Spain’s recession worsened more than previously estimated as it dragged into a seventh straight quarter amid a slump in domestic demand, threatening the government’s forecast of a return to growth this year.

Gross domestic product in the euro region’s fourth-largest economy fell 0.8 percent in the fourth quarter from the previous three months, more than the 0.7 percent drop estimated on Jan. 30, the Madrid-based National Statistics Institute said today. It had declined 0.3 percent in the third quarter. A drop in domestic demand caused output to shrink 4.7 percent, compared with 4 percent in the previous quarter, while exports generated 2.8 percent growth, up from 2.4 percent three months earlier.

Over the full year, INE said, output shrank 1.4 percent from 2011, when it grew 0.4 percent. Domestic demand chipped 3.9 percent from the nation’s GDP in 2012, compared with a negative impact of 1.9 percent a year earlier, while exports boosted growth 2.5 percent, up from 2.3 percent in 2011.

The Bank of Spain said yesterday that the recession is extending into the first quarter amid weak domestic demand even as Prime Minister Mariano Rajoy predicts a return to growth in the second half. While the government forecasts the contraction will be 0.5 percent compared with 1.4 last year, the International Monetary Fund expects it will worsen to 1.5 percent.

Top Goals

“The most important of Spain’s goals are economic growth and creating jobs,” Rajoy told lawmakers in Madrid yesterday. His government’s efforts last year to cut the second-largest budget deficit in the euro region, along with Greece’s and behind Ireland’s, are improving investor confidence, he said.

The yield on Spain’s 10-year benchmark bond was at 5.23 percent at 8:59 a.m. in Madrid after rising to 5.59 percent, its highest level this year, on Feb. 26 amid political uncertainty in Italy after inconclusive elections threw the country into political disarray. That’s 75 basis points higher than the 10- month low it reached in January, as support pledged by the European Central Bank to hold the euro together spurred a rally on debt sold in the so-called euro-periphery nations.

An anti-austerity movement won more than a quarter of the popular vote in Italy on Feb. 25 and European Union leaders are piling pressure on the country’s rival factions to form a unity government committed to budget rigor. In the meantime, the political turmoil has spread to other markets.

Tourism suffers

Spanish Economy Minister Luis de Guindos said Feb. 9 he expects the current account, due to be published around 10 a.m. today by the Bank of Spain, to be nearly balanced in 2012. Exports rose to their highest level last year since records began in 1971 even as a recession spread across the euro region.

Still, the Bank of Spain said export growth slowed in the last quarter while indicators on tourism, the other only growth driver Spain has left, showed weakness in recent months. The number of tourist visits fell 2.6 percent in January from a year earlier. Spanish public finances also deteriorated including European aid to re-capitalize the country’s banks, the European Commission estimates, as overspending rose to 10.2 percent of GDP in 2012 from 9.4 percent a year earlier.

In a separate report today, INE said consumer price inflation in February was unchanged from last month at 2.8 percent. A 26 percent unemployment rate and five austerity rounds since Rajoy came to power about a year ago have crimped spending and investment. U.K. consumer goods retailer Kingfisher Plc last week said Spain faces weak consumer confidence while French carmaker Renault SA said the Spanish market will reach its lowest point in 30 years in 2013.

Spanish retailers including Mango and El Corte Ingles SA are hiring translators, offering special tourist discounts and boosting ads in travel magazines to ensnare foreigners and buoy sales as cash-strapped locals trim spending. Vodafone Group Plc, the world’s second-largest mobile-phone company, this month announced 620 job cuts in its Spanish unit after service revenue dropped 11 percent in the six months through September.

With assistance from Harumi Ichikura in London and Manuel Baigorri in Madrid. Editors: Jennifer M. Freedman and Zoe Schneeweiss.

To contact the reporter on this story: Angeline Benoit in Madrid at To contact the editor responsible for this story: Craig Stirling at

Photo Credit: Pedestrians along Barcelona's La Rambla pedestrian shopping area. Stephanie Overton / Flickr