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Euro Consolidates Following 2nd Straight Spanish Economic Contraction

Euro Consolidates Following 2nd Straight Spanish Economic Contraction

Benjamin Spier, Technical Strategist

THE TAKEAWAY: Spanish GDP drops 0.3% for Q1 2012, as expected -> Severe austerity measures set for 2013 -> Euro consolidates above yearly low

The Spanish economy declined for the second straight quarter, as gross domestic product for Q1 2012 came in at -0.3% compared to the previous quarter, meeting analysts’ expectations. The GDP for the first quarter was also down 0.4% when compared to the first quarter of 2011, according to the National Statistics Institute.

The continued economic slump comes amidst harsh austerity measures, as Spain sets a goal of cutting its budget deficit target for 2012 to 5.3% of its GDP, and to 3% of its GDP in 2013. The current austerity measures are the deepest in decades, but Prime Minister Mariano Rajoy fears a lack of market confidence to lend to Spain if the country doesn’t severely cut its spending.

As Spain struggles to contain its lending confidence, its benchmark 10-year bond yields have risen to 6.3% compared to only a 5% yield as early as March.

Construction and real estate were two sectors that experienced heavy slowdown. Construction dropped by 3.1%, compared to the previous quarter’s 1.1% loss. Real estate slowed by 2.5% compared to a previous gain of 0.8%. Household spending also dropped 0.6% when compared to a year earlier.

Euro_Consolidates_Following_2nd_Straight_Spanish_Economic_Contraction_body_eurusd.png, Euro Consolidates Following 2nd Straight Spanish Economic Contraction

EUR/USD dropped following the GDP release, but the move could be seen more as a consolidation above the 1.2625 2012 lows, and less of a reaction to the expected economic contraction.

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