Spain flirting with deflation as prices decline

Worries that Spain’s economy might be entering a period of deflation have arisen after the release of the latest tranche of figures from the National Institute of Statistics (NIS) showing that prices in the euro zone’s fourth-largest economy fell by 0.5 per cent on the year in August, the biggest percentage decline since the country experienced a dip in prices in October last year.

Spain emerged from more than two years of recession last year, and data released by NIS showed it had one of the euro zone’s fastest rates of gross domestic product growth – 0.6 per cent between March and June, and 1.2 per cent over a 12-month period.

Growth in the economy was boosted by domestic consumption, which grew by 2.4 per cent on the year in the second quarter, the NIS said. Investment in machinery also increased, hopefully evidence that confidence in the manufacturing industry and tertiary services is rebounding from the crises.

Exports, one of the few bright spots during Spain’s recession, grew at a slower pace than imports for a second consecutive quarter, the data showed. The effect of the recent Russian embargo on EU and Spanish exports will be available from the NIS once all data is collated for the next quarterly report.

Economists are worried that falling product prices and salaries in Spain will limit growth prospects by making it more expensive for debtors to pay back loans.

The NIS said the drop in Spain’s consumer prices was mostly a result of falling fuel prices.