Spain back in recession as economy contracts 0.4 percent

Spain's economy probably contracted 0.4 percent in the first quarter of 2012, its central bank said on Monday, the first clear official confirmation of the scale of recession in one of the two large economies at the centre of the euro zone's debt crisis.

Government and economists' forecasts have been pointing for some time to a contraction at the start of this year in quarter-on-quarter terms, but the figure in the central bank's monthly report has tended to give an accurate reflection of official data. The official numbers are due on April 30.

The Bank of Spain's report said weak domestic demand had dragged the economy into its second formal recession – two consecutive quarters of negative quarterly growth - since 2008 while the outlook for the rest of the year was uncertain.

"The Spanish economy began 2012 in relapse, in which very weak domestic demand side was only offset by relative strength in the external sector," the bank said.

"The evolution of the economy in the next few quarters is subject to uncertainty and downside risks related to the potential effects of the sovereign debt crisis."

The central bank said output fell by 0.5 percent on an annual basis January to March, after growing by 0.3 percent at the end of 2011. The economy shrank by 0.3 percent
quarter-on-quarter in the last three months of 2011.

Worries over its poor growth outlook are at the heart of market pressure on Spain that has driven 10-year bond yields above 6 percent this month. Concerns centre around the potential cost of refinancing its banks, battered by a housing slump and rising loan defaults, as well as a massive public deficit that it must outgrow.

The government, which took power in December, has passed an austere 2012 budget to reduce the deficit, which hit 8.5 percent of GDP last year, and ordered banks to build provisions against potential real estate losses.

With house prices still falling after the bubble burst four years ago, economists say the property sector remains a multi-billion euro question mark over the health of Spain's lenders and their need for extra financing.

The Bank of Spain said the European Central Bank's one-trillion-euro liquidity line to euro zone banks had helped restore investor confidence. "However, the situation continues to be unstable ... due to doubts over the adjustment process of the (Spanish and Italian) economies."

The Spanish government expects the economy to shrink 1.7 percent year on year in 2012 while the Bank of Spain is more optimistic, forecasting a drop of 1.5 percent.