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Spain growth stagnates in Q3, likely lags euro zone

Source: Reuters - Thu 11th Nov 2010

Spain's economy stagnated in the third quarter, data showed, lagging behind the euro zone core and fuelling prospects of a prolonged period in the doldrums with robust exports overshadowed by persistently weak domestic demand.

Quarterly economic growth stood at zero, the statistics office said on Thursday, in line with a Bank of Spain projection while economists had forecast a contraction of 0.1 percent.

Some government stimulus measures had ended at the end of June while an austerity programme designed to cut the country's fiscal deficit kicked in.

Many economists believe the Spanish economy could contract again late this year or in early 2011 as high unemployment chokes off any meaningful recovery, and Labour Minister Valeriano Gomez said in a radio interview after the data that Spain was not able to create jobs at its current growth rate.

Spain's gross domestic product inched up by 0.2 percent in the second quarter having emerged from an 18-month recession in the first three months of the year.

On an annual basis the economy grew by 0.2 percent in the third, just above a forecast of 0.1 percent and the first rise after seven straight quarters of contraction.

But data for the euro zone as a whole due on Friday is expected to show faster quarterly growth of 0.4 percent and annual expansion of 1.9 percent.

"It emphasises the divergence between the core euro zone countries, where we expect Germany to have grown by around 0.75 percent... and the periphery where Spain continues to struggle," said Nick Matthews, economist at RBS.

On Thursday the key risk premium of Spanish debt as measured by the spread between 10-year Spanish bonds and benchmark bunds widened to 215 basis points from around 209 bps in early trade, approaching the lifetime high of around 227 bps hit in June.

Analysts said worries over Ireland's bank restructuring and budget were hitting other sovereign debt spreads on the euro zone periphery.


A stronger recovery in the rest of the euro zone seemed to have given Spain an export-driven boost in the third quarter.

"It appears that another robust export performance helped to stabilise the economy, despite a strong negative impulse from faltering consumer spending," said Raj Badiani at IHS Global Insight.

He said the data reduced the risk of the economy falling back into recession even if the outlook was grim.

But the government's forecast of growth of 1.3 percent next year is still viewed as optimistic by many analysts - though it needs to be met if the country is to hit an ambitious target of cutting its public deficit to 6 percent of GDP in 2011. In 2009 it stood at 11.1 percent.

The fiscal adjustment programme likely impacted growth in the third quarter, with a rise in value-added tax have kicked in on July 1 as well as wider cuts to civil servants wages and budget spending. In that light, some felt the economy had held up relatively well.

"Taking into account the harshening in the process of fiscal adjustment of Spanish public finances in Q3, today's GDP outcome brings a note of comfort, especially so as the deceleration in economic momentum at euro zone level had been relatively more significant," said Tullia Bucco, economist at Unicredit.

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