Spain's Economy plunges into recession: Central Bank

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MADRID: Spain's jobs-scarce economy plunged back into recession in the first quarter of 2012 as employment slumped even further, the Bank of Spain said Monday. Just two years after emerging from the last downturn, Spain slid into recession again with two consecutive quarters of economic contraction, the central bank said in a report. Gross domestic product fell an estimated 0.4-percent in the first quarter of 2012 after a 0.3-percent decline in the last three months of 2011, the bank said. Spain, whose unemployment rate at the end of 2011 was already the highest in the industrialised world at 22.85 percent overall and nearly 50 percent for the young, suffered a further jobs slump. "Employment fell again, sharply, with an estimated year-on-year decline of 4.0 percent," the report said, noting also a "significant" fall in unit labour costs. The government forecasts the jobless rate will rise to 24.3 percent this year as the sagging economy struggles to absorb millions of workers who lost their jobs when a property bubble collapsed in 2008.

The European Central Bank had helped to ease market tensions, Spain's bank said, alluding to more than one trillion euros ($1.32 trillion) in low-interest, three-year ECB loans to for the bloc's banks. Worries were further eased by an international rescue programme for Greece, by the restructuring of Greek debt and by eurozone economic governance reforms, it said. "Nevertheless, the instability returned in the first days of April, affecting Spain and Italy with particular strength because of doubts raised by the adjustment process in which both countries find themselves." New tensions pushed the borrowing rate on Spain's benchmark 10-year government bonds above a symbolic 6.0-percent threshold, the central bank noted.

Investors in Spanish 10-year bonds demanded an additional return of about 440 basis points when compared to German bonds and at the same time, the stock market has slumped by about 20 percent since the beginning of the year. The decline intensified Monday as Madrid's IBEX-35 index of leading shares slumped 206.20 points or 2.93 percent to 6,834.40 points by late afternoon, hit by concerns over the French presidential election and Spain's debt. Investors fretted after French Socialist Francois Hollande beat President Nicolas Sarkozy in a first round of voting Sunday. The pair face off in a final round May 6. Spanish markets were among those hardest hit, in part because of doubts over Madrid's ability to meet its public debt-cutting goals and thus prevent its sovereign debt mushrooming beyond control. "The gloomy outlook reflects the government's determination to cut the public-sector budget deficit from 8.5 percent of GDP in 2011 to 3.0 percent by 2013," said Raj Badiani, economist at the IHS economic and industrial information group.

Although Spain had pledged austerity measures worth 27 billion euros in its 2012 budget, more would be needed to achieve the deficit-cutting goal, he warned in a report. Analysts say the recession will make those targets even harder to reach, as tax income declines and welfare costs rise. Household consumption, accounting for 60 percent of GDP, was now a key concern, Badiani said. "Consumers will continue to spend timidly, worried about staggeringly high unemployment, shrinking house equity (values) and still-excessive debt levels, coupled with compelling evidence that Spain is set for a prolonged and deep recession," he warned.

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