Spain's two-year economic slump showed signs of coming to an end in the second quarter, data showed today, but weak domestic demand and looming fresh austerity measures mean a sustained recovery may still be far off.

The National Statistics Institute said the contraction in gross domestic product eased to 0.1% from April to June from a quarter earlier when the economy shrank 0.5%.

Following signs of some improvement in economic activity, including the first drop in unemployment in two years in the second quarter, Economy Minister Luis de Guindos has said that the recession has come to an end.

However, economists are less convinced. 

"We're not counting on a further improvement in the third quarter and are very sceptical of any statement that the recession in close to being over," analysts at Citi in London said.

"In an environment where there is more than 25% unemployment, a slightly positive GDP figure does not mean the recession has ended,'' they addded.

The second quarter improvement was largely due to temporary factors including an especially weak first quarter and strong trade data, which includes seasonal tourism. INE said today that shrinking domestic spending in the second quarter was partially offset by exports.

Spain's high reliance on activity beyond its borders - exports were worth a third of economic activity in the first quarter, up from 23% four years earlier - add increased uncertainty to the outlook as global recovery falters.

Spain's economy slipped into recession in 2008 after a burst property bubble badly undermined the foundations of one of the country's key pillars of growth - construction - sending unemployment to new record-highs and depressing business.

Since then, dire domestic demand has been further hit by tax hikes and spending cuts aimed at balancing the budget.

While the latest PMI surveys and encouraging unemployment data for the second quarter suggest Guindos' optimism may be founded, earnings for the first half of the year posted by Spain's biggest firms over the last few days offered a mixed picture.

Many indicators, including retails sales, due tomorrow, as well as electricity and gas consumption, show that activity is still struggling.

In addition, even though the emphasis in Europe has shifted toward growth and away from austerity in recent months, Spain's high fiscal imbalances mean more budget cuts are likely to be made, potentially hitting the tentative signs of recovery.

Meanwhile, national consumer prices in July rose 1.8%, down from 2.1% a month earlier, new figures showed today.