Recession eases in first quarter, Bank of Spain says

The recession suffered by Spain since the end of 2011, the second in barely four years, eased somewhat in the first quarter of the year, as private consumption fell by less than previously, the Bank of Spain said Tuesday.

In its latest monthly economic bulletin, the central bank said GDP contracted 0.5 percent quarter-on-quarter after a decline of 0.8 percent in the final fourth of last year. On an annual basis, output shrank by 2.0 percent, one tenth of a point more than in the last three months of 2012.

Private consumption fell 0.3 percent after a contraction of 2.0 percent in the fourth quarter as the effects of hike in value-added tax, introduced in September of last year, began to ease. As a result, the contraction in domestic demand slowed to 0.8 percent from 2.0 percent.

However, the central bank ruled out further improvements in private consumption any time soon. “Households’ limited saving capacity in a setting of declining disposable income, falling wealth, the persistence of an uncertain labor market outlook and high debt leave little room for consumption to pick up in the short turn,” the report said.

Employment in the quarter fell 4.5 percent, a slight improvement on the fourth quarter when it contracted by 4.7 percent. The jobless rate ended 2012 at 26 percent and is expected to climb toward 27 percent this year.

High unemployment has aided wage constraint while household wealth has fallen due to the drop in house prices.

The contribution of net external demand – exports minus imports - remained positive but declined on a quarterly basis to 0.3 points from 1.2 points in the fourth quarter. This reflected weaker exports due to the recession in the euro zone and a less marked decline in imports.

The EU’s statistics office Eurostat said Monday that Spain had the biggest public deficit in the bloc last year at 10.6 percent, including the European bailout for the country’s banks. Excluding the loan, the shortfall was seven percent of GDP, compared with a target of 6.3 percent. The Bank of Spain said Tuesday that the “sluggishness” of indirect tax collections and social security contributions is “illustrative of the difficulty that reducing the budget deficit in an adverse cyclical situation entails.”

The government on Friday is due to unveil a new battery of reforms to further reduce the deficit, although Economy Minister Luis de Guindos said in an interview Monday that the measures will aim to combine this with prompting economic growth.

Brussels is expected to give Spain a further two years to bring its deficit back within the EU ceiling of three percent of GDP. It is currently committed to doing so in 2014.