Spain First Quarter GDP Contracts 0.5% vs Fourth Quarter

Prime Minister of Spain, Mariano Rajoy.
Pierre-Philippe Marcou | AFP | Getty Images
Prime Minister of Spain, Mariano Rajoy.

Spain reported another quarter of economic decline on Tuesday, with the economy contracting 0.5 percent in the first quarter, compared to the previous three month period. Spain's IBEX 35 rose 0.77 percent in early trade as the numbers were in line with the Bank of Spain's forecast.

On a year-on-year basis, the economy contracted by 2 percent.

Spain has experienced seven consecutive quarters of economic decline. The economy contracted by 0.8 percent in the fourth quarter of 2012.

On Tuesday, the Bank of Spain revised down its gross domestic product (GDP) forecast for the whole of 2013, from a contraction of 0.5 percent to a contraction of 1.3 percent.

The recession forced Spain to revise its public deficit target down to 6.3 percent of GDP from 4.5 percent this year. The budget minister, Cristobal Montoro, admitted last week that Spain would need two extra years to bring its budget deficit back within the EU limit of 3 percent of GDP.

Last week, the government announced a reform program aimed at promoting growth rather than austerity, in order to combat the recession and unemployment crisis. The jobless rate in Spain reached a record high of 27.2 percent in the first quarter and the country's debt-to-GDP ratio has reached 84.2 percent.

Prime minister Mariano Rajoy said Spain would remain disciplined on spending but signaled that he would also look to stimulate growth by reviewing corporate taxes and labor reform.

The Deputy Prime Minister Soraya Saenz de Santamaria said on Friday that the Spanish economy would grow by 0.5 percent next year and by 0.9 percent in 2015.

Javier Hernani, director general and chief financial officer of Bolsas y Mercados Espanoles (BME), the operator of the Spanish stock exchange, told CNBC he was confident that the Spanish economy would recover.

"The first steps are clearly in place, if you think of the situation in Spain last year, the stock market has rebounded more than 40 percent from the lowest point last July and the spread of the Spanish ten-year bond was around 700 basis points (bps) but I think in general terms there are some elements that financial stability in place."

"Obviously the economy needs credit to flow back into [industrial] activity, back in the small and medium-sized businesses so let's hope we're able to reverse the situation in the near future," he added.

Nicholas Spiro, head of Spiro Sovereign Strategy, said there was a disconnect between market sentiment and the real economy.

"When it comes to financial conditions, it's just the sovereign that's benefiting from the more favorable perceptions of Spain. Borrowing costs for businesses and households remain punitive and show how the transmission mechanism is still impairing the European Central Bank's monetary policy," Spiro said.

Jonathan Hopkin of the department of comparative politics at the London School of Economics and Political Science (LSE) said Spain would now look to see if Italy can persuade countries such as Germany to relax the drive for austerity.

"In Spain, they'll be waiting to see what happens as a result of the new Italian government marking a policy shift and sending out a challenge to European policy makers," Hopkin told CNBC's "Worldwide Exchange."

Hopkin said that a different policy approach was needed towards Southern Europe, but said he did not expect any shift from Germany before the country holds general elections in September.

Correction: An earlier version of this story incorrectly stated that Spain had experienced eight consecutive quarters of decline. Spain has, in fact, experienced seven consecutive quarters of decline.