottom line, a complete nightmare, with the only bright spot being imminent control of the political system being assumed in Brussels and Frankfurt, since along with the economy the political "automatic stabiliser" system also seems to be broken. Could, I ask myself, recent events in Hungary give us any indication of the most likely way out of this mess.