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Spain's service sector shrinks

Source: Reuters - Wed 5th Jan 2011

Spain's key services sector - more than 60 % of the economy - shrank at its fastest pace in a year in December when consumer sentiment slid anew, overshadowing an above-expectation rise in industrial output.

Since Spain's property bubble burst in 2008 unemployment has soared and increasingly gloomy consumers have abandoned the high streets and restaurants, hitting the key services sector and reinforcing worries over the economy's ability to recovery.

"The headline PMI is consistent with stagnant growth. Our view remains that Spain will fall back into recession this year and, even if it doesn't, growth will be worse than government forecasts," Capital Economics economist Ben May said.

The euro zone debt crisis, which gained pace in November after Ireland was forced to seek an EU/IMF backed bailout, has stunted a recovery in the blocs' peripheral countries and highlighted their disparity with the core economies.

"Near-record growth in Germany and strong expansion in France contrasted with a collapse in growth in Italy to near-stagnation and increased rates of decline in both Spain and Ireland," said Chris Williamson, chief economist at Markit.

Investor concern the Spanish economy will be unable to restart after stalling last year following a prolonged recession has pushed up bond yields and fuelled expectations the government will be forced to apply for EU/IMF aid.

The premium investors demand to hold Spanish debt over German Bunds was around 244 basis points on Wednesday, below euro-era highs touched at the end of last year but a long way from the around 70 bps before the euro debt crisis began.

Markit's purchasing managers' index (PMI) of Spain's services companies was below the 50 mark which divides growth from contraction for the fifth straight month in December, showing the economy is still struggling.

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