Fragile Spanish economy limps out of recession

MADRID Wed Oct 30, 2013 11:42am EDT

A woman leaves a food shop as people walk past it in central Barcelona October 29, 2013. REUTERS/Albert Gea

A woman leaves a food shop as people walk past it in central Barcelona October 29, 2013.

Credit: Reuters/Albert Gea

MADRID (Reuters) - Spain just pulled clear of recession in the third quarter and inflation eased in October, data showed, laying foundations for a gradual recovery in consumer spending though the country's economic crisis looks far from over.

Gross domestic product (GDP) inched 0.1 percent higher between July and September, state statistics agency INE said, notching up the first quarter-on-quarter growth since the beginning of 2011 and officially ending a two-year slump.

The preliminary figures confirmed a growth estimate given last week by the country's central bank.

Spain's economy has been shrinking or close to flat since a decade-long property bubble burst in 2008, putting thousands of companies out of business and driving up an unemployment rate that has not dropped below 25 percent since spring 2012.

"Growth seems to be due to the strength of the external sector, which is encouraging, and business surveys suggest there may be more of that to come in the near term," said Ben May, economist at Capital Economics.

"However, domestic demand is still contracting and against that backdrop it's hard to see a strong and sustained recovery."

INE confirmed that third quarter output was supported by exports, the only area of growth since the recession began. The economy was also supported by a busy tourist season as holidaymakers shied away from resorts in the politically troubled Middle East and northern Africa.

Domestic consumption has plummeted since the property crash, though the first annual increase in retail sales in September after over three years of contraction suggested the worst could be over.

DEFLATION CONCERNS

Depressed high-street spending could see a slight boost after inflationary pressures eased in October, though that development also gave rise to fears that Spain could be entering a phase of price declines.

National prices fell 0.1 percent year on year in October, INE said in a separate statement on Wednesday.

That was the first fall since October 2009 and mostly due to a 3-percentage-point increase in value added tax in September 2012, though low consumption and wage cuts were also factors.

European-harmonized inflation was just 0.1 percent in October, according to the preliminary INE data, also the lowest in four years.

"The fall in prices won't provide an incentive for consumption but rather it is a consequence of falling salaries. The mix of job (losses) and an unemployment rate of 26 percent points to deflation," says Jose Carlos Diez, economist at business school ICADE said.

Headline Spanish unemployment fell slightly to 26 percent in the third quarter but, on a seasonally adjusted basis, joblessness rose 0.21 percent from a quarter earlier.

"It's good news that the economy is no longer contracting, but we're not out of the crisis," Diez said, sentiments shared by the country's prime minister.

"We no longer face the reserve and lack of (market) confidence of just a year ago," Mariano Rajoy told the lower house of parliament on Wednesday.

"All that's behind us, but still have a lot to do. It's a long way away, but we can see land."

Spain's financing costs have dropped sharply from unsustainable levels in the midst of the debt crisis in mid-2012, supported by the first stirrings of recovery as well as a European Central Bank pledge in the summer of that year to defend the euro at all costs.

But Madrid is still nursing one of the euro zone's highest public deficits and battling rising public debt, making it vulnerable to any downturn in market sentiment.

(Reporting By Paul Day; Editing by John Stonestreet)

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