'Bleak' outlook for the Spanish economy

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. "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 one 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.

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 per cent in July from the same time last year, the third consecutive monthly drop in sales of over 20 per cent, according to Spanish automobile manufacturers' association ANFAC figures.

Retail sales fell 7.9 per cent 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, said. The number of registered unemployed in Spain rose by 1.5 per cent in July from the previous month to a 10-year high of 2.43 million, with nearly 66 per cent of layoffs taking place in the construction sector.