* GDP growth at 0.8 pct in Q4 from Q3
* Economy expands 3.2 pct in 2015, best year since 2007
* Strong momentum encouraging amid political gridlock
* Banks report lower bad debts, shrug off instability (Adds quotes from banks, economist, new details)
By Sarah White and Paul Day
MADRID, Jan 29 (Reuters) - Spain’s economy grew at a strong and steady pace in the fourth quarter, adding to signs the country’s recovery has enough momentum to withstand fallout from political instability caused by an inconclusive election.
The economy expanded by 0.8 percent between October and December from the previous three months, one of the fastest rates in the euro zone and matching growth in the third quarter, National Statistics Institute INE said on Friday.
A consumer spending rebound, fuelled by falling unemployment, has helped Spain cement a two-year recovery from a double-dip recession. Spanish banks, which suffered big losses on soured property investments at the height of the crisis, have also benefited as loan default levels dropped in 2015.
Leading Spanish bankers said on Friday they saw these trends continuing for now, despite the election having left political parties mired in wrangling over how to build a stable coalition.
“Consumption continues to do very well. The lack of a government for a long time is not positive. We all want stability, but we see very powerful forces currently in the Spanish economy,” Gonzalo Gortazar, chief executive of Caixabank , told a conference call with investors.
Peer Sabadell said it had not observed any business impact so far from the political jitters. The two banks, along with Popular, posted higher net earnings from loans in the fourth quarter than in the third.
The Dec. 20 election split the political landscape between longstanding political forces - the centre-right People’s Party and its Socialist opponents - and two high-profile newcomers, anti-austerity Podemos and market-friendly Ciudadanos.
THREAT TO BUSINESS CONFIDENCE
For 2015 as a whole, Spain’s economy grew 3.2 percent, its fastest pace since before a severe downturn began eight years ago.
But the country can ill afford a significant slowdown.
Unemployment, which dropped to its lowest in over four years in the fourth quarter, still seems likely to hover at around 20 percent of the workforce this year even as more people find jobs.
Uncertainty over the future course of economic policy will also be prolonged while Spain is without a government, and the country may well be forced back to the polls in coming months.
For now, strong tailwinds - including a European Central Bank stimulus programme - are well placed to offset any adverse effect from the political backdrop.
Weak inflation, rooted in low oil prices, is boosting families’ purchasing power. Consumer prices slipped back below zero in January, INE data also showed on Friday.
As household spending settles into a more subdued pattern while efforts to encourage foreign tourists to spend more are ramped up, many economists expect the pace of economic expansion to slow only slightly in 2016, to between 2.5 percent and 3 percent.
Some businesses warn that a prolonged political vacuum could put off foreign investors in the long run, and corporate lobby group CEOE has urged politicians to put stability first.
“The inconclusive general election ... is a very real threat to business confidence, implying that firms could rein back their investment and employment intentions,” Raj Badiani, an economist at IHS Global Insight said in a note.
Also citing strong exports and industrial investment, Badiani said the near-term outlook remained positive, however.