Spain's economy contracted in the first quarter, putting theeuro region's fourth-largest economy into its second recessionsince 2009.

Gross domestic product fell 0.3 percent, the same as in theprevious three months, the Madrid-based National StatisticsInstitute said today. That compares with the Bank of Spain'sestimate on April 23 for a 0.4 percent decline. From a year ago,GDP dropped 0.4 percent, INE said.

Spain's government is struggling to convince investors it cannarrow the budget deficit by 3.2 percentage points of GDP this yearas the economy shrinks and unemployment approaches 25 percent.While it forecast Spain to return to growth in 2013, Standard &Poor's last week lowered the nation's credit rating to three levelsfrom junk status, citing concern the country will need to pour moremoney into its lenders.

“We fear things are likely to get worse before they get better,”Martin van Vliet, a senior euro-region economist at ING Bank inAmsterdam said in a note. “The recession will almost certainlydeepen in the coming quarters, pushing unemployment to even moredramatic highs.”

Spanish 10-year bond yields eased to 5.874 percent today from5.881 percent on April 27, leaving the gap over equivalent Germanyields at 418 basis points. The yield is 1 percentage point higherthan at the start of March as foreign investors reduced holdings ofthe nation's debt.

Non-resident holdings of Spanish bonds fell to 220 billion euros($291 billion) in March from 245 billion euros the previous month,data on the Treasury's website showed today. At the same time,Spanish banks increased their holdings to 171 billion euros from142 billion euros, the data showed.

As part of its efforts to win back the confidence of foreigninvestors, the government said on April 27 it would shift theburden of taxes onto consumption and reduce levies on employingworkers. The move will add 8 billion euros to revenue next year,Economy Minister Luis de Guindos said, while helping to makeSpanish goods more competitive abroad.

The government forecast the economy to shrink 1.7 percent in2012 before expanding 0.2 percent next year, leaving the joblessrate at about 24 percent. By comparison, the European Central Banklast month forecast euro-region GDP to drop 0.1 percent this yearand increase 1.1 percent in 2013.

Taiwan, Singapore

Spain is relying on exports to drive the recovery as householdspay down debt. While 1.73 million households have all their membersout of work, families that do have income have been hit by taxincreases and may see their wages fall after changes to labor rulesmade it easier to renegotiate contracts.

Companies may see faltering sales growth as economies around theworld show signs of slowdown. Taiwan's economy expanded at theweakest pace since 2009 in the first quarter, Singapore's joblessrate unexpectedly rose in that period and growth in South Koreanindustrial output eased in March, reports showed today.

Asian central banks are juggling the need to damp inflationarypressures and bolster growth, with the risks of Europe's fiscalcrisis and a cooling Chinese economy. The Bank of Japan last weekexpanded its stimulus program to help bolster the economy.

In the U.S., consumer spending probably rose 0.3 percent inMarch, up from 0.2 percent in the previous month, according to aBloomberg survey. The Federal Reserve remains “prepared to do moreas needed,” Chairman Ben S. Bernanke said on April 25, after policymakers reiterated their pledge to keep borrowing costs at recordlows through 2014.

Germany has helped support the region's economy and offset someof the impact of austerity measures. Retail sales in Europe'slargest economy increased in March, a report showed today, andunemployment probably declined this month, according to a Bloombergsurvey. The Nuremberg-based Federal Labor Agency will release thereport on May 2.

Still, with economies from Spain to Greece in recession and theregion's slump deepening, ECB President Mario Draghi last weekcalled for a “growth compact” consisting of structural changes andimprovements in competitiveness to bolster the economy. TheFrankfurt-based central bank on May 2 will probably keep itsbenchmark interest rate at a record low of 1 percent, according toa Bloomberg survey.

“There has never been any successful austerity program in anylarge country,” Nobel Prize-winning economist Joseph Stiglitz toldreporters in Vienna on April 26. “The European approach definitelyis the least promising. Europe is headed to a suicide.”

Bloomberg News

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