Spain facing worse economic slowdown than expected

FE Team | Published: August 11, 2008 00:00:00 | Updated: February 01, 2018 00:00:00

MADRID, Aug 10 (AFP): The Spanish economy, long a motor of growth and job creation in the Eurozone, is facing a deeper and faster-than-expected slowdown as the impact of the end of a property boom spreads to other sectors.

"The economy is decelerating sharply, the correction in the construction sector is still ongoing, and the outlook for the near to medium term is rather bleak," investment bank Morgan Stanley said in a report issued last week.

"We believe the deterioration of Spain is just in the beginning stages," it added, predicting "the bulk of the pain will be suffered in 2009."

Last month Economy Minister Pedro Solbes slashed the government's economic growth forecast for this year and the next from 2.3 per cent to 1.6 and 1.0 per cent respectively.

Spain has until recently had one of the world's fastest growing developed economies, posting an expansion of 3.8 per cent last year.

"The economic situation is worse than we all predicted. We thought it would happen slowly but instead it has hit fast," he said in an interview published in daily El Pais last weekend.

The Spanish economy, the fourth-largest in the Eurozone, began to stumble last year as rising interest rates and the international credit crunch put the brakes on a decade-long property boom.

The country is especially vulnerable to higher lending costs because the majority of mortgages have variable rates and the housing sector accounts for a much larger share of the economy than in the rest of the European Union.

As Eurozone interest rates rose, housing sales began to drop and more and more people began to struggle to make their monthly mortgage payments.

One desperate Spaniard who could no longer pay the mortgage on a Madrid flat he bought in 2005 tried to dispose of it through an Internet lottery in May before authorities pulled the plug on the venture because it lacked the proper authorisation.

Last month Martinsa-Fadesa became the first major Spanish property developer to seek bankruptcy protection from creditors since the property boom ended and industry analysts expect more firms will follow its lead.

The slump in the property sector has fuelled a sharp rise in unemployment which, combined with rising food and fuel prices, has hurt consumer confidence and retail sales.