Spanish economy shrinks in Q4, nearing recession

By CIARAN GILES | January 30, 2012 | 6:05 AM EST

A sign warns people not to enter the prohibited area of a building site, next to Pamplona, northern Spain, Friday, Jan. 27, 2012. The National Statistics Institute says Spain's unemployment figures has surpassed the 5 million mark, with the jobless rate rising to 22.8 percent in the fourth quarter of 2011, and prompting the new conservative Popular Party government to pledge new labor reforms. (AP Photo/Alvaro Barrientos)

MADRID (AP) — Spain's economy contracted by 0.3 percent during the fourth quarter, according to official figures released Wednesday, edging the country closer to a new recession as it deals with huge levels of unemployment and painful austerity cuts.

The figure announced by the National Statistics Institute broke a run of seven quarters without economic contraction. The institute said GDP fell 0.3 percent during the quarter compared with a year earlier. For all of 2011, it increased 0.7 percent.

The economy is expected to slide further through March, placing Spain back in its second recession in less than three years. A technical recession is defined as two consecutive quarters of contraction.

The country, where unemployment has hit a eurozone-high of 22.9 percent, is struggling to avoid slumping further into a debt crisis that has seen Greece, Ireland and Portugal needing financial bailouts.

Spain began in 2010 to emerge from a near two-year recession triggered by the collapse of a real estate bubble that had fueled growth for nearly a decade and helped make it Europe's top job creator up to 2008.

But the recovery has gone into reverse. The Bank of Spain says the debt crisis has sapped business confidence and dried up bank credits, leading to a huge drop in domestic demand, only partially offset by strong exports.

The bank predicts the economy will contract 1.5 percent this year while the International Monetary Fund says Spain will stay in recession until the end of 2013.

The figures are putting the new right-leaning Popular Party government, which took office last month, under increased pressures to usher in reforms.

On Friday, it introduced a budget-discipline law that will allow the government to impose penalties on debt-laden regional governments if they run deficits after 2020. It has also promised labor and financial sector overhauls in the next few weeks.

Spain's deficit for 2011 is expected to be 8 percent of national income. Prime Minister Mariano Rajoy's government says it is still committed to reducing that to 4.4 percent in 2012 and down to the EU limit of 3 percent the following year, although with a recession looming, that pledge may prove impossible to keep.

Since taking office Dec. 23, the government has also approved austerity measures and tax increases it hopes will bring in some euro15 billion ($19.7 billion) to help ease the swollen deficit.