The Bank of Spain today estimated that the economy shrank by 0.1% in 2010, a better performance than expected by the government after an expansion in the final quarter.
Spain is fighting to revive its economy, Europe's fifth-largest, and convince nervous investors that it will grow enough to bring its massive public deficit under control without resorting to a Greek or Irish style bail-out.
The government earlier this week signed a 'grand social pact' on reforms covering pensions and collective bargaining to boost growth and slash an unemployment rate of just over 20%, the highest level in the industrialised world.
It had predicted the economy would shrink by 0.3% in 2010 after contracting 3.7% the previous year, although in recent weeks officials had forecast the decline this year would be limited to 0.2%.
The Spanish economy slumped into recession during the second half of 2008 as the global financial meltdown compounded the collapse of a credit-fueled property boom that had been the driver of growth for over a decade. It emerged with tepid growth of just 0.1% in the first quarter and 0.2% in the second, but then stalled with zero percent growth in the third.
Prime Minister Jose Luis Rodriguez Zapatero's Socialist government predicts Spain will expand by 1.3% this year and will grow grow faster than the European Union average as early as 2013.
The International Monetary Fund predicts the Spanish economy will post growth of just 0.6% this year which will pick up to 1.7% in 2012 and 1.9% in both 2013 and 2014.
Stronger growth is key to the government's goal of slashing Spain's public deficit to below the a European Union limit of 3% of gross domestic product by 2013. Spain's public deficit hit 11.1% of GDP in 2009, the third-highest in the euro zone after Greece and Ireland, both of which have subsequently required European bail-outs.
Madrid has since announced a raft of austerity measures, including an average cut to public workers' pay of 5% and plans to to sell stakes in the national lottery and the country's main airport operator, to help bring the deficit under control.
It has also taken steps to strengthen the financial system by requiring all lenders to raise their levels of rock-solid core capital or face state intervention.
