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Spain Economy Shrinks as Spending Stalls, Investment Falls

Spain’s economy shrank in the first three months of 2012 as investment slumped and household spending stagnated amid the harshest austerity measures in three decades.

Gross domestic product declined 0.3 percent from the previous quarter, when it fell the same amount, the Madrid-based National Statistics Institute said today, confirming an April 30 estimate. Investment fell 2.6 percent in the quarter while household spending stagnated and exports of goods and services fell 0.9 percent.

Prime Minister Mariano Rajoy, in power since Dec. 21, is implementing tax increases and spending cuts as he battles a surge in borrowing costs. The extra yield on Spanish bonds rose to a euro-era high yesterday amid concern that losses from Spain’s banking industry risk overwhelming public finances and a possible exit of Greece from the euro may spur contagion.

“The question is whether we have seen the bottom yet, and we probably haven’t,” Jose Luis Martinez, a strategist for Spain at Citigroup Inc in Madrid, said in a telephone interview. “There aren’t many arguments supporting a recovery.”

Bond Yields

The yield on Spain’s benchmark 10-year bond rose to 6.34 percent today, compared with less than 5 percent in early March. The extra cost investors demand to hold Spanish bonds rather than German debt was 487 basis points, after rising to a euro-era record of 5.07 percentage points yesterday.

Government spending fell 0.3 percent in the quarter, compared with 1.1 percent in the previous three months. From a year earlier, it declined 5.2 percent, the report showed. Household spending fell 0.6 percent from a year earlier, while exports rose 2.2 percent, INE said.

Rajoy’s government, struggling to reduce an unemployment rate of more than 24 percent, forecasts a 1.7 percent contraction this year as it aims to reduce the deficit by around 27 billion euros ($34 billion). The country’s 17 semi-autonomous regions, which control spending on schools and hospitals, are trying to halve their own shortfall.

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