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Spain stuck in recession as inflation bites

Spanish Prime Minister Mariano Rajoy at a news conference on, October 29, 2012.

ANDREA COMAS/REUTERS

Spain's recession extended into the third quarter while inflation stayed high in October, data showed, indicating a government austerity program to cut the public deficit is also pushing up living costs.

Gross domestic product shrank 0.3 per cent quarter on quarter between July and September, marking the fifth straight quarter of contraction, according to Tuesday's preliminary data from the National Statistics Institute.

The reading was slightly better than forecasts for a fall of 0.4 per cent, but any suggestion that that marked an upturn was "a mirage," said Estefania Ponte, an economist at Madrid-based broker Cortal Consors.

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"It does not mean the economy is doing better, but only shows the families have brought forward purchases ahead of the VAT hike," she said.

On an annual basis, the economy shrank 1.6 per cent, suggesting Spain was in line to meet its end-of-year GDP target.

EU-harmonized consumer prices rose by 3.5 per cent year-on-year in October, according to separate preliminary data that topped a Reuters forecast of 3.4 per cent. The figure was unchanged from September.

Spain's conservatives, in power since December, have laid out spending cuts and tax hikes worth over €60-billion ($78-billion U.S.) to end-2014 to cut the budget gap to within EU guidelines.

The measures included an across-the-board increase of the value-added tax rate, in force since Sept. 1, which pushed up consumer prices and hit sentiment on the high street.

Retail sales fell at the sharpest pace on record in September after already cash-strapped shoppers shied away from purchases after the tax hike.

The euro zone's fourth largest economy is at the centre of the bloc's debt crisis on concerns the government cannot control its finances.

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Spain's refinancing costs on international debt markets soared to euro-era highs in July but have since eased after the European Central Bank said it would activate a sovereign bond-buying program for countries that ask for European aid.

Prime Minister Mariano Rajoy appears in no rush to apply for aid, with debt premiums falling to more manageable levels since the ECB announcement and wary that deeper austerity measures might further hobble the economic recovery and fuel popular protests.

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