Greece’s recession deepened more than expected in the second quarter of 2010 after the country was rocked by its financial crisis and a series of government measures to slash public debt.

We expect growth to remain negative for the rest of the year, with an average decline of around 3.5% for 2010.

Investment dropped and public spending slumped in the three months to June as Greek politicians battled to regain the confidence of financial markets and meet the conditions of a multibillion-euro bailout from the European Union and International Monetary Fund.

The country’s ELSTAT statistics office estimated that second-quarter GDP fell by 1.5% during the three months, and was 3.5% less than a year ago.

Those were steeper falls than the quarterly 1% and annual 3.3% contractions forecast in a Reuters poll of economists.

The falls were also sharper than in the first quarter.

So while many fellow European economies, including the UK, were enjoying a quicker recovery out of recession in the second quarter, Greece’s first-quarter contraction of 0.8% almost doubled.

The statistics office said that the deterioration reflected a drop in investment and public spending cuts.

Economists predict Greece’s economy is unlikely to recover for some time yet as austerity measures continue to hurt consumers and businesses.

The overhaul includes a public-sector pay freeze, a VAT rise, and new laws making it easier for companies to lay off workers, and a higher retirement age.

Giada Giani at Citigroup said “We think the largest hit to private consumption from tighter fiscal policy is probably still ahead of us, as monthly indicators on consumer spending had not really plummeted yet in the second quarter.

“On the other hand, net export probably provided a large positive contribution to GDP as export growth is lifted by improving global trade while import is depressed by falling domestic demand.

“We expect growth to remain negative for the rest of the year, with an average decline of around 3.5% for 2010.”

Reflecting the austerity measures and efforts to shrink the public sector, Greek unemployment posted a record jump in May.

According to labour market data from the statistics service, the unemployment rate rose sharply to 12% from 8.5% a year earlier.

It was the biggest annual rise since comparable records began in 2004, with the number of people out of work rocketing by 43% from May 2009 to 602,185.

Echoing a report earlier this week from the International Labour Organisation (ILO), the Greek data showed young people were the hardest hit by the latest jump in unemployment.

The jobless rate for 15 to 24-year-olds now stands at 32.5% in Greece.