2010.11.0508:46:00UTC+00Spanish Economy Stagnates In Q3

Spanish government's severe fiscal austerity is likely to have weighed heavily on the economic recovery as the central bank said on Friday that the economy stagnated in the third quarter.

Gross domestic product is expected to have stabilized at the previous quarter's levels, according to preliminary estimates of the Bank of Spain. However, the economy is estimated to have grown 0.2% on an annual comparison in the third quarter, following seven consecutive quarters of declines.

Initial estimates suggest that Spain just about avoided entering a "double dip", but the outlook for the economy remains pretty grim, said Capital Economics economist Ben May.

The central bank estimate usually matches the actual GDP developments. The National Statistics Institute is slated to issue its third-quarter GDP estimate on November 11. Data released today showed an unexpected 1.4% annual fall in industrial production in September.

In its monthly bulletin, the bank said the information available for the third quarter suggests a transitory weakening in economic activity, largely due to the tailing off of certain expansionary factors. Consumers brought forward their spending in the first half of the year, to avoid the rise in the value added tax that took effect from July 1.

The stagnation in the third quarter will be temporary, according to the central bank. Nonetheless, if the recovery is to gain the force needed to create jobs, a continuing positive contribution by net external demand will be necessary.

Spain continues to have the highest unemployment rate in the euro area. An unemployment rate of 19.8% in the September quarter is nearly double the eurozone average of 10.1%

On the expenditure side, GDP growth is estimated to have been supported by net external demand, which contributed 1.2 percentage point to the increase in total output. At the same time, the decline in national demand deepened to 1%, the central bank report said.

Analyzing by the supply-side, construction and services felt the impact of the loss of momentum in domestic expenditure, while employment continued to show no signs of recovery.

Huge fiscal squeeze, unsustainable public debt, high unemployment, weak consumer sentiment, combined with an unexpected decline in September industrial production all provide grim picture.

"Spain may avoid a technical recession, but by any other definition the economy is engulfed by recessionary conditions-falling employment, low core inflation, a prolonged real estate slump and still rising unemployment when compared to a year ago," IHS Global Insight economist Raj Badiani said.

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