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Spanish central banker : 'growth forecasts optimistic'

Source: Reuters - Wed 6th Oct 2010

Spain's services and factory sectors contracted in September, signalling more bad news for government growth forecasts which the head of the central bank said look optimistic compared to economists' consensus.

Spain has laid out a plan for reining in its budget deficit, crucial to keeping markets' trust and staving off a Greek-style crisis, but analysts say the plan is based on overblown hopes that it can avoid sliding back into recession.

Asked about the official 1.3 percent forecast, Bank of Spain Governor Miguel Angel Fernandez Ordonez told lawmakers on Tuesday: "The consensus today is 0.6 percent (growth in 2011), meaning that the government is optimistic by 7 decimal points."

"I don't know whether that is a lot or a little, but it is 7 decimal points more optimistic than the rest" he said.

In a speech to parliament days after the government presented its 2011 budget, he also said exports had the potential to drive a sluggish recovery, but emphasised that risks abound and reforms are needed to bolster long-term economic growth.

Spain's manufacturing and services sectors both contracted in September, according to Markit surveys released on Friday and Tuesday, although there were signs that exports are picking up.

The contractions point to very fragile growth in the third quarter and some economists forecast Spain will slip back into recession after emerging from one earlier this year.

Indeed, Goldman Sachs said in a research note after the purchasing managers index data that Spanish GDP would contract 0.4 percent on a quarterly basis in the third quarter.

RISKS ABOUND

The central banker said he foresaw "greater dynamism" in net exports, but that slow economic growth overall posed a risk to the tough 2011 budget and quick action would be needed if the deficit-cutting goals came under challenge.

"The cyclical moment.. is marked by the timid beginnings of a recovery that began early this year and is seen continuing throughout next year, though the perspectives for its evolution are surrounded by exceptional uncertainty, internal and external" Ordonez said.

The euro zone, especially Germany, which is seeing a more robust recovery, is the main destination for Spanish-made cars, industrial equipment and other exports.

"Net exterior demand should maintain a preponderant role (in supporting economic activity), Ordonez said.

Spain's Economy Minister Elena Salgado cited exports earlier on Tuesday when she said in a television interview the government maintains its 1.3 percent economic growth forecast for 2011, which many experts see as too optimistic.

"We're basing our outlook on our belief that exports will continue to grow ... and we also believe that consumer spending will continue to recover" Salgado said.

Spain's budget cuts government salaries and infrastructure projects to slash the deficit and restore credibility to Spain after markets punished its sovereign debt earlier this year on fears the country could be heading to a debt crisis.

The government has emphasised deficit-cutting - to 6 percent of gross domestic product next year from 11 percent last year - over stimulating economic growth in an effort to maintain access to financing at reasonable cost.

"However, the risks to fulfilling the objectives should not be underestimated. The budget is based on a strong economic recovery, which if it is not seen could see growth in state income come in worse than expected" Ordonez said.

He said that perhaps the biggest risk to meeting the budget deficit targets was if Spain's regions did not meet their own austerity objectives, something he feared was happening.

SLOW GOING

Spain lost its sole remaining top-line triple-A credit rating last week and Standard & Poor's ratings agency forecast years of anaemic economic growth.

The government has pledged to stick to austerity measures that drew protests last week in a general strike that failed to impact sectors beyond transportation and industry.

Salgado admitted it will be slow going to implement structural reforms to overhaul an economy that was heavily dependent on the construction industry - a long run of growth imploded when a housing bubble burst in 2007.

Spain's unemployment was the highest in the euro zone at over 20 percent in the second quarter and Salgado said job creation will not happen until next year.

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