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Spain's economy shrinks but bond demand stays high

Spain's economy shrinks but bond demand stays high
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There was confirmation of the grim state of Spain’s economy with the release of figures showing gross domestic product shrank by 0.3 percent at the end of last year from the previous quarter.

With unemployment the highest in the eurozone and harsh austerity measures being introduced to slash the massive budget deficit economists fear a prolonged slump.

For all of 2011, the economy grew by 0.7 percent compared with a fall of 0.1 percent in 2010.

The economy would be a “little worse” in the first quarter of 2012 than the last three months of last year, Economy Secretary Fernando Jimenez Latorre said on Thursday, confirming expectations that Spain is already in recession.

In the fourth quarter, exports were the only sector to show growth with industry surviving solely because of demand outside of Spain, though even that is slowing as the economies of the country’s main trading partners stumble.

However there was solid demand for Spanish government bonds at its latest debt auction.

It easily sold all the bonds it wanted to, although concerns about Greece’s second bailout and the fragility of some of the eurozone’s riskier economies pushed the interest rates Madrid had to offer higher.

An auction in France also attracted good support, leaving two-year yields below one percent, showing investors continue to favour the stronger northern European economies.

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