Economy shrinks for first time in two years

Madrid.—The gloomy predictions were made yesterday as Madrid implements harsh austerity measures to deflate a massive budget deficit.
Gross domestic product shrank by 0.3 percent in the fourth quarter on a quarterly basis, as forecast in a flash estimate, and after stagnating in the third quarter, final official data showed yesterday. A test of the country's attraction to investors came later yesterday with a bond sale, including one for seven years. There has been healthy demand recently, boosted by cheap loans to banks and others from the European Central Bank. 0n an annual basis the economy grew by 0.3 percent in the fourth quarter, in line with Reuters forecasts consensus and compared to 0.8 percent in the third quarter. Economic output in the 17-nation currency area fell 0.3 percent in the fourth quarter from the third, official data showed on Wednesday as the sovereign debt crisis crushed a recovery and looked set to push the bloc in to a mild recession. The Italian economy joined Belgium, Greece and Portugal in formal recession having already shrunk in the third quarter of 2011, the data on Wednesday showed. Purchasing data from Markit for January showed a slight improvement for the Spanish manufacturing and services industries, but it may not be enough for an economy that has been in recession or close to stagnation for almost five years. Spain had been growing at an above-average rate since the country entered in to the euro zone monetary union 12 years ago, but the boom was largely due to the housing expansion fuelled by cheap loans and has been struggling since the 2007 crash. In the fourth quarter, exports were the only sector to show growth with industry surviving solely because of demand outside of Spanish shores, though even that is slowing as the economies of Spain's main trading partners stumble. Meanwhile, Spain's new government is fighting to reduce a budget deficit it has estimated at 8% of GDP in 2011 to a target of 4.4% this year, implying necessary savings of an estimated around 45 billion euros. The International Monetary Fund believes GDP will contract by 1.7% in 2012.