(Recasts to focus on political impact, adds inflation)
MADRID, Oct 28 (Reuters) - Spain’s economy expanded at a slightly slower pace in the third quarter, though growth has so far largely weathered a political deadlock expected to be resolved this weekend.
Output grew 0.7 percent in the July to September period from the previous three months, according to preliminary data from the National Statistics Institute (INE) on Friday, down from the 0.8 percent recorded a quarter earlier.
There were also signs of recovery in Spain’s troubled banking sector on Friday as Caixabank, the third largest lender, and medium-sized Banco Sabadell beat profit forecasts and improved both their bad loan and capital positions.
Weak inflation, a job market recovery and a bumper tourist season have boosted consumer spending this year, helping Spain’s three-year recovery from recession stay on track in recent quarters following two inconclusive elections.
Conservative leader Mariano Rajoy is set to return to power this weekend after 10 months of effort to form a government amid bickering between political rivals on the left and right, some of whom have now decided to step aside.
Rajoy’s People’s Party (PP) will not have a majority in parliament, however, creating another potential headwind for the economy, which is expected to start slowing more markedly next year.
Parties will have to reach agreements to pass a new budget for 2017 or introduce further labour reforms, for instance.
Spain’s gross domestic product is widely expected to expand by at least 3 percent this year, while the caretaker government forecasts growth will slow to 2.3 percent next year.
Britain’s vote to leave the European Union is seen as a possible threat to economies across the bloc next year, while rising inflation may also prove a hindrance for Spain, where low prices have boosted household budgets.
Spanish consumer prices, harmonised for comparison with other EU countries, were up 0.5 percent year-on-year in October, preliminary data from INE showed on Friday, their biggest rise since September 2013.
On an annual basis, Spanish output grew by 3.2 percent, INE said, exceeding forecasts but down from 3.4 percent in the previous quarter. Last quarter’s reading was revised upwards from 3.2 percent. (Reporting by Sarah White; Editing by Kevin Liffey)