Further Marked Reduction in Spanish Services Activity

Michelle Remo, “Big 4″ observer
September 09, 2012 /

The Spanish service sector remained stuck in contraction in August, with activity, new business and employment all falling sharply over the month. However, slower reductions in output and new orders were recorded. Higher fuel costs led to a sharper rise in input prices, but weak client demand meant that companies continued to lower their prices charged. Meanwhile, business sentiment remained historically weak.

The headline seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – stayed well below the 50.0 nochange mark in August, posting 44.0, up from 43.7 in July.

Andrew Harker, economist at Markit and author of the report said: “The summer months have so far provided no
respite for the Spanish service sector, and August data showed the current downturn continuing along much the same path as has been seen throughout 2012 so far. Sentiment among companies remains weak, with a number of respondents worried about the effects that the upcoming rise in VAT will have on already falling demand in the sector.”

Although the rate of contraction slowed to the weakest since March, the fourteenth successive reduction in activity was still sharp. Respondents highlighted market uncertainty and falling new business as the main factors leading to the drop in activity.

New business at Spanish services companies decreased again in August, and at a marked pace. Panellists mentioned that clients were reluctant to commit to new projects given the economic crisis in Spain. All six monitored sectors posted falling new orders, with the sharpest fall in Renting & Business Activities.

As has been the case in each month since October 2007, backlogs of work decreased. Although the pace of depletion slowed, it was still marked. Anecdotal evidence suggested that the fall in outstanding business reflected declining new work.

Employment fell again in August, extending the current sequence of monthly job cuts to four-and-ahalf years. Some respondents pointed to the nonreplacement of leavers and the non-extension of contracts.

Input costs rose for the fifth time in the past six months, and at the fastest pace since July 2011 as a number of respondents signalled an increase in fuel costs. That said, the rate of inflation remained weaker than the series average.

In contrast to the trend for input costs, Spanish service providers lowered their output prices again in August. Charges have now decreased in each of the past 49 months. Moreover, the rate of decline remained substantial. Where output prices fell, this was mainly linked to weak client demand and strong competition.

Although the level of sentiment among companies improved from the negativity seen in July, it remained weak compared with the series average. While some panellists expect economic conditions to improve over the coming year, a number forecast the crisis to extend well into 2013.


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