Spanish economy trundles on in fourth quarter

MADRID Thu Feb 27, 2014 9:08am EST

A man searches for food in a garbage container along a street, with the Four Towers business district pictured in the background, in Tetuan, Madrid, January 28, 2014. REUTERS/Susana Vera

A man searches for food in a garbage container along a street, with the Four Towers business district pictured in the background, in Tetuan, Madrid, January 28, 2014.

Credit: Reuters/Susana Vera

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MADRID (Reuters) - Spain's economy grew between October and December as domestic demand and investments improved, data showed, adding to signs that its recovery from recession is slowly gaining traction.

Gross domestic product expanded by 0.2 percent in the fourth quarter from the third, its second quarterly expansion in a row, Thursday's final National Statistics Institute (INE) data showed. The economy contracted 0.2 percent year-on-year.

Both figures were below INE estimates given earlier this year of a 0.3 percent quarterly expansion and a 0.1 percent annual drop, though analysts played down the growth gap.

"There's been a small downward revision, but it doesn't change the overall picture dramatically," said Silvio Peruzzo, economist at Nomura.

"The recovery is clearly on track and accelerating, with investment and consumer demand improving."

In Spain, domestic demand is worth around two thirds of output and, after a burst property bubble in 2008 left millions out of work, has been a heavy drag on the economy as both consumers and businesses reined in spending.

The economy shrank 1.2 percent in 2013 from a year earlier, its fourth annual contraction in five years and cutting its overall worth to 1.023 trillion euros ($1.40 trillion) - the lowest figure since 2006.

In the fourth quarter, domestic demand had a negative drag on GDP of 0.6 percentage points compared to 2.5 percentage points a quarter earlier. Exports lifted GDP by 0.4 percentage points, down from 1 percent a quarter earlier.

"The last two quarters of the year reflect a change in the trend, and show how internal demand is driving growth, as much in private consumption as in investment," Economy Secretary Fernando Jimenez Latorre said in a conference.

"For the next few quarters, early data points to a continuation of these trends."

SPENDING GROWTH

Household spending grew in the fourth quarter on an annual basis for the first time since the start of 2011 and while investment remained negative, dragged down by a still weak construction sector, it was the strongest reading in six years.

The return to economic growth in the third quarter and better-than-expected expansion towards the end of the year, prompted the International Monetary Fund and Commission to upgrade their forecasts for this year.

Prime Minister Mariano Rajoy said in his state of the nation address earlier this week he saw the economy growing 1 percent this year and 1.5 percent next.

In a further boost for the euro zone's fourth largest economy, which less than two years ago was close to needing billions in international aid, Moody's raised its debt rating for the first time since stripping Spain of Aaa status in 2010.

But Spain is still nursing serious imbalances, notably a 26 percent unemployment rate and one of the highest budget deficits in the euro zone.

Unemployment is not expected to fall back to pre-crisis levels for decades and, while the banking system has been through a deep restructuring, is unlikely to begin lending to highly indebted consumers and businesses.

Spanish banks' bad loans as a percentage of total lending rose to a new record of 13.6 percent in December as consumers and companies struggled with paying back massive debts while the economic recovery gains momentum.

"I think domestic demand will be weaker than many other forecasts, and would expect household spending to grow at a slower pace than at the end of last year," said Ben May, economist at Capital Economics.

"Whilst there's been progress with the banks, I don't see they'll be rushing out to lend any time soon. Given high levels of corporate debt, it suggests any expansion in investment is likely to subdued, at best."

(Editing by Catherine Evans)

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