2010.08.2707:00:00UTC+00Spanish Retail Sales Slump On VAT Rise

Spanish retail sales dropped sharply in July as the govenment's VAT hike came into effect in July, official data showed on Friday.

Statistical office INE said retail sales fell 2.2% compared to a year ago, reversing the 0.9% increase in June. On a calendar adjusted basis, sales were down an even faster 2.4%.

The fall in retail sales coincides with the July 1 rise in the VAT rate to 18% from 16%. The government rose the sales tax to cut its large budget deficit and bring it under Maastricht limits.

INE said retail sales excluding those at service stations fell 1.9%. A 1.6% rise in food sales was offset by a 4.2% decline in non-food sales. Sales at service stations were down 0.9%.

Retail sales fell in all regions excepting Galicia in the North-West, where it rose 0.4%. The biggest declines were recorded in Andalusia, the Balearic Islands and La Rioja.

On Thursday, INE said the Spanish economy grew 0.2% between April and June, with growth driven by exports and consumer spending. Gross domestic product had increased 0.1% in the first three months of the year.

Spanish household consumption grew 2% in the June quarter, the first rise after seven quarterly falls. But analysts said the rise was mainly brought about by temporary factors such as the final days of the government's car scrappage scheme and consumers bringing forward purchases to avoid the VAT hike.

Spanish Prime Minister Jose Luis Rodriguez Zapatero announced steep budget cuts aimed at bringing down the country's large budget deficit, after pressure from the European Union. Measures include public sector wage cuts and smaller budget allocations for regional governments. Spain currently has a deficit of 11.2% of GDP, which it has pledged to bring under 3% by 2013.

Many analysts expect the government's harsh austerity regime to drag the economy into another recession in the second half of the year, albeit a milder one than the six-quarter recession it exited in the first quarter.

The government's spending cuts have been met with stiff resistance from Spaniards, with numerous demonstrations and strikes staged by public sector workers. The Iberian nation has the highest unemployment rate in the euro area at 20.1%, with nearly half of under 25s without a job.

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