By Andrew Hay

MADRID
SPAIN was hit by a wave of bleak economic news yesterday, five weeks before national elections, and economists feared the euro zone's fourth-largest economy might fall into recession.

The services sector, which accounts for over 70 percent of the economy, suffered its sharpest ever fall in activity during January, a survey showed, and consumer confidence fell to a record low in January as inflation has reached a 12 year high.

On a terrible day of economic woe for the Socialist government, which faces elections on March 9, official data showed that industrial production suffered its sharpest fall in 5-1/2 years in December as the end of a 10 year housing boom has cut demand for Spanish goods.

The government reported on Monday that the number of registered jobless saw its biggest monthly rise on record last month. “At this point the risk of a recession is significant,” said Veronique Riches-Flores at Societe Generale. “The Spanish situation begins to have increasing influence on the euro zone and the European Central Bank, reinforcing our forecast the ECB will have to ease its policy in coming months.” The headline Purchasing Mangers Index (PMI) for the services sector fell to a record low of 44.2 from 51.0 in December, according to a survey compiled by NTC Research. It was also the sharpest fall since the survey began in 1999. “This makes absolutely dreadful reading,” said Chris Williamson, chief economist at NTC Research, adding that financial and consumer services and anything connected with construction and the property market were the worst performers. “I'm amazed. I've never seen anything like this and I would think the economy is in for a very tough ride on the basis of these figures,” said analyst Jose Zarate at 4Cast in London about the fall in the PMI.

The rapid deterioration of Spain's economy worries European policy makers as it drives around 11 percent of euro zone economic growth and created 40 percent of new jobs in the European Union between 2004 and 2007.

With an election imminent, Socialist Prime Minister Jose Luis Rodriguez Zapatero regularly rejects talk of a crisis and says Spain is protected by a high public sector budget surplus that can be spent if necessary to keep growth above 3 percent.

Economy Secretary David Vegara said he was unconcerned by the data. “When the economy was growing at 4.1 percent in June we forecast growth for the following year at a rate a percentage point lower, so we were giving a clear indication of the tendency,” Vegara told reporters yesterday.

Private sector economists have cut their growth forecasts towards 2 percent as the economy struggles to offset a slump in construction investment and consumer spending.

The Socialists have a lead of 4-6 percentage points in most opinion polls, but the conservative opposition has now seized on the rapid economic deterioration as its main campaigning point
Spaniards openly talk of an economic crisis as they pay higher mortgage costs on homes that, according to property website Facilisimo.com, lost one percent of their value last month. Not all sectors are affected but practically everyone knows someone who is suffering. “Our sales still haven't suffered from the crisis, but we've seen it hit customers,” said Jesus Lopez Gago of bookshop chain Booksellers, adding that big banks and other firms are cutting staff training.