As announced by the Bank of Spain a week ago, Spanish GDP growth was 0.0% in Q3, after 0.2% in Q2. Relative to a year ago, GDP was 0.8% higher in Q3 2011. Data on the GDP components have not been released. We expect a negative contribution from domestic demand, balanced by a positive contribution in foreign demand.

Going forward, we forecast the Spanish economy to fall into recession, with GDP decreasing until Q2 2012 (-0.5% QoQ in Q4, -0.6% QoQ in Q1 2012 and -0.3% QoQ in Q2 2012) and to start recovering only in the second half of next year. The factors behind our call for a recession in Spain are (1) the decline in trade and global growth in 2012, given that, so far, the recovery in Spain was sustained by the export sector; (2) the worsening of the Euro area sovereign crisis and its effect on confidence; (3) the direct negative effect that the crisis has on Spain via the potential need for further fiscal adjustment measures and (4) via the reduction in banks' lending, due to the need of banks to deleverage.

On the positive side, should our call of the key ECB policy rate materialize (we expect the ECB to cut the main interest rate to 0.5% by Q1 of 2012), Spanish households will benefit via the reduction in their mortgage bills, given that a large fraction of mortgages are variable rate ones. Also, elections will be held on 20-Nov: a new government committed to a strong and credible reform agenda could help improving the fundamentals of the Spanish economy.



source: Bank of America ML