Spanish third quarter GDP figures tomorrow are likely to confirm the Bank of Spain’s prediction that the euro zone’s fourth largest economy has finally put nine quarters of contraction behind it, albeit with growth of just 0.1 percent.
Today, we get some appetizers that show just how far an economy with unemployment in excess of 25 percent has to go. Spanish retail sales, just out, have fallen every month for 39 months after posting a 2.2 percent year-on-year fall in September, showing domestic demand remains deeply depressed. All the progress so far has come on the export side of the balance sheet.
Spain’s public deficit figures, not including local governments and town halls, are also on the block. The deficit was 4.52 percent of GDP in the year to July and the government, which is aiming for a 6.5 percent year-end target, says it is on track.
Spanish borrowing costs have been falling and outperforming those of Italy but yesterday, Italian two-year yields hit a five-month low at an auction of zero coupon bonds, so there is no sign of debt-raising problems there either despite all the country’s economic and political troubles. Today, Rome is back with up to 8 billion euros of Treasury bills. On Thursday, it will auction up to 6 billion euros of five- and 10-year bonds.
It would be a mistake to take that as a sign of smooth running. After Silvio Berlusconi’s failure to pull down the government, Prime Minister Enrico Letta has some time to push through economic reforms, cut taxes and spending in an effort to galvanize activity. But already the politics look difficult.