Spain: economy will shrink, unemployment will soar

The Associated Press

Published: January 16, 2009

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MADRID, Spain: Spain's economy will contract 1.6 percent this year and unemployment will jump to nearly 16 percent, the government predicted Friday in a desperately gloomy outlook for a country that had been one of Europe's great success stories.

This year the government will also run up a huge deficit equivalent to 5.8 percent of GDP, nearly double the 3 percent target set by the European Union, Finance Minister Pedro Solbes said.

The economy will start to recover in 2010, but vigorous growth will not return until 2011, he told reporters Friday after a Cabinet meeting at which a major revision of Spanish economic growth forecasts and other figures was presented.

"The panorama I have just described is a complex and difficult one," Solbes said.

Until now, even as economists and the OECD predicted negative economic growth in Spain in 2009, the government had insisted it foresaw at least moderate expansion.

That upbeat talk is over, at least for the time being.

Fueled by a red-hot real estate market, the Spanish economy had posted more than a decade of solid and sometimes robust growth, and as recently as 2007 GDP increased 3.8 percent.

But the construction industry was hit hard by sharply higher interest rates on mortgages and a credit crunch in which banks, spooked by financial turmoil abroad, abruptly ended what had been lavishly easy lending practices.

Housing sales in November were down nearly 36 percent from the same period of 2007.

Spain's unemployment rate now stands officially at 11.3 percent, the highest in the European Union, although the EU puts it even higher. In the space of about a year, Spain has gone from being one of Europe's top net creators of jobs to seeing them axed right and left.

Solbes said Friday the jobless rate could go up to 15.9 percent this year. Spain's number is traditionally higher than in other EU countries, and in the early 1990s, when the country grappled with recession, it surpassed 20 percent.

Still, the prospect of seeing it go up to 16 percent is chilling for Spaniards who have spent the last few years on a gleeful spree of buying homes and new cars.

Over the past year alone the number of people claiming unemployment benefits has increased by one million, to a total of 3.1 million. Spanish economists say that since the country relied so much on the labor-intensive construction industry for growth, the country was vulnerable to big rises in unemployment in the event of an economic downturn.

The government's predictions are just the latest in a string of dreadful economic news. Earlier this week Solbes acknowledged that the Spanish government debt might lose its AAA rating from Standard & Poors, and on Thursday the government said housing prices in 2008 dropped 3.2 percent, their first yearly decline since 1993.

Beyond the numbers, evidence of the economic crisis is everywhere in the streets. For-sale signs on apartment balconies yellow with age for lack of buyers and newspapers are full of stories about how people cope with the crisis. Anecdotes abound of office Christmas parties being canceled or toned down: top-quality Iberian ham being replaced with potato omelets, a staple of Spanish tapas.

Last year the Socialist government of Prime Minister Jose Luis Rodriguez approved several packages of measures designed to stimulate the economy, help the jobless pay their mortgages and provide liquidity for banks to start lending again.

But officials acknowledged Friday it will take time for all this to kick in.

"2009 is going to be a tough year," Deputy Prime Minister Maria Teresa Fernandez de la Vega said.