Madrid - Spain slid deeper into recession in the second
quarter as a tough new round of austerity to head off the budget crisis that
threatens the euro took effect both on overall demand and the price consumers
have to pay for goods.
The first official numbers on gross domestic product showed
the economy shrank 0.4% from the previous quarter after contracting 0.3% in the
first three months of the year. The economy was 1.0% smaller than a year
Consumer prices according to both Spanish and EU methodology
rose 2.2% year-on-year, with the EU-harmonised increase above forecasts being
due to medicine price hikes put in place by the government to save money and
deflate the deficit.
Economists warned price hikes, and especially a 3-point rise
in value-added tax due to come into effect in September, would distort consumer
prices while the deepening recession reflected slower domestic demand.
That will further weaken the government’s efforts to get the
economy growing again - vital if it is to meet targets on reducing its budget
shortfall and halting a market-inspired crisis in how it finances its debt.
“To properly follow Spain's economic reality, I would look
at domestic service inflation, which is where we’ll see stagnation and even
deflationary pressures. Consumption remains very weak,” economist at
Madrid-based broker Intermoney Jose Carlos Diez said.
Spain slipped into the second recession since 2009 in the
first quarter and is expected to continue to shrink until well into 2013 as
consumers and businesses rein in spending and the eurozone debt crisis saps
Fears over the health of Spain’s economy as it fights to
reduce its public deficit has lifted funding costs to euro-era highs in recent
weeks leading many to think an application for a full-bailout could soon become
A full breakdown of the growth data will be published August
28, while the final price data will be available August 14.
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