Spain recession deepens as austerity weighs

Last Updated: Tue, Aug 28, 2012 09:45 hrs
Woman walks past a banner showing euro sign as part on advertisement for pizza sales outside pizza store in Madrid

Spain's economy shrank further in the second quarter of the year and a slump in domestic spending accelerated, signalling a protracted recession as the country presses on with efforts to slash its public deficit.

Gross domestic product fell by 0.4 percent in the second quarter of the year, according to final data that confirmed a preliminary reading. But on an annual basis it dropped by 1.3 percent, worse than initial estimates of 1.0 percent.

Spain's economy fell back into recession in the first quarter of the year, when output fell 0.3 percent, and government estimates show GDP will probably fall for this year and next year as it pushes through further measures aimed at slashing a bloated deficit.

The data came a day after Spain said its economy performed less well than expected in both of the last two years.

On Tuesday, the National Statistics Institute, INE, also revised down 2011 fourth quarter GDP to -0.5 percent from -0.3 percent.

Close to record high borrowing costs and an economy showing little sign of picking up any time soon is nudging Spain closer to calling for a European bailout, which analysts say is only a matter of time.

"With much more fiscal austerity in the pipeline and unemployment at astronomic highs, the risks are clearly tilted towards a more protracted recession," said Martin van Vliet, economist at ING.

He expected Spain to make a formal request for additional external financing in mid-September or October. Spain has already negotiated up to 100 billion euros in aid for its ailing banks.

Tuesday's data showed exports provided a degree of support for the economy, growing by 3.3 percent year-on-year in the second quarter. That compared with a fall of 3.9 percent in national demand, after a revised fall of 3.2 percent in the first quarter.

Spain's government is hoping that exports will put the economy on the road to recovery. But a slowdown in the wider euro zone, where most of the country's goods are shipped, could test that theory.

The country desperately needs to stimulate growth to help it meet the public deficit targets agreed with the European Union.

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