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Spain growth slows as recession fears loom

Source: Reuters - Fri 26th Aug 2011

The Spanish economy grew at a slower pace in the second quarter than the first, fuelling concerns Spain could slip back into recession if the euro zone economy continues to worsen.

Final official numbers on Friday showed gross domestic product grew 0.2 percent in the second quarter on a quarterly basis, as forecast in a flash estimate and down from a revised 0.4% in the first quarter.

On an annual basis the economy grew by 0.7%, in line with consensus, and down from a revised 0.9% in the first quarter.

"Overall we continue to think that Spain's going to grow very weakly over the next two quarters at best and it could well fall back into recession," said Ben May, economist at Capital Economics said.

The Spanish government is forecasting economic growth of 1.3% year on year in 2011, but the consensus among economists is closer to 0.8%, meaning it will be harder for the government to meet targets for a reduced budget deficit.

A burst property bubble and prolonged credit crunch has hit construction, once a concrete pillar of growth, but solid exports and continued household spending have kept Spain from dipping back into recession.

Economists said relatively strong household spending in the second quarter, with unemployment at almost 21% and disposable income falling, meant family spending was likely to be drawn from savings.

"The story once again is that this probably reflects households running down their savings or saving less and that obviously is not a long-term solution," said May. Exports could also face a rocky future.

Many economists have slashed growth expectations for the euro zone, where Spain sent 53.4% of all its exports in the first half, meaning its main safety net against a second recession in 2 years could be taken away.

"The more downbeat assessment reflects a far less certain Spanish export outlook, given the prospect of a worsening international outlook amid heightened financial-market turmoil," economist at Global Insight Raj Badiani said.

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