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Spain Returns To Recession In Q1

Spain Returns To Recession In Q1
4/23/2012 6:43 AM ET

The Spanish economy slipped back into recession in the first quarter of 2012, fueling concerns that the country may fail to meet the deficit targets, which may force the government to seek an international bailout.

Bank of Spain said that based on the as-yet incomplete information available, gross domestic product shrank 0.4 percent quarter-on-quarter. This followed a 0.3 percent fall in the fourth quarter, which was the first decline in activity since the final three months of 2009.

A technical recession is commonly defined as two consecutive quarters of economic contraction.

Domestic demand fell once again as has been the case over the past four years, although the decline was milder than in the preceding quarter, the central bank said. This deducted 0.9 percentage point from the overall output.

The contribution of net external demand was positive, adding 0.6 percentage point, but lower than that in the previous three months.

Annually, GDP fell 0.5 percent in the March quarter, marking the first fall in eight consecutive quarters. In the fourth quarter, GDP rose 0.3 percent. The government expects the economy to shrink 1.7 percent this year.

Developments in the Spanish economy over the coming quarters will be subject to uncertainty and to downside risks associated with the possible ups and downs of the sovereign debt crisis, the central bank said in the report.

Currently, Spain is grappling with high borrowing costs amid declining economic activity, which in turn, makes the deficit goals difficult to achieve. Also, the country has the highest jobless rate in the EU, with almost one in four people out of work.

On March 2, Spanish Prime Minister Mariano Rajoy said the country's budget deficit would be 5.8 percent of GDP in 2012, higher than its agreed target of 4.4 percent. After, consultations with the EU, Rajoy agreed to set the target at 5.3 percent of GDP.

Fears about Spain's ability to meet the budget goal sent another round of shock wave across the markets and the country's 10-year borrowing costs surged to over 6 percent last week, close to levels widely seen as unsustainable. After falling back moderately last week, the yields on Spain's 10-year bonds rose again on Monday.

According to the central bank report, household spending fell 0.4 percent quarter-on-quarter largely due to the worsening labor market situation as well as lower disposable income owing to higher personal income tax rates.

The priority should be to dispel the doubts over the Spanish economy's adjustment capacity by concluding the clean-up, restructuring and recapitalisation of the banking system, and by strict compliance with the budgetary targets for 2012, Bank of Spain said.

by RTT Staff Writer

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