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 Wednesday.
Available data pointed to gross domestic product plunging by 0.6 percent on a quarterly basis in the final three months of the year after a 0.3-percent 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 percent 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.
A weak labour market -- with a jobless rate of 25 percent in the third quarter -- further depressed demand for Spanish goods and services, the bank said. The unemployment rate is expected to rise to about 26 percent in the final quarter of 2012, it said.
Over the whole of 2012, the Bank of Spain estimated that economic output fell by 1.3 percent from the previous year. That was slightly better than the government's forecast for a 1.5-percent contraction, but was likely to give little comfort given the deterioration at the end of 2012.
The end-of-year economic slump should serve as a warning to Spain, said a report by Capital Economics.
The news contrasted with Spain's recent easier ride on the debt markets, with sovereign borrowing costs sliding since the European Central Bank promised in September to buy the bonds of troubled states under strict conditions, if need be.
"While market pressures on the country have abated in response to the ECB's promised intervention, the underlying economic outlook remains extremely weak," Capital Economics said.
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 percent of annual gross domestic product in 2011 to 6.3 percent in 2012, 4.5 percent in 2013 and 2.8 percent in 2014.
But analysts say it will be hard to reach such ambitious targets, and that the measures being taken to reach them are delaying economic recovery. The government has forecast a 0.5-percent economic decline in 2013, an outlook viewed as optimistic by others including the OECD and IMF.
"Demanding a drastic reduction in the public deficit in a short period could be counter-productive," said Josep Comajuncosa, economist at the Esade business school, who warned of a risk that the recession could deepen further.