Spain says economic growth halted in third quarter

Spain’s battered economy stalled in the third quarter of 2011, official data showed Wednesday, feeding recession fears in the midst of market turmoil four days ahead of general elections.

A feeble economic recovery, with 0.2-percent growth in the second quarter, all but vanished with zero growth in the third quarter, the National Statistics Institute said.

Over the year, growth was 0.8 percent.

The economy, dragged down by a 21.5-percent unemployment rate, may now be sliding back into recession barely two years after escaping the last one, caused by a 2008 property bubble collapse, analysts say.

The stark report, which confirmed earlier economic estimates, came as Spain and Italy suffered a hammering on the debt markets with borrowing rates rising to dangerous levels.

The timing could hardly be worse for the Socialist government ahead of general elections Sunday, which polls show the opposition Popular Party winning by a landslide.

The government, in power since 2004, has targetted 1.3-percent growth for 2011 and has refused to alter that forecast despite broad consensus shared even by the Bank of Spain that the expansion will be closer to 0.8 percent.

A sense of crisis on the markets hounded the government’s final pre-election days.

The Madrid Stock Exchange’s IBEX-35 index of leading companies’ shares dropped 2.15 percent Monday, 1.61 percent Tuesday and another 0.29 percent in opening trade Wednesday.

Spains’ debt took a hit.

The risk premium — the extra borrowing rate investors demand for Spain’s 10-year government bonds when compared to Germany’s — hovered at a dangerous high of 4.526 percentage points after breaking euro-era records Tuesday.

Exports including tourism kept Spain’s head above water in the third quarter, according to the official report.

“The exterior sector continues to be the main engine of growth,” the statistics institute said.

Recession is now widely feared.

Goldman Sachs and the French statistics insitute INSEE both predict that the Spanish economy will shrink by 0.2 percent in each of the next two quarters. French bank Natixis tips declines of 0.2 percent in the final quarter of 2011 and 0.1 percent in the first quarter of 2012.

Spain only emerged from an 18-month recession at the start of 2010 after a housing bubble collapse, which destroyed millions of jobs and left banks with mountains of bad loans.