Spanish recession deepens in second quarter

A woman walks past sales banners on a shop window in Barcelona July 15, 2012.

MADRID (Reuters) - Spain slid deeper into recession in the second quarter as a tough new round of austerity to head off the budget crisis that threatens the euro took effect both on overall demand and the price consumers have to pay for goods.

The first official numbers on gross domestic product showed the economy shrank 0.4 percent from the previous quarter after contracting 0.3 percent in the first three months of the year. The economy was 1.0 percent smaller than a year earlier.

Consumer prices according to both Spanish and EU methodology rose 2.2 percent year-on-year, with the EU-harmonized increase above forecasts being due to medicine price hikes put in place by the government to save money and deflate the deficit.

Economists warned price hikes, and especially a 3-point rise in value-added tax due to come into effect in September, would distort consumer prices while the deepening recession reflected slower domestic demand.

That will further weaken the government's efforts to get the economy growing again - vital if it is to meet targets on reducing its budget shortfall and halting a market-inspired crisis in how it finances its debt.

"To properly follow Spain's economic reality, I would look at domestic service inflation, which is where we'll see stagnation and even deflationary pressures. Consumption remains very weak," economist at Madrid-based broker Intermoney Jose Carlos Diez said.

Spain slipped into the second recession since 2009 in the first quarter and is expected to continue to shrink until well into 2013 as consumers and businesses rein in spending and the euro zone debt crisis saps investor confidence.

Fears over the health of Spain's economy as it fights to reduce its public deficit has lifted funding costs to euro-era highs in recent weeks leading many to think an application for a full-bailout could soon become inevitable.

A full breakdown of the growth data will be published August 28, while the final price data will be available August 14.

(Reporting By Nigel Davies, writing by Paul Day; Editing by Julien Toyer and Patrick Graham)