Spanish economy shrinks by 0.3 percent in the third quarter

The Spanish economy contracted for the fifth quarter in a row in the period July-September but by slightly less than expected as this summer’s value-added tax hike continued to push inflation higher in October.

According to a flash estimate released Tuesday by the National Statistics Institute (INE), GDP in the third quarter shrank by 0.3 percent from the previous three months. Both the Bank of Spain and the Economy Ministry had predicted a contraction of 0.4 percent, equal to the magnitude of the decline in output in the second quarter.

Labor Minister Fátima Báñez said Monday that the Spanish economy was “emerging from the crisis,” although she produced no data to confirm this impression. The government is still debating whether to seek a bailout from the European Stability Mechanism. This would trigger purchases of sovereign debt by the European Central Bank with a view to lowering the country’s borrowing costs. Prime Minister Mariano Rajoy said Monday he believes a bailout is not “essential” at the moment.

On an annual basis, the fall in activity accelerated to 1.6 percent from 1.3 percent. In the period January-September, GDP shrank 1.2 percent, in line with the government’s prediction of a contraction of 1.5 percent for the full year.

With inflation as it stands, the government will be legally obliged to compensate pensioners

The INE said the situation in the period July-September followed the trend of previous quarters, with a fall in domestic demand as a result of the government’s austerity drive only partly offset by a positive contribution from the export sector. The institute is due to release a breakdown of the GDP figures on November 15.

Spain’s jobless rate hit 25 percent in the third quarter for the first time on record, with over 5.7 million people looking for work. The figure is expected to rise yet further, with the economy expected to remain in recession next year. The government forecasts a contraction of 0.5 percent in output in 2013, but few experts share that outlook, with many predicting a fall in GDP of around triple that amount.

Meanwhile, the INE’s initial estimate for inflation in October is 3.5 percent, up from 3.4 percent in September when growth in consumer prices accelerated due to an increase in the standard VAT rate from 18 to 21 percent. The reduced rate was raised to 10 percent from eight.

If inflation remains at current levels next month, the government will be legally obliged to compensate holders of state pensions for a loss of purchasing power because of the deviation from the target rate for the year of 1.0 percent. This would involve finding an additional five billion euros at a time when the government is already struggling to reach its deficit-reduction targets.