February 16, 2012 12:24 pm

Spain teeters on brink of recession

Spain is teetering on the brink of recession after final official data confirmed that the eurozone’s fourth largest economy contracted for the first time in two years in the fourth quarter of 2011.

Spain’s gross domestic product fell by 0.3 per cent in the fourth quarter compared with the preceding three months, a drop earlier forecast by flash estimates and setting the scene for what is widely expected to be a sharp recession this year.

Spain will join Italy and Portugal, Belgium and Greece in suffering two consecutive quarters of contraction if, as expected, its economy shrinks in first three months of this year.

The country is suffering the highest level of unemployment in the eurozone, which stands at about 23 per cent or more than 5m people after the collapse of one of the most excessive real estate bubbles in Europe.

Luis de Guindo, Spain’s finance minister, had previously warned that the country would fall back into recession at the start of this year, while the Bank of Spain has forecast a total contraction of 1.5 per cent of GDP for 2012.

Spain’s recently installed conservative government is battling to slash a budget deficit standing at about 8 per cent of GDP to a target of 4.4 per cent in one year, a reduction that critics argue will need to be so severe in terms of austerity measures that it will strangle any nascent recovery.

Cristobal Montoro, Spain’s budget minister, who this week lambasted the previous socialist government for the country’s spending situation, has displayed apparent hesitance in interviews that the high bar set for deficit reduction could be achieved, but was swiftly contradicted by his party.

After the unveiling of labour reforms last week the government of Mariano Rajoy is facing the threat of strikes, with several of Spain’s largest unions organising preliminary protests against the measures to be held this Sunday.

On Thursday after the release of the GDP data the Spanish government managed to sell €4bn of debt in a strongly subscribed auction which was hailed by Mr De Guindos as evidence that the government’s reform programme was being welcomed by international investors.

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