Prime Minister Mariano Rajoy promised Spain a dose of economic stimulus yesterday, leavening his strict diet of austerity for the first time as figures showed the country’s recession had deepened.

Gross domestic product fell 0.7 per cent in the fourth quarter of last year from the third, its steepest contraction in a year as households hit by state spending cuts and stubbornly high unemployment slashed spending.

The National Statistics Institute data showed that, notwithstanding an easing of debt market tensions in recent months, the Government faces an uphill battle if it is to put public finances back on a sustainable footing as the economic outlook remains bleak.

“The outlook for the remainder of 2013 and 2014 is no better. The main impediments to any recovery prospects remain the fallout of the ongoing financial crisis hanging over Spain, coupled with still-punishing employment losses,” Raj Badiani of IHS Global Insight said.

Reflecting the scale of the task, Rajoy told parliament he was planning a package of stimulus measures that would include tax breaks for entrepreneurs.

He also said Spain would stick to planned budget cuts.

But the announcement marked a clear departure from the rigorous pro-austerity policies that his government has stuck with since taking office in December 2011.

A buoyant bond market to which yield-hungry foreign investors have returned in droves has helped Spain get its 2013 debt issuance programme off to a flying start.

But that bright picture contrasts starkly with the economic gloom that looks likely to dominate the country’s mood for the foreseeable future.

“These sharp falls in GDP leave a tough scenario for the first two quarters of this year. The question is how market improvements can soften the falls, but it’s still too early to tell,” said Citigroup strategist Jose Luis Martinez.

The Bank of Spain says the return of international investors to Spain’s debt market had not translated into the real economy, though it has allowed the Government to conduct a large chunk of its 2013 borrowing at the start of the year, potentially easing the pressure on it for months to come.However well Spain’s bonds are selling, analysts say the country will struggle to get out from under a still-growing debt burden that has put it at the centre of the eurozone’s crisis.

Spain‘s economy fell back into recession in the final quarter of 2011 due to the fall-out from a burst property bubble.