Bank of Spain says weak recovery doesn’t invite “complacency”

Governor Linde says government revenues need to pick up toward the end of the year to ensure deficit target is met

The governor of the Bank of Spain, Luis María Linde.
The governor of the Bank of Spain, Luis María Linde.Uly Martín

The governor of the Bank of Spain, Luis María Linde, said Monday that while the domestic economy is showing signs of improvement, the pace of the recovery remains weak and does not invite complacency.

“Prudence advises avoiding any complacency since the risks have not disappeared and the momentum for a sustained recovery is still weak,” Linde said in an appearance before the Senate budget committee.

Spain emerged from its longest recession in decades in the third quarter of this year, when GDP was up 0.1 percent from the previous three months. The economy was sustained by the dynamism of the export sector with the contribution from domestic demand remaining negative due to the government’s austerity drive and subdued consumer spending as a result of high unemployment and wage cuts.

As a result of the strength of the export sector, Linde said that Spain is on course to show a net lending position with the rest of the world this year of about 2 percent of GDP, “an unprecedented and record figure in recent decades.”

However, the governor also noted that while the European Central Bank has cut its key lending rate to a euro-era record low of 0.25 percent and has pledged to provide as much liquidity as is required, borrowing costs in Spain remain “excessive,” reflecting the fragmentation of euro-zone financial markets. This in turn is weighing on the recovery.

The momentum for a sustained recovery is still weak”

Linde pointed to a recent report by the European Commission which, based on the budget outcome for the first half of the year, views the deficit-reduction target for the full year of 6.5 percent of GDP as achievable, although conditioned by revenues in the last few months of the year, which need to “pick up.”

The overall general government shortfall in the eight months to August stood at 4.8 percent of GDP. According to figures released Monday by the secretary of state for the budget, Marta Fernández Currás, the central government deficit in the first 10 months of the year came in at 3.61 percent of GDP, up from 3.33 percent in the same period a year earlier and from 3.58 percent in the first nine months of the year. In homogeneous terms, the shortfall in the first 10 months was 3.29 percent of GDP.

Fernández Currás said growth in revenues in the period January-October was 0.8 percent but picked up to an annual 4.3 percent in October alone.

Linde said the GDP growth figure underpinning the 2014 draft state budget of 0.7 percent, with a contribution of 1.2 percentage points from the external sector, was “prudent.” Brussels is predicting growth of only 0.5 percent and has suggested that further budget measures of around 35 billion euros may be required over the next three years in order for Spain to meet its deficit-reduction targets, which are 5.8 percent of GDP in 2014, 4.2 percent in 2015 and 2.8 percent in 2013, bringing the shortfall back within the European Union ceiling of 3 percent of GDP in 2016.

Economy Minister Luis de Guindos reiterated to Spain’s European partners over the weekend that the government is fully committed to meeting the deficit target for this year and plans to achieve its goals by means of further structural reforms rather than spending cuts. In this context, De Guindos referred to an additional reform of the labor market that could bring in 2.5 billion euros.

The Bank of Spain governor said it remains to be seen how much of the 67.3 billion euros in taxpayers money used to clean up the banking sector would be recovered. He said the alternative of liquidating banks would have been “worse and much more expensive.”

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