June 7, 2019 / 11:26 AM / 9 days ago

UPDATE 2-Spanish economy seen leading economic growth in euro zone-Bank of Spain

* Economy seen expanding 0.6% in Q2 vs Q1 - c.bank

* Central bank leaves 2020 and 2021 growth forecasts unchanged

* Risks include Brexit, trade tensions, Italy budget (Adds quotes, background)

By Jesús Aguado and Jose Elías Rodríguez

MADRID, June 7 (Reuters) - The Spanish economy is likely to grow at a higher pace this year than previously expected after a solid first half, outpacing the average growth of euro zone countries thanks to strong internal demand, the Bank of Spain said on Friday.

In its economic outlook for 2019-2021, the central bank forecast growth this year of 2.4%, above its previous 2.2% view released in March but still marking a slowdown from 2018’s 2.6% expansion.

It left its growth outlook for 2020 and 2021 unchanged at 1.9% and 1.7% respectively.

“The year has started with higher growth than expected ... and signs in the second quarter point to the economy keeping up solid growth too,” Oscar Arce, the Bank of Spain’s director general for economics, statistics and research, told a news briefing.

The central bank forecast that gross domestic product would expand 0.6% in the second quarter from the previous three-month period when growth reached 0.7%.

“It is expected that the rate of progress of the economy will continue to comfortably exceed its potential rate (1.5%), which will allow it to continue to grow, allowing the still high volume of unemployment to be reabsorbed,” it said.

Spain’s growth outlook contrasted with that of Germany, the euro zone’s largest economy. On Friday, Germany’s central bank slashed its 2019 growth projection to 0.6%.

Spain’s economy has consistently outperformed much of the European Union since it emerged from a five-year slump in 2013, though growth is expected to ease slightly this year as a weakening global economy weighs on exports.

On Thursday, the European statistics agency Eurostat confirmed its estimate that gross domestic product (GDP) in the euro zone grew 0.4% in the first quarter.

The Bank of Spain said it expected growth to continue in the medium term thanks to better competitiveness and good financing conditions while monetary policy remains accommodative despite a gradual slowdown in economic growth.

The central bank was also more upbeat on unemployment and fiscal imbalances, two of the remaining problems facing the domestic economy.

It now sees unemployment falling to 11.8% at the end of 2021 from 12.1% in a previous forecast.

It also reduced its budget deficit forecasts, saying it expects a fiscal gap of 2.4% of GDP this year, 1.8% in 2020 and 1.6% in 2021. Previously it had forecast shortfalls of 2.5%, 2.0% and 1.8%, respectively.

Spain’s Socialist government was forced to roll over the 2018 budget to this year after its 2019 budget proposal was defeated in parliament.

Though the European Central Bank raised by 0.1 percentage point its growth forecst for 2019 to 1.2%, it lowered its 2020 outlook to 1.4% and its 2021 projection to 1.4% citing prolonged global uncertainties.

On Friday, the Bank of Spain said risks to its forecasts include Britain potentially leaving the EU with no deal on their future relations, increasing global trade tensions and uncertainties over Italian fiscal policy. (Reporting by Jesús Aguado and Jose Elías Rodriguez; Editing by Andrei Khalip and Hugh Lawson)

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