* Spanish economy grows at fastest rate in 6 years
* Pick-up in internal demand boosts GDP growth
* Consumer prices fall 0.3 percent year on year in July
(Adds details, background)
By Julien Toyer
MADRID, July 30 Spain registered its fastest
economic growth since before the financial crisis in the second
quarter, becoming one of the brightest spot in a struggling euro
zone, though a sharp fall in consumer prices showed the economy
Wednesday's preliminary National Statistics Institute (INE)
reading of 0.6 percent was the strongest quarter on quarter rise
since the final months of 2007 and beat economists' forecasts of
0.5 percent. It compared growth of 0.4 percent in the previous
The institute said internal demand had picked up, but
inflation data it released for July - which showed EU-harmonised
consumer prices down 0.3 percent year-on-year - suggested
domestic activity may have been less expansive since.
Spain's Economy Minister Luis de Guindos said on Tuesday the
government planned to raise its 2014 and 2015 economic
projections in September after stronger-than-expected
performance over the last six months.
The forecasts are likely to be raised to 1.5 percent
expansion this year, up from a previous estimate of 1.2 percent,
and 2 percent next year, up from 1.8 percent.
On an annual basis the economy grew by 1.2 percent in the
second quarter, INE said - the fastest rate since the second
quarter of 2008, up from 0.5 percent in the previous quarter,
and beating economists' expectations of 1.1 percent.
This contrasts with Germany and France, the euro zone's two
biggest economies, which are eyeing little or no growth this
But Spain still faces major economic challenges with
unemployment at around 25 percent and a public deficit of more
than 6 percent of GDP.
"There are still a number of post-crisis headwinds facing
the Spanish economy," said Timo del Carpio, European Economist
at RBC Capital Markets, in a note.
"But the acceleration in activity seen over the second
quarter reaffirms our view that the headwinds on the recovery
are continuing to recede. Moreover, we think this outturn puts
the Spanish economy well on course to outperform both Germany
and the euro area average over the second quarter of the year."
Meanwhile, inflation data looks to be going the opposite
way, with Spain dropping into deflation - July's fall in the CPI
index was steeper than expected - while prices in Germany
continue to rise, albeit modestly.
The Spanish inflation reading will be followed later on
Wednesday by corresponding numbers for the biggest economy in
the euro zone, where the European Central Bank launched broad
measures last month to spur growth and avert deflation risks.
German inflation due at 1200 GMT is expected at 0.2 percent
month-on-month and 0.8 percent year-on-year.
Spanish deflation was greater than the 0.1 percent drop
forecast by analysts and followed a revised 0.1 percent rise in
prices in June. It was the second month recently in which
inflation was negative, after prices fell in March.
"This drop can be explained, mainly, by the stability of
gasoline, food and non-alcoholic beverages prices following
increases in 2013," INE said in a statement. "The drop in
electricity prices has also influenced this trend."
With private consumption and business investment recovering
in recent months their role as engines of the Spanish economy,
prices moderation is likely to help consumer spending become
more resilient over time.
Internal demand, which accounts for about two third of
Spain's economic output, could also benefit from improving
funding conditions as evidenced on Wednesday by encouraging
earnings at BBVA and Popular .
(Reporting by Julien Toyer, editing by John Stonestreet)