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Spanish Recession Deepens In Q2

04:47, 30th July 2012

(RTTNews) - Spanish economic output sank further in the second quarter, deepening the recession in the euro area's fourth largest economy, which is already hit by a banking sector crisis and the government's tough austerity measures.

The gross domestic product fell 0.4 percent in the second quarter of 2012 after a 0.3 percent decline each in the first quarter of 2012 and in the fourth quarter of 2011. The outcome was in line with the Bank of Spain's estimates released early last week.

Annually, GDP shrank 1 percent following a 0.4 percent decline in the first quarter. This also matched the central bank's forecast.

The decline was mainly led by a further fall in domestic demand, the statistical office said. This was, however, partially offset by a slightly positive contribution from external demand.

Various differing factors have contributed to compounding the sovereign debt crisis, including doubts over the Spanish economy, in particular over the recapitalization needs of its financial system and its ability to see through the fiscal consolidation process along the lines agreed at the European level," the central bank said last week.

The International Monetary Fund, or IMF, on Friday slashed Spain's economic outlook again and said Spain's economic contraction will deepen further and continue for longer than previously anticipated. The IMF now forecast GDP to fall 1.7 percent this year compared to the 1.5 percent predicted in its latest Global Economic Outlook.

The economy is seen contracting 1.2 percent in 2013, steeper than the previously predicted 0.6 percent contraction. The economic outlook for the crisis-hit Eurozone member-nation "remains very difficult and vulnerable to significant downside risks," the Fund said in the report.

Prime Minister Mariano Rajoy unveiled a EUR 65 billion austerity package on July 11 that calls for further tax hikes and spending cuts. The country's high borrowing costs, coupled with deteriorating economic activity, are threatening the government's efforts to reach the deficit targets.

The yield on Spain's benchmark 10-year bonds hit euro-era high last week after media reports said Murcia could emerge the second Spanish region to seek government aid after Valencia.

However, the yield fell back on Friday after Germany and France vowed to do everything possible to protect the Eurozone from collapsing. Later on Sunday, Italian Prime Minister Mario Monti joined the leaders in offering support to euro.

On Thursday, European Central Bank President Mario Draghi said the ECB is prepared to do whatever it takes to preserve the euro and act on rising bond yields, raising hopes that Europe will act more decisively to save the currency bloc.

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