Spain's economy finally puts recession behind it

Spain provided the beleagured eurozone with respite yesterday, revealing that its economy had finally emerged from recession. The Bank of Spain said its initial estimate of economic performance in the first quarter of 2010 was for growth of 0.1 per cent, suggesting that the final large Western country to still be mired in recession has now escaped the slump.

The bank said the boost could be attributed to stronger exports thanks to the gradual improvement of the global economy, as well as the continuing fiscal boost that is being supplied by the Spanish government. However, Spain's economy is still mired in difficulties. The nation's credit rating was downgraded last week, fuelling the flames of the sovereign debt crisis sweeping across southern Europe, and its economy faces significant headwinds. The unemployment rate has now hit 20 per cent, official statistics revealed this week, while the country's property sector remains bombed-out.

Esade, the Barcelona business school, warned yesterday that Spain was still likely to see the size of its economy shrink this year, with a 0.5 to 1 per cent decline following last year's 3.6 per cent fall.

"Among developed economies, the Spanish economy will be one of the very few that will continue contracting in 2010," it added.

Raj Badiani, an economist at Global Insight, warned that the markets had little faith in the more bullish forecasts published by Spain's government, with analysts expecting Prime Minister José Luis Rodriguez Zapatero to cut them, putting further strain on the public finances. Even without that to contend with, Spain's high debt will make it impossible for the government to go on supporting the economy for much longer, Mr Badiani warned.

"We expect the budget deficit reduction plan to start to bite in the second half of 2010, spelling the end of the sustained stimulus to growth from ever higher levels of general government spending witnessed since the late-1990s," he said.

The end of Spain's recession failed to limit the corrections seen on European stock markets yesterday, with Spanish equities off by more than 4 per cent.