Banks warn of traumatic downturn as construction sector continues to decline at a rate faster than predicted

In its latest report on the economy, the Spanish savings banks’ association FUNCAS warns that the Spanish property market downturn might turn out to be “more traumatic than envisaged at the start of 2007.”

The report suggests that construction sector output is falling twice as fast as the 10% - 15% falls expected in a ‘soft landing’ scenario.

Despite evidence of a more severe correction than (they) expected, the report tries to find the silver lining. “Demand will return, albeit with less impetus than at the top of the cycle. Regardless of the level at which demand settles, it is likely to be more mature and exacting than in the past.”

Note that any report on the property market from Spain’s savings banks has a vested interest in downplaying the severity of the housing market situation. Savings banks are heavily exposed to the property market, and can’t afford to tell it like it is.

The report also argues that Spanish economic growth will fall to 2.6% in 2008, leading to an increase in unemployment. For what it’s worth I think Spanish GDP growth will be negative in 2008, with a massive surge in unemployment, especially amongst immigrants.