Spanish GDP Contracts 0.5% in First Quarter

Spain's Instituto Nacional de Estadística (INES) reported this morning that the country's gross domestic product (GDP) shrank 0.5% sequentially in the first quarter of 2013, the seventh consecutive quarter of falling GDP in the troubled country. Year over year, the economy shrank by 2%.

Unemployment in Spain now tops 27% and is not expected to fall below 25% until 2016. The country's central bank recently forecast a drop in GDP of 1.3% for all of 2013, a much steeper decline than the original estimate for a drop of 0.5%.

Spain has adopted some new policies to try to mitigate the impact of the deficit reduction program it agreed to last year. For example, Spain now expects its 2013 budget deficit to come in at 6.3% rather than the 4.5% it had previously agreed to. The government has said it will need an additional two years to bring the deficit down to that level.

Perhaps the contraction in Spanish growth will lead the European Central Bank (ECB) to cut its policy rate when it meets on Thursday. Such a reduction would at least indicate to the eurozone periphery that the central bank is trying to do something to alleviate their pain. The impact of a rate cut at this point would reinforce the ECB's determination to preserve the common currency, but likely do little to improve the lot of Spain and the other struggling eurozone economies.

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