Spain Set For Deeper Slump As Retail Sales Drop

Retail sales drop at fastest pace in more than eight years -- Jan-April budget deficit at 2.4% of GDP due to one-offs -- Central bank warns of second quarter economic contraction -- Ratings agency Egan-Jones cuts Spain to B From BB- MADRID -- Spain's economy showed fresh strain Tuesday as retail sales fell at a record pace in April, showing the government's austerity program is strangling consumption and suggesting deepening recession. Data Tuesday from the National Statistics Institute, or INE, showed seasonally-adjusted retail sales fell 9.8% on the year in April, compared with a 3.8% drop in March. The decline was the sharpest since INE started collecting the data in January 2004. Household spending is dropping as unemployment approaches 25% of the workforce. Spain is in recession, seen by most economists as two consecutive quarters of contraction. The Bank of Spain said in its monthly economic report Tuesday that data point to a second-quarter fall in gross domestic product. The government is caught between the floundering economy and European Union requirements to cut the deficit to 3% of GDP by 2013. State spending had been the one cushion since a property bust in 2008 and drove a brief, temporary recovery up to the fourth quarter. Spanish second-quarter GDP will fall at a "markedly sharper rate" of between 0.7% and 0.9% after declining by 0.3% in the first quarter from the fourth, said Raj Badiani, an analyst at IHS Global Insight. Concerns over Spain's economy and the government's ability to repay debt pushed the yield on the 10-year government bond to as high as 6.49% today. There is speculation the country may follow Portugal, Ireland and Greece to a bail out by international lenders, though it could potentially be covered by existing rescue funds and the International Monetary Fund, said analysts at Societe Generale. There are "worrying signs that European countries are, one by one, crumbling," they wrote in emailed comments. Spanish consumers spent 20% less on personal equipment such as clothes and cosmetic goods in April compared with the same month last year. The four-month fall was 8%, INE said. Spending on household goods such as furniture and washing machines fell an annual 15% and by over 10% in the first four months, INE said. Spain said the central government budget deficit was EUR25.5 billion--or 2.4% of gross domestic product--between January and April, up from 1.9% of GDP in January-March. The increase is due to fund transfers to cash-strapped regional governments and other payments made earlier than usual to give liquidity to the credit-starved economy. That means lower-than-usual transfers later this year and make it easier for the government to bring the budget deficit down to a targeted 5.3% of GDP in 2012 from 8.9% in 2011, Deputy Budget Minister Marta Fernandez Curras said. Less consumer spending cuts into state funds and value-added tax revenue decreased 8.2% in the first four months of the year, compared with the same period of a year ago. Spain has already raised VAT to a main 18% rate; slightly below that of many European countries. Fernandez Curras said the government is not looking to raise that rate as another hike may only depress consumption further. Between January and April, Spain's central government revenue rose by 1.3%, while expenses soared 10.3%, largely the result of the accelerated transfers and higher debt interest payments. The central bank said Tuesday that exports, a chief economic support, decreased 2.3% on an annual basis in March. Ratings firm Egan-Jones cut Spanish sovereign debt to BB- from B today. It was the third downgrade in a month and pushed the country further into junk status. In its cut, Egan-Jones said Spain continues to be weakened by government debt and the shrinking economy. Unemployment is also concerning, it said. Additional bank losses and possible depositor withdrawals from the banking system add to the country's already weak fiscal position, it added. "Spain will inevitably be faced with payments to support a portion its banking sector and for its weaker provinces. Assets of Spain's largest two banks exceed its GDP," wrote Egan-Jones. "We are slipping our rating to "B'; watch for more requests for support from the banks and money creation." Following the decision from Egan-Jones, the euro dipped below $1.25 to touch $1.2470--its lowest level since July 1.

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