Double-dip recession adds to woes of struggling Spain

The battered Spanish economy has officially slumped back into recession, as figures yesterday showed that the eurozone laggard shrank by 0.3 per cent in the first three months of the year.

The confirmation of the contraction followed a host of economic blows for Mariano Rajoy's centre-right government, which is struggling to implement the toughest budget in Spain's modern history in the face of spiralling unemployment and intensifying, popular opposition.

Last week, the credit ratings agency Standard & Poor's (S&P) downgraded Spain by two notches and the country's headline unemployment rate hit a record 24.4 per cent. About half of all 16- to 24-year-olds are out of work. "We fear things are likely to get worse before they get better," said Martin van Vliet, an analyst at ING. "The recession will almost certainly deepen in the coming quarters, pushing unemployment to even more dramatic highs."

Tens of thousands of Spaniards took to the streets on Sunday to protest at the government's planned cuts to education and healthcare. Madrid, under pressure from the European Commission, is pushing through a €27bn (£22bn) package of tax rises and spending cuts designed to slash the deficit from 8.5 per cent of GDP in 2011 to 5.3 per cent in just one year.

But many analysts doubt that this target will be achievable as the cuts hammer consumer demand.

The latest quarterly contraction, which was slightly better than the 0.4 per cent shrinkage analysts expected, follows a 0.3 per cent fall in the final quarter of 2011. The government has forecast the economy will contract by 1.7 per cent in 2012. Financial markets fear Spain could be forced to follow Greece, Ireland and Portugal in requesting a bailout from the eurozone and the International Monetary Fund.

Spanish 10-year bond yields are now 1 per cent higher than they were at the beginning of March because investors have reduced their exposure to Spanish sovereign debt.