Spain is falling deeper into recession as Madrid moves closer to seeking a European rescue package.
Data released on Tuesday show the economy shrank 1.3 percent between April and June from the same period last year.
The amount of money being withdrawn from Spanish banks soared in July, with private sector deposits falling almost five percent at end-July from one month earlier.
The recession is expected to worsen as austerity measures introduced in response to the eurozone debt crisis reduce demand for goods and services.
A major example of the effect is the up-market retailer El Corte Ingles. Its profits fell as customers headed instead for budget stores.
Carlos Hernandez, an analyst at the consultancy Planet Retail, said: “It is almost five years we are in this crisis situation so the company is obviously feeling the pressure more and more. If we have a look at the sales of El Corte Ingles in the last five years, we see that sales have gone down by around twelve per cent. That’s more than most competitors.”
El Corte Ingles – which is a barometer for Spanish middle-class spending – saw its profits fall by more than a third last year.
Overall Spanish retail sales were down in June for the 24th straight month. To make matters worse the main rate of VAT sales tax id due to rise from 18 percent to 21 percent on September 1st.
Analysts believe it is inevitable that Spain will soon have to call for a European rescue package to help bring its debt costs down as austerity measures designed to slash the public deficit push the economy deeper into recession.
“The economy is much weaker than previously thought and this could make it more challenging for the government to achieve the ambitious fiscal targets,” said Tullia Bucco, an economist at UniCredit.