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Austerity-hit Spain economy likely stagnated in Q3

Source: Reuters - Fri 5th Nov 2010

The Spanish economy likely stagnated in the third quarter, data showed, held back by broad austerity measures designed to cut the country's fiscal gap and as industrial output unexpectedly fell in September.

Gross domestic product was unchanged from the second quarter and grew 0.2 percent from a year earlier, the first annual expansion after seven straight quarters, the Bank of Spain forecast in its monthly bulletin on Friday.

"Fiscal austerity is hitting -- the end of stimulus measures and a rise in value added tax is having an effect. But Spain is being helped by a global recovery. Without that it would be in a much worse position" said economist at HSBC Astrid Schilo.

Spain's economy inched out of an 18-month recession in the first quarter and has since crawled along aided by strengthening exports but with little support from weak domestic demand and a collapsed construction industry.

Sweeping austerity measures to rein in public spending, inflated by anti-crisis stimulation measures over the last two years, could prompt a double dip recession in the weaker euro zone economies, some economists believe.

The usually accurate Bank of Spain GDP forecast is the first official third quarter growth estimate from a euro zone country. Official preliminary data will be released Nov. 11.

Stagnation in the third quarter - when some economists believe Spain's economy in fact contracted - was temporary and mostly due to the distortion of accelerated consumer spending ahead of value-added tax hikes in July, the bank said.

"A continued positive effect from external demand and the progressive dynamism of the private sector are indispensible for a strong enough recovery to create jobs," the central bank said. The key spread between Spanish government 10-year debt and German bunds jumped on Friday to 205 basis points, the highest since July 12, from around 190 bps on Thursday.


Spanish industrial output unexpectedly shrank in September, data showed, putting further pressure on an already fragile economy at the end of a tough quarter that has seen worsening indicators in all major sectors.

Output fell 1.4 percent in September year on year, the National Statistics Institute said on Friday, well below forecasts for a rise of 0.8 percent and a revised August rise of 1.6 percent.

"This is looking pretty indicative of where growth is going in 'ClubMed' at the moment. The bond market is cracking the whip and making the peripheral economies do exactly what they shouldn't be doing right now, which is cutting spending," said Eric Wand, analyst at consultancy 4Cast.

The output data follows a Markit survey of purchasing managers for the manufacturing and services sector that showed activity in both areas had taken a turn for the worse at the end of the third quarter.

Economists believe the economy contracted by 0.1 percent in the third quarter, according to the most recent Reuters survey.

"We have to acknowledge the usually accurate forecast from the Bank of Spain and assume that stronger exports offset weak domestic demand. I am very curious to see the details as weak construction and services data paint a much worse picture of the economy," said Unicredit economist Tullia Bucco.

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