Spain economy shrinks further in first quarter

Spain's economy shrank in the first quarter of 2013, official data showed Tuesday, as a job-destroying recession held its grip on the struggling nation.

Weak domestic demand dragged down output in the eurozone's fourth largest economy, which has been shrinking since mid-2011, the National Statistics Institute said.

Gross domestic product tumbled by 0.5 percent on a quarterly basis after a 0.8-percent drop in the final three months of 2012.

"A key drag on activity remains the perilous condition of the household economy, struggling to overcome uncertain job prospects, shrinking real incomes, and limited access to credit," said analyst Raj Badiani of IHS Global Insight in London.

On an annual basis, the economy contracted by 2.0 percent following a 1.9-percent decline in the previous quarter, the institute said in a preliminary report.

The news confirmed that Spain is entrenched in a double-dip recession that sent the unemployment rate soaring to a record 27.16 percent in the first quarter.

"The economy remains mired in recession but at least the pace of contraction appears to be slowing, a mildly encouraging feature," said Nick Stamenkovic, London-based strategist at RIA Capital Markets.

"We expect signs of recovery to remain elusive until early 2014."

Weak demand in the Spanish economy eclipsed relatively healthy exports, the statistics institute said, with retail sales in March plummeting by 8.9 percent after correcting for seasonal variations.

Prime Minister Mariano Rajoy's government is battling to cut Spain's annual public deficit with austerity measures that have prompted mass protests.

But his right-leaning government has offered little hope of a solid recovery, forecasting last week a 1.3 percent contraction in 2013, and only a feeble 0.5-percent rebound in 2014.

The government predicted that the unemployment rate -- now the highest since Spain returned to democracy after the death of General Francisco Franco in 1975 -- would not fall below 25 percent until 2016.

At the same time, despite biting austerity measures, Spain is struggling to meet European Union targets to curb the public deficit as tax revenues are squeezed by the slowdown and welfare costs rise to cope with a lengthening jobless queue.

The government has forecast that the public deficit will amount to 6.3 percent of gross domestic product in 2013, well above its earlier target of 4.5 percent.

The public deficit will only fall below the EU-agreed ceiling of 3.0 percent of GDP in 2016, two years later than earlier agreed, it said last week, announcing a new programme of economic reforms and targets.

The European Commission welcomed that new programme, which sharply lowered Spain's 2013 economic forecast and included structural reforms aimed at spurring growth after months of austerity.

A property market crash in 2008 plunged Spain into a recession, destroyed millions of jobs and left banks awash in bad loans.

The economy emerged gingerly from that downturn in 2010 before sliding back into recession in mid-2011.

"The economy will have to fall back on net exports to restrain the fall in real GDP during 2013/14, but the export picture is more challenging in light of the deteriorating Eurozone economic outlook," Badiani warned.

"Spanish exports face an uphill battle in the wake of the continued squeeze on domestic spending across the Eurozone over the period."