Spain Enters Recession, Worst GDP Drop in 15 Years

Spain's economy shrank at its fastest pace in 15 years at the end of last year, pushing it into recession for the first time since 1993 and pointing to further dire output data from across the euro zone on Friday.

The 1 percent quarter-on-quarter contraction was slightly better than an earlier Bank of Spain estimate of 1.1 percent but began what the bank fears could be the country's slide into economic mediocrity without ambitious labor reforms.

The fourth quarter figure was the worst since early 1993, as the financial crisis dismantled construction and consumer spending booms, and analysts saw the downturn deepening this year as the economy tumbles into its worst recession in half a century.

The data piled pressure on Spanish Prime Minister Jose Luis Rodriguez Zapatero to overhaul the jobs market and get loans to credit-starved firms and families after unemployment rose to the highest rate in the European Union at 14.4 percent in December, according to European Commission figures.

"Spain has entered a prolonged painful recession that may last longer than in the rest of the euro zone," said economist Tullia Bucco at UniCredit Research.

Germany, Italy and France are expected to report even steeper GDP declines on Friday, ahead of wider euro zone data.

Bank of Spain Criticized

Spanish growth outpaced the European Union average from 1994 as the former economic backwater caught up with EU living standards in a credit-driven housing and consumer spending binge.

Annual growth fell to 1.2 percent in 2008, compared with an average 3.8 percent in the past decade, the government reported.

Economy Minister Pedro Solbes sees GDP contracting 1.6 percent this year, which would make this the worst recession since 1959 according to Conference Board data.

The government expects a recovery in 2010, although the European Commission thinks contraction will continue, with unemployment climbing to 19 percent.

Unlike other European countries, Spain's unemployment is long-term and structural after it based growth on creation of over 8 million low-skilled jobs in construction and service sectors that have collapsed in the last 18 months.

The global crisis has cut off foreign financing and put over 6,400 workers on the dole each day in January after bankruptcies quadrupled in the fourth quarter, leaving vast, abandoned building sites on the edges of Spanish towns and cities.

Bank of Spain Governor Miguel Angel Fernandez Ordonez on Wednesday said Spanish growth would fall below the EU average without labor reforms to boost job mobility and retraining.

He sided with business groups that favor cutting firing costs that are among the highest in Europe.

Zapatero has refused to cut worker benefits and his labor minister on Thursday told Ordonez to stop doling out advise and instead focus on Spain's credit problems, after household and corporate debt more than doubled in the last decade.

"If Mr. Fernandez-Ordonez thinks there should be labor reforms, I'd ask that next time he take other factors into consideration, especially the financial system," Labor Minister Celestino Corbacho told La Ser radio.

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