Spain, reeling under the weight of massive unemployment and a collapsed property market, saw its economy shrink by 0.1 percent last year, although it grew by 0.2 percent during the fourth quarter, according to the country’s National Statistics Institute.

The fourth quarter gain was principally driven by increased demand for Spanish exports.
2011 looks to be another tough year, however. Prime Minister Jose Luis Rodriguez Zapatero's government is currently forecasting a 1.3-percent growth this year.

Last fall, the government passed a draconian austerity budget –which included spending reductions, pension reforms, public sector job cuts, pay cuts for government workers, higher taxes, among other measures -- to meet EU standards on debt.

The government has vowed to reduce its deficit 6 percent of GDP in 2011, from 11.1 percent in 2009. It seeks to further lower that figure to the EU-mandated 3 percent by 2013.

Spain’s unemployed figure stands at 20.33 percent, the highest in the industrialized world.

Raj Badiani, an economist at IHS Global Insight, is less thansanguine about Spain’s near-term prospects.
“Despite a stronger than expected performance in the final quarter of 2010, we continue to doubt whether Spain will able to generate any significant growth in 2011,” he said.

“A key concern is that [the] economy continues to shed with employment falling for the tenth straight quarter when it contracted by 1.3 percent year-on-year at end-2010.”

Recent indicators also point to still contracting demand for labor, he added, suggesting firms believe that Spain remains far away from a strong recovery path, and that any rise in output is likely to be modest due to poor domestic demand conditions.

“Other key data suggest the economic malaise has spilled into 2011, particularly acute consumer pessimism and still falling service sector activity,” he noted.