By Geoffrey T. Smith, Tom Fairless and Santiago Perez
The finance ministers of Spain and Germany will meet for crisis talks
in Berlin Tuesday, but while the ministers come together, their
economic performance is diverging ever more sharply.
Two separate reports published Monday by the countries' respective
central banks showed the two economies headed in drastically different
directions, with Spain's saying that output had contracted 0.4% in the
second quarter. Having already fallen by 0.3% in the first three
months of the year, Spain is now officially in recession. The Bank of
Spain expects the economy to shrink by 1.5% this year.
By contrast, the Deutsche Bundesbank said in its monthly report that
Germany had probably grown "moderately," its shorthand for growth of
between 0% and 0.5%. That follows a small drop of 0.2% in the first
quarter.
The travails of Spain threaten to bring the debt crisis to a truly
critical point. Economists have warned for more than a year that the
euro zone's limited financial backstops couldn't cope with the
collapse of one of its larger economies, and Spain is the region's
fourth-largest, accounting for nearly 12% of euro-zone output --twice
as much as Portugal, Ireland and Greece put together.
The Bank of Spain cited a "substantial contraction in private and
public spending" in a very challenging environment affected by weak
global growth, unstable financial markets and doubts on the euro
zone's outlook.
As expected, the combination of rising unemployment and intensified
attempts by the government to cut its budget deficit crushed domestic
demand, which fell 1.2%. The country's export sector cushioned the
contraction somewhat, the bank added.
By contrast, it was the domestic sector that supported Germany's
economy, the Bundesbank reported. Rising wages and employment helped
ensure that construction and services remained buoyant even while the
country's export-sensitive industrial sector was hit by a slowdown in
foreign demand.
Germany's economy, Europe's largest, has so far remained relatively
resilient to the debt crisis that has enveloped its euro-zone peers,
but with Spain and Italy, the euro area's third-largest economy, both
shrinking rapidly this year, it is looking increasingly likely that
Germany, too, will be affected, dependent as it is on the euro zone
for around 40% of its exports.
The Bundesbank warned that the outlook for the next quarters is
"characterized by great uncertainty," pointing to recent indicators
that have reflected falling optimism among German businesses. The
expectations component of the key Ifo business confidence index turned
down already in May and is expected to hit its lowest point in nearly
three years in July's survey, which is due Wednesday.
The gloom is by no means confined to businesses. The European
Commission's July consumer confidence survey, published Monday, fell
to an index level of -21.6 from -19.8 in June, well below its
long-term average of -12.8. That broad-based corrosion of optimism
suggests consumers are unlikely to spend more in coming months, acting
as another drag on broad economic growth.
The scale of the drop suggests that it was spread across the euro
zone, and not just its most troubled members.
"We suspect that the weakening in confidence was pretty widespread in
July," said Howard Archer, an economist at IHS Global Insight. "It may
well have taken a particularly serious hit in Italy and Spain as more
austerity measures and reforms were introduced. Consumer confidence
may also have been hit in...northern countries by concern that the
sovereign debt crisis is, if anything, intensifying."
A wave of gloom has swept Europe since last Friday, when the euro zone
finally agreed on the terms of a 100 billion euro ($121.58 billion)
rescue package for the country's banks, laid low by the explosion of a
real estate bubble. Contrary to market hopes, but wholly in line with
the small print of a summit declaration three weeks ago, the Spanish
government will have to assume liability for the aid, pushing its
ratio of debt to gross domestic product close to 100%.
Recent academic research suggests that any ratio over 90% is
potentially unsustainable. Data released by Eurostat earlier Monday
showed that Spain's ratio is still some way off that, at 72.1% of GDP
in the first quarter--nearly 10 percentage points lower than Germany's
81.6%. The euro zone's aggregate debt ratio now stands at 88.2%, with
Greece's still at more than 132% even after its partial debt
restructuring earlier this year.
But markets have focused instead on current deficit dynamics. While
Germany is set to balance its structural budget three years ahead of
schedule, and balance its budget completely by 2016, the government of
Prime Minister Mariano Rajoy has had to announce EUR65 billion of new
spending cuts and tax increases just to keep the deficit to 6.3% of
GDP this year.
The one "ray of hope," said UniCredit's chief euro-zone economist,
Marco Valli, is that the European Central Bank and the European
Financial Stability Facility, the EU's temporary rescue fund, will
keep markets orderly for long enough for the euro's dramatic fall to
feed through into a boost in exports. This, he argues, would allow the
recession to bottom out towards the end of the year, first in Italy,
and then, somewhat later, in Spain too. The currency has lost 5.3% in
trade-weighted terms since February.
"The depreciation is very, very significant," Valli said. "It should
improve the growth outlook for the euro zone as a whole, but
particularly for those peripheral countries which have a problem with
price competitiveness."
Write to Geoffrey T. Smith at geoffrey.smith@dowjones.com
--Paul Hannon and Alex Brittain in London and Franziska Scheven in
Berlin contributed to this article.
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(END) Dow Jones Newswires
July 23, 2012 12:40 ET (16:40 GMT)
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