Bank of Spain says latest data shows recovery continuing

MADRID, June 13 Fri Jun 13, 2014 8:00am EDT

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MADRID, June 13 (Reuters) - Spain's economic recovery is continuing, boosted by expansive euro zone monetary policy and domestic structural reforms, though challenges remain, the head of the Bank of Spain said on Friday.

Spain's economy has been in or near recession since a decade-long property bubble burst in 2008, though it expanded at its fastest quarterly pace between January to March in six years, raising hopes it had turned a corner.

"Activity was progressively dynamic through 2013 leading to growth as of the third quarter. Most recent data indicate a strengthening of this trajectory so far in 2014," Bank of Spain Governor Luis Linde wrote in an introduction to the bank's 2013 annual report.

The government has passed a slew of structural reforms and austerity measures aimed at boosting competitiveness, cutting one of the euro zone's highest budget deficits and creating jobs.

However, unemployment remains the second highest in Europe, at 25.9 percent and the deficit is not set to drop to the European Commission's recommended 3 percent until 2016.

"Despite the advances in nursing the Spanish economy back to health, the recovery's consolidation is faced with great challenges due to the depth of the crisis," Linde said.

"Economic policy must lead to additional improvements to competitiveness and the reassignment of resources to sectors with the greatest growth potential at the same time as reducing debt in the public and private sector."

While admitting that the margin for expansive policy was limited, Linde said he hoped the government's fiscal reform, due before the end of the year, will help fix public revenue which has dropped to one of the lowest amongst developed economies.

The government, faced with a national election next year and an electorate tired of years of tax hikes and spending cuts, has said it will reduce income and corporate taxes as part of the reform to help feed the recovery.

European Central Bank monetary policy, which has cut interest rates to record lows, has helped support structural reforms and the euro area's lenders are in a better position to lend in to the recovery, Linde said.

Long-term inflationary expectations remain in line with the ECB's price target of near 2 percent, but persistently low inflation rates over an extended period are a risk to the recovery's sustainability, he said.

Spanish national consumer prices rose 0.2 percent year-on-year in May according to data from the National Statistics Institute on Friday, compared to 0.4 percent in April and a Reuters poll forecast of 0.2 percent. (Reporting by Paul Day)

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