* Spain lifts 2014 GDP forecast to 1.3 pct from 1.2 pct
* Forecast below previous outlook of 1.5 pct growth in 2014
* Knock-on effect from slowing growth in the euro zone
* Q3 growth seen matching Q2 - Economy Minister (Adds new comments, details, Q3 growth projection)
By Sarah White and Andrés González
MADRID, Sept 26 (Reuters) - Spain on Friday raised its forecast for economic growth this year and next, in contrast with countries like Italy and France that are lowering their outlook.
Spain has emerged from a deep recession marked by a banking crisis, soaring unemployment and a prolonged property market slump as one of the best-performing economies in the euro zone this year, thanks in part to rising exports.
However, the Spanish government tempered expectations for a year-end upturn, as a recovery in domestic demand was offset by a slowdown elsewhere in the euro zone. Inflation has been stubbornly low through the region, France’s economy flat-lined in the second quarter and Germany’s contracted in the period.
The Spanish government also announced on Friday a cautious draft budget for next year, still tending towards austerity. It did not increase spending, even though it faces a general election in 2015. Pensions will rise by a minimum of 0.25 percent, but the civil service is still effectively shrinking.
The cautious approach on spending comes amid warning signals about the strength of the recovery.
Spain’s new independent fiscal authority (AIReF) said in a report on the budget that “the risks derived from an international environment with slower growth in the euro area could significantly affect the Spanish economy,” though it said growth forecasts were realistic.
Earlier this week, the Bank of Spain had said domestic consumption and job creation was losing steam.
Spain raised the economic growth outlook for 2014 to 1.3 percent from a previous forecast of 1.2 percent. That was slightly less than forecast around 1.5 percent growth by Economy Minister Luis de Guindos in July.
For 2015, it is now projecting gross domestic product will grow 2 percent, up from a previous forecast of 1.8 percent.
By contrast, Italy is back in recession and preparing to slash its economic outlook for 2014 and 2015, a government source told Reuters this week.
“Even though the outlook has worsened, the growth and employment projections in Spain have improved,” De Guindos told a news conference after a weekly cabinet meeting. There was a clear contrast between growth in Spain and in the rest of the euro zone, he said.
De Guindos projected the economy could grow in the third quarter at a similar pace to the second, when it expanded 0.6 percent quarter on quarter, the fastest rate in six years.
Spain is recovering after the centre-right government made deep spending cuts and reforms since coming into office in 2012.
Diminishing concern about the future of the euro also helped lower its borrowing costs after the country found itself at the centre of the euro zone crisis and narrowly avoided a bailout.
It still had to ask Europe for 41.3 billion euros ($52 billion) to help its weakest banks and overhaul its financial sector, which sapped credit to the economy.
Joblessness remains a drag on the recovery. The government said the unemployment rate - currently the second-highest in Europe after Greece - would average 24.7 percent in 2014, down from a previous forecast of 24.9 percent, then slip to an average of 22.9 percent in 2015, down from a 23.3 percent forecast.
It projected the rate would fall to 22.2 percent at the end of 2015, just below what it was when Prime Minister Mariano Rajoy, who had pledged to lower it, came into office. (1 US dollar = 0.7879 euro) (Editing by Julien Toyer, Larry King)