Spain in recession as austerity bites

Spain sank into recession in the first quarter and economists said spending cuts aimed at meeting strict EU deficit limits together with troubles in the banking sector would delay any return to growth until late this year or beyond.

It is the second recession in just over two years for the euro zone's fourth largest economy and comes as the government tries to convince investors it will not need outside aid to pay its bills like other countries caught up in the debt crisis.

The country is facing intense pressure from its European peers to fix public finances as well as growing domestic resistance to austerity measures that have helped push unemployment to more than double the EU average.

Ratings agency Standard & Poor's added to the country's problems with a two-notch rating downgrade last week and on Monday it chopped the credit score of eleven banks.

While the 0.3 percent contraction from January to March from the previous quarter was slightly better than the forecast drop of 0.4 percent, it confirmed the economy is in a tough spot.

"The wheels are very clearly coming off the economy," Jefferies economist David Owen said.

"It wouldn't surprise me to see a very significant decline in GDP both in the second and third quarters this year, and it's still reasonably easy to envisage GDP to be down about 1.5 percent this year."

Spain was last in recession, defined by two straight quarters of economic contraction, at the end of 2009. On an annual basis, the economy contracted by 0.4 percent, compared with growth of 0.3 percent in the previous quarter, Monday's official data showed.

The government's latest economic plan, published on Friday before it was sent to the European Commission for approval, forecast a contraction of 1.7 percent in 2012 turning to 0.2 percent growth by next year.

Spanish bonds showed little reaction to the report but yields have risen to around 6 percent in recent weeks as investors digest the country's worsening economic news. Yields of around 7 percent are seen as financially unsustainable.