Spain is unlikely to exit recession until early 2014 as falling demand and the deepening crisis in the euro area would continue to restrict recovery, while economic activity will be further hampered by a squeeze on spending following the recent VAT hike, the government's austerity measures and a tight fiscal policy, IHS Global Insight economist Raj Badiani said Wednesday. IHS Global Insight expects Spain's GDP to fall at a faster rate of 0.6 percent in the fourth quarter than the previous quarter's 0.3 percent drop, implying the economy is projected to shrink by a revised 1.4 percent in the whole of 2012. Further, the economy is forecast to contract 2 percent in 2013 and by 0.2 percent in 2014.

Amid subdued domestic activity, Spain will be forced to rely excessively on net exports to restrain the fall in real GDP in the next few quarters. However, the country's exports face the prospect of a further squeeze on domestic spending across the Eurozone over the period. Economic activity could also take a considerable hit from the contagion from a possible exit by Greece from the Eurozone no later than the third quarter of 2013, the firm cautioned.

Initial estimates from statistical office INE Tuesday showed Spain's GDP dropped a better-than-expected 0.3 percent sequentially in the third quarter after falling 0.4 percent in the second quarter and 0.3 percent in the first quarter. The latest fall was the fourth in a row, and suggested that the economy has fallen deeper into recession. Year-on-year, GDP declined at a faster rate of 1.6 percent than the previous quarter's 1.3 percent contraction, and beat initial estimates. According to Badiani, Spain's deepening recessionary conditions have also been highlighted by the steadily accumulating job losses. The main contributor to economic activity is continued positive impetus from net exports, resulting from a mix of still shrinking import demand and some export growth.

The economist observed that the final GDP figure for third quarter will likely show a much sharper contraction, given that the collapse in consumer spending seen in September after the steep VAT hike at the start of the month is at odds with the flash estimate.

The improvement in domestic demand in recent months was influenced mainly by consumers and firms who brought forward their spending plans to avoid the VAT hike from September. The government's payment to-suppliers plan for companies' accounts also had a positive effect.

The purchasing managers' survey for September, which revealed a deeper decline in Spanish service-sector activity, underpins the intense pressure on private spending after the tax hike, so do the disastrous fall in retail spending and new car sales, the economist added.

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