MADRID WEEKLY ECONOMIC UPDATE -- AUGUST 25-29

UNCLAS SECTION 01 OF 02 MADRID 000943

SIPDIS

STATE FOR EUR/WE AND EEB/IFD/OMA
TREASURY FOR OIA/OEE/W.LINDQUIST

E.O. 12958: N/A
TAGS: ECON EFIN EIND EINV ENRG PGOV SENV SP
SUBJECT: MADRID WEEKLY ECONOMIC UPDATE -- AUGUST 25-29

REF: MADRID 921

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Contents:

ECON: Consumer Spending Slumps
ECON: Budget Deficit Growing Rapidly
ECON/EFIN: Inflation Indicators Mixed - Industrial Up in
July, Consumer Down in August
EIND: GM to Reduce Production
PGOV: Solbes Stands Firm on GOS Regional Financing Plan
ENRG: Regulator to Meet with Industry after Nuclear Plant Fire
EINV/SENV: Acciona to Build Largest U.S. Desalination Plant
in California


Consumer Spending Slumps


1. (U) The economy's deceleration continues to be reflected
in slowing consumer spending. Household spending, which
drives two-thirds of the economy, appeared to continue its
drop in the summer sales season according to reports from
retailers and business associations. Aggressive pricing
during Spain,s traditional summer sales was not successful
in turning consumption around. While consumers bought more
items during the season, overall they spent less money than
the year before. Auto sales in the year through July
decreased by 19 percent and are expected to reach a
year-on-year drop of up to 40 percent in August according to
auto association ANFAC. Comment: Analysts are not surprised
by decreased consumer spending in areas related to the ailing
housing market. However the extent of slowing spending in
other areas such as textiles has surprised some. Consumer
confidence has been rattled by the economic "crisis," a word
which has become commonplace in Spanish homes. (El Pais,
Expansion, Reuters, 8/27)

Budget Deficit Growing Rapidly


2. (U) The GOS budget deficit for the year through July
reached 0.89% of GDP. Through May, the GOS was slightly in
surplus. Since then, increased spending -- in part due to
GOS stimulus measures -- and lower revenues have created a
deficit for the first time since June of 2005. While some of
the increase in June and July was the result of the first
half of the 400-euro tax rebate, analysts expect that as
activity slows and unemployment rises, the deficit will
continue to grow. (Presidency press release, 8/27;
Expansion, 8/28)

Inflation Indicators Mixed - Industrial Up in July, Consumer
Down in August


3. (U) The National Statistics Office's preliminary consumer
price inflation indicator showed August prices 4.9% above
their August 2007 level. The drop from July's 5.3%
year-on-year rate was largely due to lower oil prices, but
some analysts believe the rate is likely to gradually decline
during the remainder of the year. In July, industrial prices
reached 10.2 percent above their July 2007 level, a rate of
increase not seen since 1984. (El Pais, 8/26 and 8/29; La
Vanguardia, 8/26)

GM To Reduce Production


4. (U) GM Spain has advised its workers that it will cut back
on production this year in its Figueruelas plant due to
slowing auto sales. For now, the company intends to cut back
on worker hours, thereby foregoing production of 12,000
vehicles. GM is the first car manufacturer in Spain to
announce a production cut. GM employs over 7,000 in plants
in Figueruelas and Barcelona. Comment: GM had announced
layoffs earlier in the year, but a union leader speculated
that all the layoffs might not take place given the expense
of severance packages. Spain is the world,s eighth largest
auto manufacturer. (All media, 8/28)

Solbes Stands Firm on GOS Regional Financing Plan


5. (U) Second Vice President and Minister of Economy and
Finance Pedro Solbes, in parliament on August 28, defended
the national government,s original financing proposal to
Spain,s autonomous regions, which has been roundly rejected
as insufficient by the Catalan parties in the national
parliament and the Socialist-led tripartite Catalan regional
government. Solbes called the July proposal a good starting
point for discussions and the only viable alternative for

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funding equality of fundamental public services in all of
Spain,s regions. He also stated that his Economy Ministry
would continue working with the regions to come to an
agreement beneficial to all, but he warned that if a
compromise cannot be reached, the GOS would impose its
financing model. (All media, 8/29)

Regulator to Meet with Industry after Nuclear Plant Fire


6. (U) A nuclear power plant near Tarragona will remain
closed for several weeks while investigators determine the
cause of an electrical fire in one of its generators on
August 24. Spain,s nuclear regulator CSN reports that the
fire was located outside the Vandellos II plant,s
radioactive perimeter and was extinguished less than two
hours after being discovered. Subsequent media reports have
indicated that the fire may have been caused by a problem
that the operator had known about for several months. The
plant,s operator ANAV, a joint operating company owned by
Iberdrola and Endesa, is already under heavy scrutiny for
recent mishaps at its Asco I and II plants. The day after
the fire, CSN announced that it will conduct a meeting with
nuclear plant operators and industry representatives to
analyze recent problems in Spain,s nuclear plants and review
operating action plans. Environmental groups are calling on
CSN to revoke ANAV,s operating licenses. (Various media)

Acciona to Build Largest U.S. Desalination Plant in California


7. (U) Acciona Agua, a division of construction and
renewable energy company Acciona, has received approval from
the state of California to construct the biggest desalination
plant in the U.S. in Carlsbad, California. When completed in
2011, the $300 million plant will provide 204,000 cubic
meters of water a day -- enough to supply 110,000 homes.
Acciona already operates the U.S., largest desalination
plant in Tampa, Florida with daily capacity of 108,000 cubic
meters. Acciona has built over 70 desalination plants
worldwide that provide water for 50 million people. (Cinco
Dias, 8/26; Reuters, 8/26; Company news release, 8/26)
Aguirre