Spain back in recession as fears grow of another bailout by the eurozone

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

The confirmation of the contraction follows 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 rating agency Standard & Poor's (S&P) downgraded Spain by two notches and the headline unemployment rate hit a record 24.4 per cent. About half of 16 to 24-year-olds are out of work.

"We fear things are likely to get worse before they get better," Martin van Vliet, an analyst at ING, said. "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 Spain's 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 that analysts had expected, follows a 0.3 per cent fall in the final quarter of 2011. The Spanish government has forecast that the economy will contract by 1.7 per cent over 2012 as a whole. 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 as investors have reduced exposure to Spanish sovereign debt.

Markets are particularly concerned about the prospects for Spain's banks, which are still believed to be sitting on about €100bn of losses incurred after the bursting of the nation's property bubble in 2008.