Economic growth slackens as domestic demand eases

MADRID - Annual growth in the Spanish economy slowed to its lowest level in over a year in the third quarter as domestic demand eased, according to a flash estimate released Tuesday by the National Statistics Institute.

The INE said that gross domestic product was up 3.8 percent year-on-year in the period, compared to an increase of 4.0 percent in the previous three months. On a quarter-on-quarter basis, GDP decelerated to 0.7 percent, the lowest growth rate in just under three years. The increase in the second quarter was 0.9 percent.

The slower pace of domestic demand was only partly offset by a less negative contribution from net trade - exports minus imports. The INE will give a breakdown of the third quarter figures on November 21.

The year-on-year figure given by the INE was slightly above an earlier estimate by the Bank of Spain of annual growth of 3.7 percent. The government expects full-year GDP to be up 3.8 percent.

Higher borrowing costs in the wake of a series of interest rate hikes by the European Central Bank have started to weigh on consumer spending, particularly for big-ticket items such as passenger cars.

At the same time a massive housing boom, which has been one of the mainstays of the domestic economy for close to a decade, is showing clear signs of petering out.

Increased activity in the European Union, the main destination for Spanish shipments of goods and services, has helped the foreign sector, which, nonetheless, remains a drag on the overall economy. While weaker domestic demand depresses imports, export competitiveness continues to be undermined by relatively higher inflation.

Spain has enjoyed well over a decade of uninterrupted economic growth at rates above the European average. While this will remain the case this year, the scenario for 2008 has been blighted by the potential fallout from tighter liquidity conditions in the wake of the US subprime mortgage crisis.

While the government is sticking by its forecast for GDP growth for next year of 3.3 percent, the International Monetary Fund has trimmed its estimate for 2008 to 2.7 percent. Last week, the European Commission cut its prediction for 2009 to 2.3 percent, which would be the first time in 15 years that Spain would fail to grow above the European average.

[Copyright EL PAÍS, SL./ A. SIM 2007]