MADRID, August 10 – 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 percent to 1.6 and 1.0 percent respectively.
Spain has until recently had one of the world\’s fastest growing developed economies, posting an expansion of 3.8 percent 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.
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.
New car sales plunged 27.5 percent in July from the same time last year, the third consecutive monthly drop in sales of over 20 percent, according to Spanish automobile manufacturers\’ association ANFAC figures.
Retail sales fell 7.9 percent in June in calendar-adjusted terms from the same time last year, its worst plunge since Spain began registering the results in 2004.
The drop is putting the squeeze on many multinationals whose results had been boosted until recently by Spain\’s credit-fuelled expansion.
Last month British cellphone operator Vodafone, Europe\’s largest mobile operator, warned that its results would suffer in 2008 due to the sharp slowdown in Spain.
British luxury goods group Burberry have told shareholders that Spain has become a "very complicated market" while Coca-Cola has reported a drop in sales in Spain.
"The almost recession is having an impact. I suppose people are going out less than before," the head of the US beverage producer\’s unit for Spain and Portugal, Marcos de Quinto, told El Pais last week.
The number of registered unemployed in Spain rose by 1.5 percent in July from the previous month to a 10-year high of 2.43 million, with nearly two of every three layoffs taking place in the construction sector.
About 12,000 Spaniards will head to France later this year to work in the grape harvest, a 10 percent jump on last year, because of rising unemployment in the building industry, the General Workers Union predicted this week.
The government forecasts the unemployment rate, which hit 7.95 percent in the second quarter of 2007, its lowest level since the fourth quarter of 1978, will rise to 10.4 percent this year and to 12.5 percent next year.
Spain\’s second largest bank BBVA paints a bleaker outlook. It predicts the unemployment rate could soar above 14 percent next year.