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

Gross domestic product fell 0.3 percent, the same as in the previous three months, the Madrid-based National Statistics Institute said today. That compares with the Bank of Spain's estimate 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 can narrow the budget deficit by 3.2 percentage points of GDP this year as 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 levels from junk status, citing concern the country will need to pour more money 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 in Amsterdam said in a note. “The recession will almost certainly deepen in the coming quarters, pushing unemployment to even more dramatic highs.”

Spanish 10-year bond yields eased to 5.874 percent today from 5.881 percent on April 27, leaving the gap over equivalent German yields at 418 basis points. The yield is 1 percentage point higher than at the start of March as foreign investors reduced holdings of the 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 from 142 billion euros, the data showed.

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

The government forecast the economy to shrink 1.7 percent in 2012 before expanding 0.2 percent next year, leaving the jobless rate at about 24 percent. By comparison, the European Central Bank last month forecast euro-region GDP to drop 0.1 percent this year and increase 1.1 percent in 2013.

Taiwan, Singapore

Spain is relying on exports to drive the recovery as households pay down debt. While 1.73 million households have all their members out of work, families that do have income have been hit by tax increases and may see their wages fall after changes to labor rules made it easier to renegotiate contracts.

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

Asian central banks are juggling the need to damp inflationary pressures and bolster growth, with the risks of Europe's fiscal crisis and a cooling Chinese economy. The Bank of Japan last week expanded its stimulus program to help bolster the economy.

In the U.S., consumer spending probably rose 0.3 percent in March, up from 0.2 percent in the previous month, according to a Bloomberg survey. The Federal Reserve remains “prepared to do more as needed,” Chairman Ben S. Bernanke said on April 25, after policy makers reiterated their pledge to keep borrowing costs at record lows through 2014.

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

Still, with economies from Spain to Greece in recession and the region's slump deepening, ECB President Mario Draghi last week called for a “growth compact” consisting of structural changes and improvements in competitiveness to bolster the economy. The Frankfurt-based central bank on May 2 will probably keep its benchmark interest rate at a record low of 1 percent, according to a Bloomberg survey.

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

Bloomberg News

Instant Insights /

Spain Slips into Recession

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