MADRID -- The Spanish economy may be over the worst of the economic crisis, but there is still a long way to go before the country is on the way to recovery, former Spanish Secretary of State for Economy Jose Manuel Campa said recently.

Speaking to Xinhua on the sidelines of an event organized by the IESE business school in Madrid, Campa said the government of Mariano Rajoy needs to take care not to stifle any recovery by imposing too many taxes.

Spain's economy shrank by 0.5 percent in the first three months of 2013, the Bank of Spain confirmed earlier in the week with estimates that it will contract by 1.4 to 1.7 percent for the rest of the year.

"My perception is that we have a dual economy," explained Campa, who said Spain's export market was performing well, though internal demand continues to contract sharply.

"We have half of the economy which is medium and large enterprises which are linked to the global markets and are exporting a lot and which are doing fairly well and contributing to growth and we have the other part of the economy oriented to the internal demand," he added.

It is the weak internal demand which is the problem as the government continues with its structural reforms and attempts at fiscal consolidation, he said.

"Both government expenditure is being reduced and investment is being reduced and consumption is not growing," said Campa.

However, he expected good economic news in the latter part of the year.

"Investment in manufacturing will pick up and that will help to compensate the negative aspect of the fiscal consolidation, so will see some positive growth, hopefully in the fourth quarter of the year," he said.

The European Union this week lifted some pressure off Spain by setting a deficit target of 6.5 percent of GDP for 2013. This is actually 0.2 percent above the original target for 2012 and should allow Rajoy's government to be more flexible with their reform measures.

"I think that in the short term, there will not be such an impact on growth by the fiscal consolidation," said Campa, before cautioning "we should not be misled into the fact that we need to engage in some fiscal consolidation in the mid-term to help bring our primary deficit down."

He further expected Spain's banking system to be more or less stabilized after last year's problems caused by overexposure to toxic assets in the construction sector.

"The adjustments and the recapitalization that took place last year means the excesses of the real estate boom and bust of the past have been dealt with appropriately," said Campa.

"The banks may be exposed to increasing non-performing loans in the medium term if the economy does not pick up aggressively and quickly, but this does not necessarily mean there is a major need for recapitalization. It just means the banking sector could be under more pressure," he added.

The good news, according to Campa, is that any further need for finance would be relatively easy to deal with through "retained earnings and other private mechanisms rather than by direct recapitalization from government funds," he said.