Spain double-dips

Economy contracts by 0.3 per cent.

Spanish anti-cuts protestors.
Spanish anti-cuts protestors. Photograph: Getty Images

The Spanish Institute of National Statistics (INE) estimates that the country's economy shrank by 0.3 per cent in the first quarter of 2012, following a contraction of 0.3 per cent in the last quarter of 2011, putting the country back into a technical recession.

The news is actually better than many feared. Last week the Bank of Spain predicted that this quarter's contraction would be 0.4 per cent. Nonetheless, the news for the year ahead is bleak. The government is predicting an annual contraction of 1.7 per cent over this year, worse still than the prediction of a 1.5 per cent shrinkage which caused the ratings agency Standard and Poor's to downgrade the country two notches last week. The government is more pessimistic than S&P when it comes to 2013, as well, predicting  0.2 per cent annual growth rather than 0.5 per cent.

The reaction of the ruling People's Party to the news has been markedly remiscent to that of their ideological siblings, the Conservatives. Even before the news broke, Prime Minister Mariano Rajoy was telling supporters that:

Spain needs deep structural change, not makeup.

Rajoy clearly does not agree with the analysis of Paul Krugman and Martin Wolf showing that recession is strongly correlated with austerity.

Before the news of the double-dip broke, S&P added to their Spanish downgrade by downgrading 11 Spanish banks, including Santander, the largest bank by market capitalisation. As a result, the government is in talks over creating an Irish-style "bad bank"; an institution designed to relieve the downgraded banks of much of their risk by taking on bad debt. Officials from the government argue that its not actually a bad bank, since it won't be a bank, but that raises more questions about how it will work.