Spain Falls Back Into Recession As Austerity Bites

First the United Kingdom, and now Spain: the latter's economy has joined Britain in tipping back into recession, after implementing austerity measures -- budget cuts and tax/fee increases -- designed to put the nation on a a long-term, sustainable fiscal track.

Spain's recession will invariably spark a renewed debate between conservative/monetarist school economists and Keynesian economists.

Conservatives argue that cutting government spending and balancing a fiscal budget is required to increase investor confidence to the point where investors deploy more capital, which will increase commercial activity, economic growth, and create new jobs.

Conversely, Keynesians argue that to impose austerity measures in the form of large government spending cuts during a period of weak demand and not enough private sector investment to compensate for the public sector cuts, will tip an economy back into recession.

Spain sank into recession in the first quarter and economists said spending cuts aimed at meeting strict EU deficit limits together with troubles in the banking sector would delay any return to growth until late this year or beyond, Reuters reported Monday.

Second Recession In Spain In Two Years

It is the second recession in just over two years for the eurozone's fourth largest economy and comes as the government tries to convince investors it won't need outside aid to pay its bills like other countries caught up in the debt crisis.

The country is facing intense pressure from its European peers to fix public finances as well as growing domestic resistance to austerity measures that have helped push unemployment to more than double the EU average.

Ratings agency Standard & Poor's added to the country's problems with a two-notch rating downgrade last week and on Monday it chopped the credit score of 11 banks, Reuters reported.

While the 0.3 percent contraction from January to March from the previous quarter was slightly better than the forecast drop of 0.4 percent, it confirmed the economy is in a tough spot.

The wheels are very clearly coming off the economy, Jefferies economist David Owen said, Reuters reported.

It wouldn't surprise me to see a very significant decline in GDP both in the second and third quarters this year, and it's still reasonably easy to envisage GDP to be down about 1.5 percent this year.

Spain was last in recession, defined by two straight quarters of economic contraction, at the end of 2009. On an annual basis, the economy contracted by 0.4 percent, compared with growth of 0.3 percent in the previous quarter, Monday's official data showed.

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Reuters news service contributed to this report.