Spanish economy grinds to a halt in third quarter

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Spain's timid economic recovery ground to a halt in the third quarter as government cut-backs began to bite, official data showed Wednesday, feeding recession fears.

Total economic output, or gross domestic product, showed zero growth in the three months to September compared to the previous quarter, the National Statistics Institute said, confirming preliminary figures issued last week.

And worse may be ahead for the economy, analysts said, because Spain has yet to feel the full impact force of its cost-cutting, including the suspension of dozens of road and rail projects and lower civil servant wages.

At the same time, the flat economy makes it harder to increase jobs and cut an unemployment rate of more than 20 percent, the highest among the 16 nations that have adopted the euro currency.

"With the full force of the fiscal squeeze yet to be felt and global demand set to slow, it may not be long before activity begins falling again," said a report by London-based analysts Capital Economics.

"Accordingly, concerns that Spain could suffer its own debt crisis are unlikely to ease," it said.

The grim data comes at a particularly tense moment with Spain stressing that its economic situation is far healthier than that in Ireland and Portugal which are caught up in a crisis over massive debt and public deficits.

Part of the concern about Ireland and Portugal is that tough austerity measures to control public deficits and debt could dangerously bear down on growth and tax revenues, making the situation even worse.

Spain has the fifth-biggest economy in the European Union and a debt crisis here could have a far broader impact.

Raj Badiani, analyst at IHS Global Insight in London, said Spain may avoid falling into a technical recession -- two consecutive quarters of negative economic growth.

"But by any other measure the economy is deep in recession, signalled by very weak domestic spending, a struggling labour market and a prolonged real estate slump," said Badiani, who forecast a 0.3-percent contraction in 2010 and 0.3-percent growth for 2011.

"Furthermore, the economy has yet to face the full impact of the tough austerity measures, which will be a severe jolt after the prolonged period of deep government fiscal stimulus," he said.

The latest figures showed that on a 12-month comparison, Spanish gross domestic product expanded by 0.2 percent after seven months running of declines by this long-term measure.

The stall in the third quarter followed growth of 0.2 percent in the second quarter and 0.1 percent in the first.

The government has forecast the Spanish economy will shrink by 0.3 percent this year, following a fall of 3.7 percent in 2009.

The government aims to bring the public deficit down to 6.0 percent of GDP in 2011 and to the eurozone limit of three percent in 2013. The deficit hit 11.1 percent of GDP last year, the third highest in the eurozone after Greece and Ireland.

Citi Group senior European analyst Giada Giani said domestic demand in Spain has made little progress.

"Given the poor competitive position and the inability of Spanish exports to generate a pick-up in domestic activity, we see a recovery in domestic demand as an essential element for Spain to start growing again," she said.

"Given such a recovery in domestic demand is unlikely, prospects for the Spanish remain weak."

© 2010 AFP

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