Spain’s recession deepened more than economists forecast in the fourth quarter as the government’s struggle to rein in the euro zone’s second- largest budget deficit weighed on domestic demand.

Gross domestic product fell 0.7 per cent in the three months through December from the previous quarter, when it declined 0.3 per cent, according to the Madrid-based National Statistics Institute. That is more than the 0.6 per cent contraction the Bank of Spain had predicted on January 23rd.

GDP dropped 1.8 per cent in the fourth quarter from a year earlier and 1.37 per cent in the full year from 2011.

The European Commission this week signalled it may recommend easing Spain’s budget goals for the fourth time in a year as unemployment rose to a record 26 per cent at the end of prime minister Mariano Rajoy’s first year in power.

The yield on Spain’s 10-year benchmark rose one basis point to 5.17 per cent earlier after a euro-era high of 7.75 per cent in July.

The spread with German borrowing costs has narrowed about 45 per cent to 3.47 percentage points. – (Bloomberg)