Spain Officially in Recession

MADRID-Spain, Europe's fifth-biggest economy, entered recession in the fourth quarter for the first time in 15 years driven down by the collapse of a real estate boom, official data showed on Thursday.Gross domestic product (GDP) contracted by 1.0 percent during the last three months of 2008 over the level the previous quarter and was down by 0.7 percent from the equivalent figure 12 months earlier, national statistics institute INE said.The economy shrank by a revised 0.3 percent in the third quarter of last year from output in the previous quarter, it added.Recession is widely defined as two quarters running of contraction of the economy."Spain is set for one of the most protracted downturns in the eurozone," said Capital Economics in a research note, adding it expects Spanish economic output to shrink by at least 3.0 percent this year.Formerly one of the eurozone's chief engines of economic growth and job creation, Spain suffered an abrupt change of fortunes last year when the outbreak of the global financial crisis hastened a correction that was already underway in its key real estate sector.The economy expanded by 1.2 percent during all of 2008, a sharp slowdown from the expansion of 3.7 percent in the previous year, INE said. The institute will publish final fourth quarter GDP figures on February 18.Last month the socialist government, which had long predicted a slowdown in growth but no contraction, slashed its forecast for the economy for this year to a decline of 1.6 percent from the growth of 1.0 percent previously forecast.It has responded with an 11-billion-euro (14-billion-dollar) infrastructure plan to create over 300,000 jobs, mainly through 31,000 public works projects across the country.Bank of Spain governor Miguel Angel Fernandez Ordonez said Wednesday that Spain needed to implement reforms to boost competitiveness and productivity if it wanted to return to high rates of growth."It's obvious that inadequate labor market institutions are having a pernicious effect not only on productivity and economic growth, but also on workers' welfare," he said, adding that without reforms Spain will grow at around the European Union average or lower.The view has already been expressed by the International Monetary Fund in December when it warned the Spanish economy risks entering an extended period of stagnation unless sweeping structural reforms are carried out.Dismissal costs must be lower to boost hiring, collective bargaining agreements need to be more flexible and the practice of indexing wages to inflation must end, the Washington-based Fund said.But Prime Minister Jose Luis Rodriguez Zapatero rejected the central bank chief's advice on Thursday, saying the reduction of social protection had produced "unsatisfactory results" and "was not the road we should take".Morgan Stanley forecasts that the "sizeable" infrastructure spending announced by the government will become noticeable only at the end of 2009 with a "muted recovery"likely the following year. Capital Economics was more pessimistic. It predicted it might not be until 2011 before the Spanish economy stages any meaningful recovery.Spain's unemployment rate hit 13.9 percent in the last quarter of 2008, the highest in the 27-nation European Union, and the government expects it will rise to 15.9 percent this year before starting to gradually decline.
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