Spain's prime minister called an emergency cabinet meeting on Wednesday to tackle a deepening economic crisis after data showed soaring inflation and debt defaults were pushing Spain towards recession.
Jose Luis Rodriguez Zapatero interrupted his holidays and gathered ministers to accelerate plans to eliminate taxes, reform an uncompetitive service sector and cut red tape so as to head off Spain's first economic contraction since 1993. Surging fuel costs sent Spain's year-on-year inflation to 5.3 percent in July, its highest level since the series began in 1993, according to data published on Wednesday.
"The idea is to improve our economic growth potential, in the medium- and long-term, given the delicate situation we are going through," Economy Secretary David Vegara told reporters of the meeting which starts at 1500 GMT.
Opinion poll ratings for Zapatero fell to their lowest ever level after Spanish unemployment rose to the highest rate in the European Union in the second quarter and house sales collapsed during an economic crisis he long said would never happen. Most worrying to analysts was underlying inflation, discounting energy and fresh food components, which rose to a record 5.3 percent, in a sign high production costs are feeding into consumer prices and could push inflation higher.
"Spain, one of the euro zone's biggest underperformers on growth, is proving unable to curb inflation at source," said Jose Garcia Zarate at the 4Cast consultancy in London. The global credit crunch burst Spanish housing and debt bubbles this year and could end 14-straight years of economic expansion built on rapid growth in construction, consumer spending, cheap euro zone credit and low skilled jobs.
Spanish growth fell to zero in the second quarter, according to a Reuters poll on data due out at 0700 GMT on Thursday. Vegara said inflation had peaked in July and saw no risk of recession. He expected lower oil prices to cut inflation to around 4 percent by year end and below 3 percent in 2009.
"With the information we have available to us, we don't see GDP contracting, he told reporters. Economy Minister Pedro Solbes says Spain's downturn should trough in late 2008 or early next year before the economy rebounds in the second half of 2009.
Some analysts fear a 2009 recession followed by up to 5 years of economic stagnation as Spain retools its economy. Spain did little to diversify out of construction during its boom years and the sector now drives 18 percent of growth, or twice the euro zone average.
That has left Zapatero scrambling to find economic substitutes after debt defaults soared 172 percent in the second quarter, quarter-on-quarter house prices fell for the first time in a decade and unpaid bills rose 118 percent in June.
He launched a 10 billion euro package of tax rebates and low-cost credit to revive consumer spending. On top of these measures, Wednesday's emergency meeting aims to speed up Congressional approval of previously announced plans to eliminate inheritance tax and offer VAT rebates.
The meeting will set a timetable to implement cuts in government red tape and elimination of certain business charges as well as plans to reform Spain's service sector which is renowned for its high costs and weak productivity. "We need to improve a sector that drives two thirds of our economy, provides two thirds of jobs and explains nearly 70 percent of our inflation gap with the euro zone," Vegara said. Spain's financial system has so far weathered the economic crisis, thanks to high reserve levels and zero exposure to the US subprime crisis.