Spanish Slump Shallower Than Predicted

Smaller shrinkage than expected buoys European stocks

A stock board in Germany. (Photo: AP) A stock board in Germany. (Photo: AP)

Although the numbers showed that Spain entered a recession in the first quarter, its economy shrank less than expected and that seemed to be enough cause for investors to celebrate.

European stocks rose in early morning trading on Monday, despite the fact that Reuters reported the Spanish economy shrank 0.3%. The Bank of Spain had predicted a contraction of 0.4%.

Tough austerity measures unpopular with the Spanish public have taken a toll on its economy, and last week its unemployment rate hit the highest level in 20 years. Youth unemployment in Spain has hovered around 50%.

Viewed on an annual basis, the economy contracted by 0.4%, compared with growth of 0.3% in the previous quarter. Both the Bank of Spain and a group of economists polled by Reuters had expected the decline to be even larger, predicting 0.5%.

Guillaume Menuet, an economist at Citi, said in the report, "Spain's still very much in recession and we think that this isn't going to improve soon. It's likely they'll have to create more fiscal tightening in order to catch up if they wish to avoid going in to plan, and that's going to be counterproductive."

On Friday the Spanish government published its updated economic stability plan prior to sending it to the European Commission (EC). In the plan, the government estimated an economic contraction of 1.7% for 2012, with a transition to growth of 0.2% for 2013.

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