Spanish economy falls deeper into recession as austerity measures bite

PUBLISHED : Wednesday, 29 August, 2012, 12:00am
UPDATED : Wednesday, 29 August, 2012, 4:11am

The Spanish economy is falling deeper into recession and depositors are pulling their money out of the banks, figures published yesterday showed, while the economically important Catalonia region said it needed a rescue from Madrid.

Spain's recession grew stronger in the second quarter and is expected to get worse as austerity measures after the euro-zone debt crisis cut into demand for goods and services.

A rush by consumers and firms to withdraw their money from Spanish banks intensified last month, with private sector deposits falling almost 5 per cent, to €1.51 trillion (HK$14.6 trillion) at the end of July from €1.58 trillion in June.

Analysts believe it is inevitable that Spain will soon have to call for a European rescue package to help bring its debt costs down as austerity measures designed to slash the public deficit push the economy deeper into recession.

Adding to Spain's bleak outlook, the north-eastern region of Catalonia, which represents about 20 per cent of the country's economy, said it needed a €5 billion rescue from the central government to meet its financing needs and debt costs this year.

After meeting with Prime Minister Mariano Rajoy in Madrid, European Council president Herman van Rompuy said it was up to Spain to decide whether to apply for additional aid. Rajoy repeated that he needed more details from the European Central Bank to help him decide.

On September 6, the ECB will meet to discuss measures to help debt costs in the European nations hit hardest by the crisis.

"With much more fiscal austerity in the pipeline and unemployment at astronomic highs, the risks are clearly tilted towards a more protracted recession," said Martin van Vliet, an economist at ING.

He said he expected Spain to formally request additional external financing in mid-September or October. Spain has already negotiated up to €100 billion in aid for its ailing banks.

Gross domestic product fell by 0.4 per cent in the second quarter, according to figures. But on an annual basis it dropped by 1.3 per cent, worse than initial estimates of 1 per cent.

Spain's economy fell back into recession in the last quarter of 2011, when output fell 0.5 per cent, and government estimates show GDP will probably fall this year and next.