Spanish retail sales end long slump, but hard road ahead

Reuters

* Retail sales rise year on year for first time since June2010

* September figure boosted by year-earlier sales tax hike

* Data encouraging, but no change in trend yet, sayseconomist

* Budget deficit to August on track for 2013 target -government

By Paul Day

MADRID, Oct 29 (Reuters) - Spanish retail sales rose for thefirst time since June 2010 in September and the government saidthis year's budget was on track, offering glimmers of hope for along-depressed economy as the country exits a two-yearrecession.

The 2.2 percent annual growth in sales was flattered by arise in value added tax in September 2012, which had hitconsumer spending hard in that month, and on a monthly basisretail activity fell again last month.

But the data nevertheless marked the first year-on-year riseafter 38 consecutive falls, suggesting the stirrings of arecovery in domestic demand to go with the established growth inexports that is pulling the economy out of its slump.

"We've not seen a rise in retail sales for many years," saidJose Luis Martinez, economist at Citi in Madrid. "It's a goodfigure, but we need to wait a couple of months before drawingany conclusions."

After nine quarters of contraction, Spain emerged fromrecession in the three months to September, according to a Bankof Spain forecast of 0.1 percent growth that statisticsinstitute INE is expected to confirm on Wednesday.

The recovery has been hampered by successive waves ofausterity from a government intent on cutting state debt and thefiscal deficit, and a chronically high unemployment rate thathas left more than one in four workers out of a job.

That, along with banks' reluctance to lend in the aftermathof a real estate crash, has crippled domestic demand, and INEsaid retail sales fell 2.5 percent in September from August,when they dropped a revised 4.8 percent year on year.

CLOSING THE BUDGET GAP

Since its property bubble burst in 2008, Spain has struggledto persuade wary investors it can control its finances, with thegovernment nursing one of the largest budget shortfalls in theeuro zone.

While further dampening already dire domestic demand, a slewof unpopular spending cuts and tax hikes helped Spain reduce itsdeficit to August, according to Treasury Ministry figures onTuesday.

The public deficit in the first eight months of the year,excluding local authority budgets, reached 4.8 percent ofeconomic output.

Treasury Secretary Marta Fernandez Curras said that left thegovernment on track to hit the year-end target of 6.5 percent. "Once more, disciplined spending means we will meet the deficittarget, which is also part of the economic recovery," she said.

In an attempt to boost consumption, the government has thisyear eased off on austerity measures, and it has promised taxcuts in 2015, an election year.

But the European Commission in Brussels is pushing Madrid toshave another around 35 billion euros from the deficit by 2016and many economists and business leaders are concerned the slumpwill continue to be felt by the general population regardless ofheadline figures.

Amando Sanchez Falcon, executive corporate manager of theworld's third biggest discount supermarket Dia, said hedid not anticipate a big increase in retail sales in comingquarters.

"The market is really tough and flattish... not to saynegative in terms of food consumption," he said on Monday afterthe group reported a rise in adjusted net profit in the thirdquarter.

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