Spain enters new recession with worse to come, says central bank

The Bank of Spain on Monday confirmed the Spanish economy slipped back into recession for the second time in two years as first-quarter GDP shrank for the second three-month period in a row. The contraction was due to a slump in domestic demand caused by the austerity drive and high unemployment, which depressed consumer spending.

In its latest monthly report on the economy, the central bank estimates that GDP fell 0.4 percent from the last quarter of 2011 when it shrank 0.3 percent. On an annual basis GDP dropped 0.5 percent after growth of 0.3 percent in the period October-December. That was the first annual fall in eight quarters.

As has been the case over the past four years, domestic demand continued to shrink, falling 0.9 percent. Growth in net trade – exports minus imports -- remained positive but slowed to 0.6 percent. “The pattern of contraction of economic activity is marked on the expenditure side by very muted national demand, the impact of which on output is only softened by the greater relative resilience of the external sector,” the bank said.

Private consumption dropped 0.4 percent due to a further deterioration in labor market conditions and the impact of higher personal income tax -- introduced as part of the austerity drive -- on disposable income. The bank estimated employment fell close to four percent year-on-year in the first quarter, with the jobless rate expected to move past 24 percent this year from 22.85 percent at the end of 2011.

The report indicated the slowdown is likely to become more accentuated. “Developments in the Spanish economy over the coming quarters will be subject to uncertainty and to downside risks associated with the possible ups and down of the sovereign debt crisis,” the bank said.

The government forecasts GDP will shrink 1.7 percent this year after contracting 3.7 percent in 2009.”Spain’s officially in recession and will continue to contract more sharply over the coming quarters,” Bloomberg quoted Ben May, an economist at Capital Economic in London as saying. “The labor market downturn shows no signs of easing.”

The recent rise in Spain’s risk premium reflects growing concerns about the government’s ability to trim the country’s deficit from 8.5 percent of GDP last year to 5.3 percent during a recession. The target for 2011 was six percent of GDP. After suggestions the government may have inflated last year’s data, the European Union’s statistics office Eurostat on Monday validated the 8.5-percent figure.

“I don't think we should have any doubt about the reliability of the Spanish statistical office and of the commitment of the Spanish authorities to provide clarity," European Commission spokesman Amadeu Altafaj told a regular news briefing in Brussels.

"On the contrary [...], we have very fluid and regular exchange with the Spanish authorities, in order to clarify the current fiscal positions but also the fiscal consolidation path. So we have no concerns, no doubts, in this respect."

The stock market is compounding a dark day for the Spanish economy, the Ibex 35 index having fallen by as much as 3.25 percent after the first hour of trading this morning before stabilizing somewhat at 6,843.10 points at 2pm, a fall of 2.81 percent on Friday’s close.