Here in the United States we are all too familiar with the current recession, and the impact it is having on our society at the federal, state, local and personal levels. Almost no one seems immune to the situation, as even large corporations find themselves cutting workforce and payroll, while middle-income families trim the fat and do their best to stay above water. This is by no means a local situation, as citizens across the world are feeling the pinch just as acutely, and in many places, much deeper than Americans are. Spain is one country that isn’t bouncing back, as the recession actually continues to worsen. The government has launched an effort to promote austerity that will continue to expand over the next two years, in the hopes that it will help Spain get out from under the third largest budget deficit in Europe.
The numbers just aren’t pretty. Spain saw their GDP fall .4% from last quarter to this one, a slight uptick over the .3% decline in gross domestic product from the prior quarter. That is keeping in line with estimates released by the national Statistics Institute out of Madrid, now that they’ve revised their data from the last two years. And consumers are certainly responding with further fiscal conservatism. Consumer spending continues to drop, and has posted a 1% decline across Spain during the last quarter.
Up until July, Mariano Rajoy, Spain’s Prime Minister was still predicting the country’s economy would again begin growing some time in 2013. He’s finally realized that isn’t going to happen, and instead announced significant budget cuts. His goal is to create an austerity measure that equals 15% of the country’s gross domestic product in the next two years. The fear is that their budget deficit will continue to rise. In 2011, it was nearly 9% of the country’s output, and as Spain is the fourth largest economic power in Europe, that’s a huge number. The larger concern, according to many European economists, is that Spain could end up in a similar situation as Greece. That would show the austerity strategy to be flawed, and therefore undermine a great deal of Europe’s approach to the financial crisis.
Spanish investors are certainly taking notice, with many eyes turning to the banking industry. As the United States was forced to, Spain delivered a hefty bailout to their banking system this July, to the tune of $125 billion US. Investors are wary that the first bailout will not be enough, and expect Rajoy will announce a second round at some point down the line. While the government estimated that the Spanish economy would grow .7% last year, it only grew .4%, the second straight year that the contraction was larger than they anticipated.
It’s clear that these shortfalls will also affect the country politically. Rajoy is the elected member of the People’s Party, and support for the organization dropped a full eight percentage points since its landslide election win in November of 2011. Rajoy made a series of campaign pledges that he has been forced to scrap, including tax cuts for people who own their own homes, and increased spending on education and healthcare. Add on top of that the expected cuts to benefits for the unemployed and wages for civil servants, and a good amount of his constituency may begin looking elsewhere for answers. Investors are loath to put their money back into the banking system with this sort of economic uncertainty, and while they’re not facing anything as bad as California payday loans, the drop in spending and increase in inflation could make the already nervous Spanish population downright desperate as the months pass.