Spain's manufacturing sector shrank for the tenth straight month in February, bucking forecasts for an easing in the pace of contraction and putting Spain on course for a new recession, a survey showed today.

The Purchasing Managers Index for the country's manufacturing sector was 45.0 in February, just down from 45.1 the previous month, as a surge in input prices put the brakes on any improving momentum.

The reading quashed predictions in a Reuters poll for a pick up to 45.5 and the index remained well below the 50 mark that divides growth from contraction.

Spain's economy contracted in the last quarter of 2011 by 0.3 per cent and the survey pointed to recession at the start of 2012.

The country is struggling to slash its public deficit to avoid a collapse in market confidence and although the European Central Bank's trillion euro cash infusion in banks has helped stabilise Spain's sovereign debt, the economic picture is worsening.

Unable to pass on rising costs, Spanish factories in February shed jobs at the fastest rate in more than two years, worsening employment prospects in a country where already more than one-in-five is out of work.

"2012 has so far brought little respite for struggling manufacturers in Spain, with domestic demand in particular reported to have fallen again," said Andrew Harker of data provider Markit.

A surge in input costs also hit Spain's factories in February. The input prices index rose to 58.4 in February after four months of falling prices, indicating the sharpest rise in firms' costs since May.

"Combined with another drop in output prices in the face of intense competition, the surge in costs will have added more pressure to manufacturers' margins," Harker added.

Markit said manufacturers reported rising costs in raw materials including plastics and steel. Factories have been forced to cut costs due to weak demand, and the output prices index held below the 50 mark for the seventh month in a row.

Factories reported a worsening in the pace of decline in new orders, including exports, which sustained a weak recovery in 2011 in the face of dire domestic demand.

Yesterday, the Bank of Spain backed the assessment that economic indicators at the start of the year pointed to ongoing contraction at the start of 2012.

The European Commission last week forecast the economy would shrink in 2012 by 1.0 per cent, more optimistic than the central bank's own forecast of contraction of 1.5 per cent.

Reuters