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AAP

January 24 2013, 03:19AM

Crisis Spain

By Amlie Baubeau

MADRID, Jan 23 AFP - Spain's economy took its steepest dive in more than three years in the final quarter of 2012 as high unemployment and biting austerity measures slashed demand, a Bank of Spain report showed on Wednesday.

Available data pointed to gross domestic product plunging by 0.6 per cent on a quarterly basis in the final three months of the year after a 0.3-per cent dip the previous quarter, it said.

It marked the sharpest quarterly fall in Spanish economic output since the second quarter of 2009 when the eurozone's fourth-biggest economy was reeling from a massive property crash.

Spain's economic output has been on a downward path since the final quarter of 2011 and right up to the third quarter of 2012, the central bank said. "Available data indicate that this intensified in the October-December period."

Demand by consumers and businesses plummeted by 1.9 per cent in the fourth quarter from the previous three months, the Bank of Spain said.

The Spanish economy was hammered in part because a buying spree ahead of a September 1 sales tax increase had evaporated in the final quarter. At the same time, public sector workers had their Christmas bonuses cancelled.

Tough financing conditions in the midst of a crisis in the banking sector crimped activity, it said, as Spain's bad loan-ridden banks undergo a drastic restructuring with the help of a European Union rescue loan of up to 100 billion euros ($A126.94 billion).

A weak labour market - with a jobless rate of 25 per cent in the third quarter - further depressed demand for Spanish goods and services, the bank said. The unemployment rate is estimated to have climbed to about 26 per cent in the final quarter of 2012, it said.

Over the whole of 2012, the Bank of Spain said economic output fell by 1.3 per cent from the previous year. That was slightly better than the government's forecast for a 1.5-per cent contraction, but was likely to provide little comfort given the deterioration at the end of 2012.

The government forecast of a 0.5 per cent fall in economic activity in 2013 appeared to be "very optimistic", the analyst said, tipping instead a 2.0 per cent decline.

Under pressure from Brussels to cut its public deficit and curb a fast-growing debt mountain, Spain has been slashing spending and raising taxes.

It aims to lower the public deficit from the equivalent of 9.4 per cent of annual gross domestic product in 2011 to 6.3 per cent in 2012, 4.5 per cent in 2013 and 2.8 per cent in 2014.

But "despite further onerous austerity, it looks likely that the budget deficit barely fell in 2012 and hence exceeded the official targets significantly," Loynes warned.

"Further falls in economic activity could even see the deficit rising again in the coming quarters."