The Spanish economy sunk deeper into recession in the second quarter, the Bank of Spain said, while bailout concerns pushed the country's borrowing costs to euro-era highs.
In its quarterly estimates released on Monday, the Bank of Spain said the economy would have contracted 0.4 percent sequentially in the second quarter.
This was sharper than the 0.3 percent contraction reported in the first quarter of 2012 as well as in the final three months of 2011.
Spain's borrowing costs continued to remain above the danger threshold of 7 percent despite the Eurogroup's approval of the EUR 100 billion bailout for its banks Friday.
Adding to Spain's woes, the 10-year yield climbed to a euro-era high of around 7.57 percent on Monday after media reports said Murcia could emerge the second Spanish region to seek government aid after Valencia.
Speculation is rife in the Spanish media that six regions out of the 17 are likely to seek financial assistance from the government.
Thus far, Spain has sought aid only to prop up its troubled banking system. The latest string of negative news has fueled concerns that the country may be forced to seek an international bailout for its entire economy.
Demand declined 1.2 percent quarter-on-quarter during the period against 0.5 percent fall in the previous three months. This was due to a sharper fall in household spending and general government demand.
Net external demand continued to soften the adverse impact of the decline in national demand, adding 0.8 percentage points to GDP due to a moderate pick-up in exports.
In year-on-year terms, the gross domestic product declined 1 percent following 0.4 percent fall in the first quarter.
"Various differing factors have contributed to compounding the sovereign debt crisis, including the doubts over the Spanish economy, and in particular over the recapitalisation needs for its financial system and its ability to see through the fiscal consolidation process along the lines agreed at the European level," the central bank said in the report.
Last week, the Spanish government cut its economic forecast and sees the recession extending into next year. The government now expects the economy to shrink 0.5 percent in 2013, in contrast to its earlier forecast for growth of 0.2 percent.
The International Monetary Fund has slashed Spain's economic outlook for next year and now sees a 0.6 percent contraction versus the 0.1 percent growth expected in April. The economy is forecast to contract 1.5 percent this year compared to the 1.9 percent contraction expected earlier.
On the employment situation, the Bank of Spain said employment fell sharply once more in the second quarter, more significantly in construction. Spain has the highest unemployment rate in Eurozone.
According to figures on social security registrations, the process of job destruction was halted in June in seasonally adjusted terms. But the bank felt the figures for this month are possibly distorted to some extent by factors such as the regularisation of household employees.
Prime Minister Mariano Rajoy unveiled a EUR 65 billion austerity package on July 11 that requires further tax hikes and spending cuts.
The Bank of Spain warned that the slippage detected in revenue in recent months has signalled the risk of the budget deficit once again exceeding this year the target set.
"Foreseeably, the recently approved budgetary measures should allow the fiscal consolidation path to be redressed to meet the new targets," the bank added.
by RTT Staff Writer
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