Spanish economy grinds to halt, recession looms

MADRID, (Reuters):Spain’s economy stopped growing in the third quarter, calling into question the government’s ability to achieve its deficit reduction target for 2011 and pushing the euro zone’s fourth largest economy to the brink of recession.

Austerity measures implemented to help Spain bring its deficit within European Union limits and retain the confidence of financial markets have stifled growth, while tax revenues are down in an economy blighted by chronic unemployment.

The outlook for the next quarters remains bleak, with the euro zone debt crisis set to dampen growth in the region and the likely winners of the upcoming Spanish general election promising to tighten the fiscal screws further.

The National Statistics Institute (INE) reported on Friday that gross domestic product did not grow at all on a quarterly basis -- in line with expectations and a previous outlook from Spain’s central bank -- and expanded 0.8 percent in the third quarter compared with the same period last year.

“The profile is very similar to the previous quarter, with exterior demand making a positive contribution but internal demand very weak, especially the negative public spending, which is bad for the real economy although it’s good for financial markets,” said Estefania Ponte, economist with Cortal Consors brokerage.

The Bank of Spain previously said that internal demand probably fell by 0.8 percent on a quarterly basis in the quarter ending in September, while external demand including exports and tourism would have grown by the same amount.

“The fourth quarter isn’t looking good either, which means we could be grazing a recession in the first quarter of 2012,” she said.

The INE is scheduled to report final GDP data for the quarter on Nov. 16.

Spain is expected to miss its public deficit target of 6 percent of GDP this year as its 17 autonomous regions struggle to make sufficient spending cuts. While investor focus on deficit concerns has shifted from Spain to Italy in recent months, nervous bond markets are still keeping a close eye on Madrid where a change of government is likely after a Nov. 20 general election.

The likely new centre-right People’s Party government has pledged to implement a fresh round of spending cuts to put the country on track to reach a more ambitious goal of a 4.4 percent public deficit next year.

Polls show the People’s Party, or PP, poised to win an absolute majority in the lower house of Parliament, which will give the new government a strong mandate to slash spending although it could initially inhibit economic growth

The European Union on Thursday drastically cut its growth forecast for the euro zone in 2012, to 0.5 percent from 1.8 percent and European Commissioner Olli Rehn warned of the risk of a new recession.