Central bank predicts "sluggish" third quarter

The Bank of Spain predicts "a sluggish" economic performance for the third quarter after the downturn in growth between April and June due to "unfavorable" demand on domestic products. In its latest economic bulletin released on Wednesday, the central bank stressed that the GDP growth rate remains in line with the decline reflected in the second quarter, which fell to 0.2 percent from 0.4 percent at the start of 2011.

The economic watchdog explains that the downward turn in economic progress is a reflection of the "notable" declines in domestic demand and the sharp drops in public spending.

The Bank of Spain notes that in the third quarter, individual consumption remains stagnant, reflected by some indicators such as confidence among consumers and European retailers, which also dropped in July and August. Also, private car sales are stuck at similar levels to those of the same period last year, albeit no longer registering the dramatic year-on-year falls they were up until June this year.

At the same time, the bank released the results of a poll over the recent developments of non-financial entities, which show a 0.7-percent drop in activity during the second quarter of this year. This negative figure shows that "the decline that had already been observed during the first three months of the year has intensified."

This drop in the volume of business has been felt strongly in corporate profits, which plummeted by 18.1 percent compared with a 6.5-percent increase recorded in the first half of 2010.

On the other hand, the tourism sector continues to do well with "a buoyant" and "remarkable" increase in foreign arrivals, the bank says.

And although the labor market has not recovered, and the number of social security registrations is falling, the bank says that contracts for stable employment, which are compensated at 33 days per year, instead of 45, in case of dismissal, could witness an upturn.

This type of contract could show a "slight recovery" in the future thanks to the latest labor reform measure introduced by the government, which includes a deadline for companies to qualify for employment assistance by converting temporary contracts to permanent ones, the bank said.