Spain in recession as austerity bites

The country's gross domestic product shrank 0.3% in January-March from the previous quarter

Spain's economy slipped into recession in the first quarter as domestic demand shrank, data showed on Monday, with deep government spending cuts in an uphill battle to trim the public deficit likely to delay any return to growth.

Gross domestic product shrank 0.3% in January-March from the previous quarter according to preliminary National Statistics Institute data, unchanged from October-December and compared to a Reuters poll expecting a 0.4% contraction.

Madrid is under intense pressure from its European peers to streamline the euro zone's fourth largest economy, reduce a massive public deficit and fix a banking system battered by a four-year economic slump and a burst property bubble.

On an annual basis the economy contracted by 0.4% compared with growth of 0.3% in the previous quarter, the data showed. Economists polled by Reuters, as well as the Bank of Spain, had forecast a slippage of 0.5%.

"Spain's still very much recession and we think that this isn't going to improve soon. It's likely they'll have to create more fiscal tightening in order to catch up if they wish to avoid going in to plan, and that's going to be counterproductive," economist at Citi Guillaume Menuet said.

The Spanish government's updated economic stability plan, published on Friday before sending it to the European Commission, saw an estimated contraction of 1.7% in 2012 turning to 0.2% growth by next year.