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Spain's economy lingers in recession in Q4

Source: Reuters - Sat 13th Feb 2010

Spain's economy contracted again in the final quarter of last year, leaving it the last of the four biggest euro zone countries still struggling in recession, though economists see some signs of growth in 2010.

Investors are watching Spain closely for any signs that collapsing government revenues and rising debt could add it to the list of euro zone economies that are running into trouble over financing, although its public debt levels are far below those of Greece.

Gross domestic product fell 0.1% in the fourth quarter from a quarter earlier, in line with an estimate made last week by the Bank of Spain and by economists in a Reuters poll. It compared with a 0.3% fall a quarter earlier.

The euro zone's three largest economies, France, Germany and Italy, all report GDP on Friday and all are expected to show continued quarter-on-quarter growth, while the bloc as a whole was forecast to grow 0.3%

"As expected, Spain remained in recession in the final quarter of 2009. We are confident that Spain will emerge from recession in early 2010, but the recovery is likely to be laboured," said IHS Global Insight economist Raj Badiani.

Spain's economy contracted 3.1 percent compared with the same period a year earlier and 3.6 percent over the whole of 2009, the sharpest drop in over half a century.

It is forecast to move out of recession some time after other euro zone countries.


Spain reported a public deficit of 11.4% of GDP in 2009, one of the highest in the euro zone, fuelling concern even though its total debt relative to GDP is among the lowest in the region.

In an effort to calm nervous markets, the government announced a three-year plan to bring the budget under control, but the depth of the spending cuts have prompted worries that too much, too soon could prolong the recession.

Economy Minister Elena Salgado said on Thursday Spain needed time to see if it should add new austerity measures to 50 billion euros in savings already announced in order to meet its fiscal targets.

Spain's decade-long boom came to an abrupt end in 2008 after the global credit crunch exposed over-dependence on housing construction and consumer demand funded by cheap loans.

In 2009, a state-funded stimulus plan helped stave off the worst effect of the crisis through blanket tax rebates, auto subsidies and a multi-billion euro public works programme.

"The (fourth quarter) improvement is due to a less sharp contraction in domestic demand, thanks in part to government help in the acquisition of new cars," said economist at 4Cast Jose Garcia Zarate.

"But those are temporary aids and we don't expect consumption to take off, at least over the first half of the year, because of expectations for the labour market."

While the worst of the crisis is behind it, Spain is still expected to limp through 2010 as stimulus funds slow to a trickle and over 4 million unemployed, many of whom were laid off from the construction sector, search for work.

"The outlook beyond 2010 remains challenging, with the economy weighed down by high unemployment and poor public finances. The government will need to implement a steady stream of fiscal austerity measures, placing additional strain on an uncertain and gradual recovery," said Badiani.

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