Bank of Spain: A Drastic Change of Outlook
June 19th, 2009
The governor of the Bank of Spain bluntly told the government there was no room for deficit spending beyond the plans already announced to try to revive the economy.
In his sternest policy warning since the economic crisis began last year, Miguel Angel Fernández Ordóñez said Spain’s budget deficit could reach 10 per cent of gross domestic product next year, while government debt could exceed 60 per cent of GDP, up from less than 40 per cent at the end of 2008.
“This amounts to a drastic change of outlook, and any chance of using fiscal policy to increase spending has now been exhausted,” he said in a speech on release of the bank’s 2008 annual report.
Like José Luis Rodríguez Zapatero, prime minister, Mr Fernández Ordóñez is a Socialist and a former senior government official. The Bank of Spain is not a fully independent body. But the policy clashes between economic conservatives at the bank and Socialist ministers who have embarked on one of Europe’s biggest fiscal stimulus plans have intensified in the recession.
In April, government ministers accused Mr Fernández Ordóñez of being alarmist about the reserves of the Spanish pension system. He has also been criticised for urging reforms of the rigid labour system – Spain now has more than 4m unemployed – and for earlier appeals for fiscal prudence.
On Tuesday, he said it was important not to undermine confidence in the Spanish economy or to provoke fears of future tax rises.
“It is necessary to prevent public sector debt becoming an obstacle when the Spanish economy finds itself in better conditions for growth,” the governor said.
Mr Zapatero’s government has repeatedly been shown to be over-optimistic in its economic forecasts, although Elena Salgado, finance minister,, has adopted a more realistic tone since campaigning for the European elections ended.
Chart of the Spanish government’s general financial balance as a % of GDPShe says the government intends to reduce the budget deficit to 3 per cent of GDP by 2012, thus finally conforming with the widely abused deficit limit set by the European Union. She predicts a 2010 deficit of 7.9 per cent of GDP – 2 percentage points lower than Mr Fernández Ordóñez’s pessimistic forecast.
In another sign of Spain’s economic crisis, figures released on Tuesday showed home sales fell a record 47.6 per cent in April compared with the same month last year, suggesting that Spain’s housing market remains crippled by the economic crisis.
Spanish property transactions have been declining for 16 months, but the April reduction was the sharpest year-on-year fall so far. Home sales had previously fallen by 24 per cent in March and 38 per cent in February year-on-year.
David Stix, chief executive of Iberian Equities, said the timing of Easter in April had probably made the figures look worse, but “there is certainly no quick fix for the imbalance of housing supply and demand, and it will take at least five years to be resolved”.
Spain grew faster than its European neighbours for more than a decade, largely because of a bubble in housing construction that has now burst, leaving the economy in deep recession and more than 4m people without jobs.
Unemployment in turn has contributed to the continuing fall in house prices. The government is struggling to develop a “new economic model” that would depend less on bricks and mortar and more on new technologies and renewable energy.
April transactions were not only below April 2008 but also down on March this year, implying that Spaniards are delaying their home purchases and expecting further price falls.
BBVA, Spain’s second biggest bank, earlier this month predicted that home prices would fall about 10 per cent this year and a further 12 per cent in 2010.
The bank said prices overall would fall about 30 per cent from their peak and forecast that the stock of surplus housing would start to decline next year and would reach the 2005 level only in 2012. Between 2001 and 2007, Spain built nearly a third of new homes within the European Union.
Spain’s property market crash has undermined the profitability of the country’s banks and cajas, the unlisted regional savings bank, most of which depended heavily on mortgages to homebuyers and loans to property developers.
Spain’s unemployment rate of 17.4 per cent is the highest in the EU and is expected by some economists to rise to about 20 per cent before it begins to fall again.
Story from FT.com
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