Spain Recession Deepened in Final Quarter

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Spain's economy shrank in the final months of 2012 at the fastest pace since its recession began, data showed on Wednesday, pummeled by falling domestic demand and with no return to growth on the horizon.

The Bank of Spain said gross domestic product (GDP) contracted 0.6 percent in the fourth quarter from the third, compared to a drop of 0.3 percent in the July to September period.

The forecast in the central bank's monthly economic report precedes preliminary growth data from the National Statistics Institute on Jan. 30.

"These numbers are slightly better than we thought, but it is a confirmation the economy is in a very bad state," said Silvio Peruzzo, economist at Nomura. "We expect a contraction of GDP of similar size in the first quarter of this year, with that to be protracted through this year."

Spain's economy fell into its second recession since 2009 at the end of 2011 on fallout from a burst property bubble and is struggling to return to growth amid efforts to cut high public and private debt and dire consumer sentiment.

A recent return by international investors to Spain's battered debt market, where risk premiums have fallen significantly from euro-era highs hit over the last year, has not translated into the real economy, the central bank said.

"Despite positive developments in the international financial markets in the last few months of the year, a combination of a factors ... meant a notable weakening of final demand in the fourth quarter," the bank said.

While the government expects the economy to expand again before the end of 2013, many economists say this is optimistic.

GDP shrank 1.3 percent in 2012 year-on-year, the Bank of Spain said, better than an official forecast of a 1.5 percent drop and after growing 0.4 percent a year earlier.

The economy contracted 1.7 percent in the fourth quarter from a year earlier, the central bank said, after falling 1.6 percent year-on-year in the third quarter.