Decline in economy slows in third quarter on improved household spending

The Spanish economy remained in recession for the fifth quarter in a row in the period July-September but the pace of the decline slowed from the previous three months, possibly because consumers brought forward purchases of big-ticket items ahead of the value-added tax hike introduced at the start of September.

The National Statistics Institute (INE) said Thursday that GDP shrank 0.3 percent on a quarterly basis in the third quarter after a fall of 0.4 percent the previous three months, while on an annual basis the contraction accelerated to 1.6 percent from 1.4 percent. The figures were in line with earlier flash estimates by the INE.

The quarterly decline in private consumption eased to 0.5 percent from 1.0 percent in the second quarter. On an annual basis it slowed slightly to 2.0 percent from 2.1 percent.

The slight improvement in household spending took place despite acceleration in the fall in wages to 5.5 percent from 5.1 percent, as the unemployment rate moved above 25 percent for the first time on record.

“The behavior of household spending could have been influenced by advanced purchases due to the increase in the value-added tax rates that took place in September,” the INE said in a statement.

The standard VAT rate was raised to 21 percent from 18 percent and the reduced rate to 10 percent from 8 percent.

The decline in public spending accelerated to 2.4 percent year-on-year from 0.6 percent in the second quarter due to the government’s austerity drive to rein in the deficit. On an annual basis, the pace of the decline picked up to 3.9 percent from 2.9 percent.

The negative contribution of domestic demand widened to 4.0 percentage points from 3.8 points, while the contribution of external demand – exports minus imports – was steady at 2.4 points.

The European Union commissioner for economic affairs, Olli Rehn, on Wednesday endorsed Spain’s efforts to trim the deficit this year and next, but urged the government of Prime Minister Mariano Rajoy to explain its plans for meeting its fiscal consolidation commitments for 2014.

The INE’s release coincided with figures from the EU’s statistics office Eurostat, which said the euro zone slipped into recession in the third quarter when GDP declined 0.1 percent from the previous three months. Output shrank 0.2 percent in the second quarter. Economists had forecast a contraction of 0.2 percent in the period July-September. German and French GDP in the quarter both advanced 0.2 percent, which was insufficient to outweigh the impact of contractions in countries such as Spain, Greece and Portugal. The latter’s output declined an annual 3.4 percent, while the Greek economy shrank 7.2 percent.