Spanish unemployment rises to 21% as inflation accelerates. Europe and U.S. watch warily.

Verne Strickland Blogmaster

SPANISH UNEMPLOYMENT AND INFLATION GO CRAZY.
WE CAN DEDUCE FOUR THINGS FROM THIS NEWS:

1. WE DON'T WANT TO GO THAT ROUTE.
2. WE ARE ARE HEADED THAT WAY AND BETTER WISE UP.
3. PROBLEM WON'T AFFECT SPANISH BULLFIGHTERS. OR BULLS.
3. CONQUISTADORS WILL NOT FIND WORK IN THE NEW WORLD. 

By Emma Ross-Thomas

April 29 (Bloomberg) -- Spanish unemployment, the highest in Europe, rose more than expected as inflation accelerated and retail sales plunged, undermining the nation’s recovery from its worst recession in six decades.

Joblessness rose to 21.3 percent in the first quarter, the National Statistics Institute said today in Madrid, compared with 20.3 percent in the previous three months and a median forecast of 20.7 percent in a Bloomberg News survey.

Consumer prices gained 3.5 percent in April from a year earlier, based on a European Union measure, after increasing 3.3 percent in March. Retail sales fell 8.6 percent in March from a year earlier, the steepest decline in two years, INE said.

Spain is trying to steer the economy back to growth while slashing the euro region’s third-largest budget deficit with the deepest austerity measures in at least three decades. Rising interest rates and oil prices prompted the government to revise its growth and unemployment forecasts on April 6, even as it still sees growth of 1.3 percent this year, led by exports.

“In the current scenario, with rising interest rates, I’m not at all sure this is the peak” in unemployment, said Jose Luis Martinez, a strategist for Spain at Citigroup in Madrid. “The decline in employment, rising interest rates, and rising prices leave little margin for consumption to be reactivated.”

‘Hard to Predict’

Deputy Finance Minister Jose Manuel Campa said the first quarter is traditionally weak for employment, and the data should start to improve. Asked if the jobless rate had peaked, he told reporters in Madrid it’s “hard to predict the future.” Asked the same question later in Madrid, Deputy Prime Minister Alfredo Perez Rubalcaba said the rate had peaked in what he called a “risky” prediction.

Spain has 4.9 million jobless, the survey showed today, the most since the data series started in 1996. That compares with 3 million in Germany, a country twice its size.

As companies adjust to forecasts of slower growth in Spain after a decade-long boom, Telefonica SA, the country’s largest telecoms operator, said on April 14 it plans to cut its workforce in its home market by 20 percent over the next three years.

London-based Burberry Group Plc closed a warehouse in Spain last year, while Diageo Plc cited “economic weakness” in February of this year when it said its Spanish whisky and vodka sales declined in the last six months of 2010.

Austerity Measures

Spain’s recovery from the collapse of the debt-fueled property bubble is being undermined by spending cuts and tax increases as the government aims to narrow the budget deficit to 6 percent of gross domestic product this year -- in line with France’s projected shortfall -- from 9.2 percent in 2010.

The government expects the jobless rate to average 19.8 percent this year, the Finance Ministry said on April 6, compared with a previous forecast of 19.3 percent. The economy will expand 1.3 percent in 2011 after two years of contraction, with growth accelerating to 2.3 percent next year and 2.4 percent in 2013, it said.

“The market consensus is around 0.7 percent” for 2011 growth, said Martinez, adding that the government should revise its forecast “as there have been a lot of negative factors.” He said he sees a jobless rate of 21 percent this year.

The European Central Bank increased its benchmark interest rate on April 7 for the first time in almost three years and policy makers have signaled more increases may follow. That risks further crimping household spending in Spain, where 97 percent of mortgages have variable interest rates.

Price Pressures

The ECB is trying to stem inflation, which accelerated to 2.8 percent in the euro region in April, from 2.6 percent in March, a separate report said today. The inflation rate in Spain, Portugal and Greece, which are all struggling to rein in growing debt burdens and spur growth, is higher than the euro- region average.

As part of plans to raise tax revenue, the government passed measures today to press employers to legalize underground jobs. The plan increases fines on companies that don’t register workers with tax authorities and on people claiming jobless benefits while working informally.

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To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net