Spanish economy grinds to standstill in third quarter

Spain's timid recovery from its worst recession in living memory ground to a halt in the third quarter, making the government's already demanding task of reining in the budget deficit all the more onerous.

In its latest monthly report on the economy, released Monday, the central bank said output failed to advance in the period July-September from the previous three months, when growth slowed from 0.4 percent in the first quarter to 0.2 percent. On an annual basis, the increase in GDP slowed to 0.7 percent from 0.9 percent.

The government's official target for GDP growth for this year remains at 1.3 percent, but the administration has acknowledged that will be hard to achieve. Most experts believe growth will come in at around half that figure.

The blue-chip Ibex 35 closed down 2.92 percent at 8,954.90 points ahead of the G-20 meeting this weekend, with the European bourses in general weaker, partly on profit-taking in the banks. Spain's risk premium widened by 18 basis points to 351 basis points.

Domestic demand continued to undermine overall output, shaving 0.8 percentage points off GDP due to the contraction in public spending as a result of the government's austerity drive and an ongoing fall in housing construction due to the crisis in the property sector. However, there was a slight improvement in household spending and investment by companies in equipment.

The foreign sector helped offset the weakness of domestic demand, with a positive contribution to GDP of 0.8 percentage points due to still-buoyant exports and tourism.

Experts had expected the economy to stall, with some predicting a contraction in activity due to the resurgence of the euro-zone sovereign debt crisis in the period.

Those forecasts found added weight in the latest unemployment figures released on Friday by the National Statistics Institute (INE), which showed the jobless rate rising to 21.5 percent as a 2.1 percent contraction in employment pushed the number of people out of work to just under 5 million. The INE is due to release a flash estimate for third-quarter GDP growth on November 11.

"The third quarter entailed a further deterioration in the world's financial and economic situation as a result of the deepening of the European sovereign debt crisis and a worsening of global economic growth prospects," the central bank's report said.

Local think-tank Instituto Flores de Lemus had predicted a contraction of 0.1 percent in GDP in the period July-September, citing the slowdown in the euro zone, the latest jobless figures and a slowdown in credit.

One of the consequences of the downturn in the pace of activity was to strengthen doubts about the government's ability to meet its target of reducing the public deficit to 6 percent of GDP from 9.2 percent last year, mainly due to the regions, which in the first half alone reported a shortfall in their books of 1.2 percent of GDP, compared with a target for the full year of 1.3 percent.

Earlier this month, the central government said it had built up a cushion of some ¤7 billion from the sale of cellphone frequencies, a cut in spending in medicines, corporate income tax advances and lower-than-expected interest payments on debt to help cover the possible failure by the regions to meet their deficit goal.

"The trends in place point to the risk of a deviation from the target deficit of 6 percent of GDP in 2011, as a consequence of the weakness of tax collections, and the slowdown in spending, mainly at the regional level," the central bank said on Monday.

The government is looking to further trim the shortfall in its books to 4.4 percent of GDP in 2012 before bringing it back within the European Union ceiling of 3 percent of GDP the following year.

Experts, however, say further measures may be needed to meet that goal, particularly in light of the slowdown in the euro zone, the main destination of Spanish exports.

"It will be very difficult to meet the deficit goals without additional austerity, which might push the economy back into recession," Bloomberg quoted Ben May, a European economist at Capital Economics in London, as saying. Unemployment may rise as high as 25 percent, he forecast.

In a report also released Monday ahead of the G-20 meeting in Cannes this week, the Organization for Economic Cooperation and Development cut its growth forecast for the single-currency zone for next year to 0.3 percent from 2.0 percent and predicted some countries in the bloc could fall back into recession. "In the euro area, a marked slowdown with patches of negative growth is likely," the report said.