Spain’s recession eased in the first quarter as Prime Minister Mariano Rajoy prepares plans to foster growth while reducing the country’s budget deficit.

Gross domestic product fell 0.5 percent from the fourth quarter, when it dropped 0.8 percent, the most since 2009, the Bank of Spain said in its monthly bulletin today. That’s the seventh quarterly contraction. Today’s data is in line with the median of 15 economist estimates in a Bloomberg News survey.

Rajoy pledged on April 17 to unveil measures to stimulate the economy and create jobs later this week. His government is seeking more time from European Union peers to reorder public finances in the euro-area’s fourth largest economy after a banking-sector bailout propelled Spain’s deficit last year to the largest in the region. 

“It’s a good sign after a horrible last quarter in 2012, but we are still in an intense recession,” said Jose Carlos Diez, chief economist at Madrid-based brokerage Intermoney SA. “It’s difficult to see a recovery. Our main trading partners aren’t doing well and unemployment is going to continue increasing.”

The yield on Spain’s 10-year benchmark bonds fell 23 basis points to 4.264 percent at 2:40 p.m. in Madrid, narrowing the spread with German debt of similar maturity to 3.05 percentage points after met its maximum target of 3 billion euros ($3.9 billion) in a bills sale. The Spanish 10-year yield rose to a euro-era record of 7.75 percent in July before the European Central Bank pledged to do whatever it takes to save the euro.

The International Monetary Fund last week cut its outlook for Spain, predicting the economy to shrink 1.6 percent this year before growing 0.7 percent in 2014. Still, the Washington-based fund’s managing director Christine Lagarde offered support for Rajoy’s calls for the EU to loosen demands for further deficit cuts.

Spain “needs more time,” Lagarde said in Washington on April 18. “We do not see a need to do upfront, heavy-duty fiscal consolidation as was initially planned.”

Funding conditions remain restrictive for households and companies, weighing on domestic demand, the Bank of Spain said. Households’ limited capacity to save in a context of declining disposable income as well as uncertainty on the labor market and a high level of debt leave little space for consumption to pick up in the short term, it said.

Spain’s export growth was also held back by the euro-area recession during the first three months of the year, the Bank of Spain said. Spain’s National Statistics Institute will report first-quarter GDP data on April 30.

Eurostat, the EU’s statistics agency in Luxembourg, reported yesterday that Spain’s 2012 deficit widened to 10.6 percent of GDP from 9.4 percent in 2011, more than three times the limit of 3 percent of GDP imposed by the EU on all members. Excluding aid to banks, the 2012 budget deficit was 7.1 percent, Eurostat said.

The weakness of income from tax receipts and contributions to the pensions and unemployment benefits system point to a difficulty of reducing the budget deficit in a context of economic crisis, the Bank of Spain said.

Jose Barroso, president of the European Commission, yesterday signaled European officials are being swayed by IMF pressure to relax Spain’s targets for reducing the budget deficit due to the toll on the economy. (Bloomberg)