Spain slides into recession as strike, new cuts loom

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Demonstrators shout slogans against the government's recently approved labor reforms during a protest in Barcelona, Spain, Sunday March 11, 2012. One of Spain's main labor unions has called a general strike for March 29 to protest the conservative government's drastic new labor reform and austerity measures. The strike represents the first major social challenge to the right-leaning policies of the Popular Party government that took office in December. AP PHOTO/EMILIO MORENATTI

MADRID—Spain’s unemployment-scarred economy has skidded back into recession, a Bank of Spain report said Tuesday, days before a general strike and a biting austerity budget.

The report confirmed widespread forecasts of a second straight quarterly slump in the first three months of 2012, sending Spain back into recession barely two years after it emerged from the last one.

“The most recent information relating to the beginning of 2012 confirms a continuation of the contraction of activity in the first quarter of this year,” the bank said in its March economic bulletin.

It was grim news for a country suffering from a near-23 percent unemployment rate, facing a general strike against labor-market reforms Thursday and due to hear of massive budget cuts Friday.

The central bank did not give a figure for the first-quarter contraction but said it was mainly caused by a decline in private consumption in January and February to levels not seen since 2010.

The Spanish economy, the fourth-biggest in the euro area, had already shrunk by 0.3 percent in the fourth quarter of 2011 compared to the third quarter, according to official data.

Prime Minister Mariano Rajoy’s conservative government, in power since December, announces Friday a 2012 budget that assumes an economic contraction of 1.7 percent this year after 0.7-percent growth in 2011.

European leaders are concerned over Spain’s deficit, fearing it may become the biggest victim of a eurozone debt crisis that has already driven Greece, Ireland and Portugal to accept international bailouts.

The 2011 deficit figure was 8.5 percent of GDP, high above the 6.0 percent target. Rajoy tried to get away with a target of 5.8 percent this year, above the 4.4 percent demanded by the EU, before reaching the 5.3 percent compromise.

“While the revised fiscal target for 2012 is more realistic than the previous one, the government will still need to implement a substantial fiscal adjustment,” credit rater Moody’s warned.

It calculated that Spain will have to make a huge 41.5 billion euros ($55.5 billion) in budget cuts this year to meet the target, while other economists offer even higher estimates.

Spain emerged only at the start of 2010 from an 18-month recession triggered by a global financial crisis and a property bubble collapse that destroyed millions of jobs and left behind huge bad loans and debts.

The jobless total hit 5.27 million people at the end of 2011, pushing the unemployment rate to 22.85 percent, the highest level among members of the Organization for Economic Cooperation and Development.

The government has predicted the unemployment rate will rise to an average of 23.4 percent this year.

It has overhauled labor rules to make it cheaper to fire workers and easier to lower wages, measures it argues will eventually encourage job creation when the economy improves.

Those changes prompted unions to call the general strike.

The government has also implemented 8.9 billion euros’ worth of spending cuts and 6.3 billion euros in tax rises to rein in the public deficit. But those measures may be just the beginning of a tough year for Spain.

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