Weak consumer spending aggravates recession at the end of last year

The recession in Spain at the end of last year was slightly deeper than initially forecast as high unemployment weighed heavily on consumer spending, while government outlays fell due to the austerity drive.

The only bright spot in the overwhelmingly bleak scenario was a buoyant export sector that helped offset shrinking domestic demand.

The National Statistics Institute (INE) said Thursday that on a quarterly basis, GDP contracted 0.8 percent in the final three months of the year, compared with a fall of 0.3 percent in the third quarter. In a flash estimated released at the end of this month, the INE calculated that output had shrunk by 0.7 percent. The economy has now declined for seven quarters in a row, with Spain stuck in its second recession in four years.

The INE also revised the contraction for the full year from 1.37 percent to 1.42 percent, while the flash estimate for the annual fall in the fourth quarter is now estimated at 1.9 percent, compared with 1.8 percent previously, and 1.6 percent in the third quarter.

The government believes the economy will shrink by only 0.5 percent in 2013, but most experts believe this figure is overly optimistic, with the European Commission predicting a decline of 1.4 percent.

The erosion in activity in the fourth quarter was similar to that of the period 2008-2009 when Spain suffered its worst recession in living memory. The decline in consumer spending on a quarterly basis in the fourth quarter accelerated from 0.5 percent in the previous three months to 1.9 percent, surpassed only by the decline of 2.1 percent seen in the first quarter of 2009. Household consumption accounts for about half of Spain’s GDP. On an annual basis, the decline in household spending accelerated to 3.0 percent from 2.1 percent.

“One of the components that most influenced this behavior was the decrease of household income levels via wages,” the INE said. “Employee remuneration […] showed a decrease of 8.5 percent, compared with 5.5 percent in the previous quarter.” The INE said spending may also have been impacted by advance purchases of big-ticket items by families ahead of the introduction of a value-added tax hike that took effect at the start of September.

Families also had to contend with a loss of purchasing power due to inflation, which remained high despite the weakness of demand. This remained the case at the start of this year. The INE on Thursday estimated that the consumer price index was up an annual 2.7 percent in February, unchanged from the previous month.

The fall in spending would have been even greater if families had not dipped into their savings to maintain minimum levels of consumption in the face of falling income levels. The jobless rate ended last year at a record 26 percent, more than double the average in the European Union.

The austerity drive saw spending by the public administrations shrink by 4.1 percent on an annual basis after a decline of 4.0 percent the previous three months. Companies also cut back on investment, with outlays on capital goods declined 5.4 percent on a quarterly basis and 7.9 percent year-on-year.

As a result domestic demand shaved 4.7 percentage points off overall GDP in the fourth quarter, while external demand’s positive contribution increased from 2.4 points in the third quarter to 2.8 points at the end of the year as the export sector put in its best performance since 1971.

The surge in exports also helped Spain to greatly reduce its current account deficit, which during the economic boom last decade reached absolute levels second only to that of the United States.

According to figures released Thursday by the Bank of Spain, the balance of operations in goods, services and transfers between Spain and the rest of the world last year narrowed 78 percent last year from the previous year to 8.258 billion euros. There was a surplus in December for the third month in a row of 4.875 billion euros, compared with a deficit a year earlier of 3.911 billion.