Spain: economy flat in Q3, deficit goal in danger

October 31, 2011 - 10:00 AM

MADRID (AP) — Spain's economy growth ground to a halt in the third quarter, the country's central bank said Monday, further raising doubts over the government's deficit-reduction goal.

The Bank of Spain blamed stagnant growth on a number of factors, including a drop in domestic demand in a country with a 21.5 percent jobless rate.

The latest piece of bad news came just three days after the government announced the new, unemployment rate. It means nearly 5 million people are now out of work in a country of about 47 million.

Polls indicate that the opposition conservatives could win an absolute majority in Parliament in a general election scheduled for Nov. 20. That would end eight years of socialist rule.

The Bank of Spain suggested that the flat growth calls into question the government's goal of reducing its deficit to 6 percent of GDP in 2011, from 9.2 percent last year.

The Spanish economy grew in the first two quarters of 2011 but just barely — by 0.4 percent and by 0.2 percent, respectively.

The National Statistics Institute is scheduled to release the official third-quarter GDP figure on Nov. 11.

The central bank said that, compared to the third quarter of last year, the economy grew 0.7 percent.

It said domestic demand fell because of lower government spending as a result of deficit-reducing austerity measures taken by regional governments and because of a moribund real estate market. Household and business spending posted small increases. Spain's economic woes stem largely from the collapse of a property bubble.

The Bank of Spain said there is still time to meet the deficit reduction target by the year's end but warned that fresh measures may be necessary.

The country's weak economic growth prospects have been cited by the three major credit ratings agencies for their recent downgrades of Spain's sovereign debt.

Spain's borrowing costs have risen dramatically over the past year as investors fretted over its debt load and the solidity of its banking system.

The government's forecast has been for GDP growth of 1.6 percent for 2011 but now hardly anyone thinks this will happen.

(This version CORRECTS Adds details and background, corrects that household spending rose but overall domestic demand dropped)