Spending cuts and reeling banks send Spain into recession
Spain sank into recession in the first quarter and economists said spending cuts aimed at meeting strict EU deficit limits, together with a reeling bank sector, would delay any return to growth until late this year or beyond.
It is the second recession in just over two years for the eurozone's fourth largest economy and comes as the government tries to convince investors it will not need outside aid to put its house in order.
The country is caught between pressure from its European peers to fix public finances and growing domestic resistance to austerity measures that have helped push unemployment to more than double the EU average.
Ratings agency Standard & Poor's added to the country's problems with a two-notch rating downgrade last week and yesterday it chopped the credit score of 11 banks.
While the 0.3pc contraction from January to March from the previous quarter was slightly better than the forecast drop of 0.4pc, it confirmed the economy is deteriorating.
"The wheels are very clearly coming off," Jefferies economist David Owen said. "It wouldn't surprise me to see a very significant decline in GDP both in the second and third quarters this year."
Spain was last in recession, defined by two consecutive quarters of contraction, at the end of 2009.
The government's latest economic plan, published on Friday before it was sent to the European Commission for approval, forecast a contraction of 1.7pc in 2012 turning to meagre 0.2pc growth by next year.
Spain's demand for electricity, a good indicator of the strength of economic output, fell for the eighth month in a row in April, the national grid operator said.
Spanish bonds showed little reaction to the GDP report but yields have risen to around 6pc in recent weeks. At around 7pc, they are seen as financially unsustainable.
The IBEX share index finished April down 12.7pc, its worst monthly showing in nearly one to one-and-a-half years.
The S&P downgrades of both Spain and its banks put the country's fragile financial sector back into the spotlight, while an unemployment rate nearing 25pc will remain a drag on already tight public accounts.
"Did you need any more reasons to short Spanish debt," the 4Cast consultancy said in a research note yesterday.
The banks were damaged by a real-estate collapse that began in 2008 and now bad loans in other sectors of the economy have risen sharply.
With virtually no access to wholesale-funding markets, the banks have taken on a large amount of cheap ECB money and bought domestic debt, helping the Treasury to fulfil half of its gross issuance already this year, an achievement that gives Madrid some room for manoeuvre.
Meanwhile, European inflation slowed in April as energy costs increased at a weaker pace than a year ago.
The inflation rate in the 17-nation euro area fell to 2.6pc from 2.7pc in March, the EU statistics office said yesterday.