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EDITORIAL
Editorials
These are the responsibility of the editor and convey the newspaper's view on current affairs-both domestic and international

A disastrous combination of factors

The VAT hike and the rise in fuel prices hinder economic recovery

The Spanish economy now faces the last quarter of the year, in an economic landscape that is a still far from the expected recovery. A contraction of growth, renewed inflationary stress, tax hikes and reductions in public spending coexist with the prolongation of the severest banking crisis in many decades, with precarious ratings for Spanish public debt. All this takes place in an unfavourable international context. The euro zone has not dispelled the specter of fragmentation, and the global economy as a whole is decelerating. On top of this, the prices of some raw materials, notably that of petroleum, complicate any prospects for recovery.

It has been the latter, which, in greatest measure has helped to push the Spanish CPI for August up to the level of 2.7 percent, in spite of the plunge in demand for goods and services due to the contraction in household income and the continuing erosion of confidence. Fuel prices stand at historic highs. Since July, gasoline and diesel fuel have risen by 12 and nine percent respectively. These inflationary factors are aggravated by those deriving from the VAT hike, which came into effect at the beginning of this month. All of this, by year’s end, will drive inflation levels in Spain up to three percent.

We are looking at a disastrous combination that principally affects families with low incomes, and those with less capacity for negotiation in the face of wage adjustments imposed by employers. The threats, derived from budget cutbacks in sensitive areas (pharmaceutical co-payment is one of the most explicit, but far from the only one) are intensified by price hikes affecting basic goods and services such as food, education and transport. In this context it is only to be expected that all the indicators of household confidence have sunk to record lows, drastically curbing hopes for the growth of consumption — precisely the GDP component most responsible for the aggravation of the Spanish recession in the second quarter of this year. And it will remain so at least throughout the rest of the year. The three factors of recession, unemployment and inflation comprise the worst of all possible combinations, and it will not be easy to banish them from the short-term prospects of our economy.

To deal with it, the Spanish authorities’ margin for maneuver is very narrow. The best that they can hope for is that additional support forthcoming from the European Union (any form of “soft bailout”) will not involve further demands for adjustment in areas sensitive for persons of low incomes, such as that of pensions. And of course, the government must bring home to the EU authorities, and in particular to the ECB, the belt-tightening that the Spanish population has been undergoing in order to cope with the crisis.

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