Spain's economy shrinks under debt pressure in 2012

MADRID Thu Feb 28, 2013 12:50pm GMT

People stop to read the discount signs of a store that is going out of business in downtown Madrid November 14, 2008. REUTERS/Susana Vera

People stop to read the discount signs of a store that is going out of business in downtown Madrid November 14, 2008.

Credit: Reuters/Susana Vera

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MADRID (Reuters) - The Spanish economy shrank for the sixth straight quarter from October to December, data showed on Thursday, hampering government efforts to slash the public deficit and reverse job destruction.

The economy contracted 1.4 percent in 2012 from a year earlier, after barely growing in 2011, the second worst slump since the series began in 1970 when dictator Francisco Franco was still in power.

Spain's economy is expected to shrink in 2013 for a second year in a row. Although exports have jumped, retail sales have fallen for 30 straight months as state spending cuts and high unemployment bite.

The country's current account balance - a measure of its foreign trade and investment - was in surplus for third month in a row at 4.87 billion euros ($6.4 billion) in December, compared with a deficit of 3.9 billion euros in the same month a year earlier, the Bank of Spain said on Thursday.

Growing exports, showing Spain better able to compete for business, have helped cut its trade deficit significantly over the past year. Imports have fallen, down 6.4 percent in December from the same month a year earlier.

"A lot is being made of the current account surpluses improving sharply in the peripheral euro zone countries, but to a large degree that's because domestic demand and therefore imports have collapsed," said Ben May, analyst at Capital Economics.

For 2012 as a whole, Spain registered a current account deficit of 8.3 billion euros, compared to a 37.5 billion euro deficit in 2011.

Spanish GDP fell 0.8 percent in the fourth quarter on a quarterly basis, slightly steeper than forecast in a flash estimate and its deepest quarterly decline since mid-2009, data showed, with falls across the board.

"The breakdown makes for terrible reading, with a slump in nearly all sectors," said Jose Luis Martinez, economist at Citigroup.

The European Union has signalled it wants Spain to lay out an ambitious plan of further structural changes to the economy in order to bring down the public deficit, expected to miss Europe-imposed targets this year and next.

Spain's labour costs already have come down and productivity has risen. That, and a labour market reform that has reduced the bargaining power of labour unions, has prompted carmakers to announce new investment in the country.

But prices have continued to rise on high energy costs, with European Union harmonised consumer prices up 2.8 percent year-on-year in February, data from the National Statistics Institute showed on Thursday, in line with forecasts.

May of Capital Economics said rising prices meant companies may not be saving as much as they could by laying off workers and cutting wages.

"The price of raw materials have carried on rising, so even if firms have been reducing their unit labour costs they've not been passing on those savings to their customers," he said. ($1 = 0.7628 euros)

(Additional reporting by Tracy Rucinski and Manuel Maria Ruiz; Editing by Ruth Pitchford)

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