Spain economy stagnates, deficit at risk-cbank

• Banks says economy didn’t grow in third quarter from second
• Says year-on-year growth eased to 0.7%
• Risks to Spain’s fiscal deficit target; onus on new govt
• Official data invariably match Bank of Spain figures

MADRID (Reuters): Spain’s already lacklustre economy likely stagnated in the third quarter with domestic demand slumping, posing a threat to budget targets that will require a decisive response from the new government, its central bank said.

Friday’s estimate of zero quarter-on-quarter growth in the bank’s three-monthly bulletin was in line with economists’ forecasts in a Reuters poll.

The data marks a slowdown for an economy that grew just 0.2 percent quarter on quarter in the previous three months, and economists said a new recession could be on the cards.

Spain is struggling to persuade markets it can bring its public deficit back within EU limits, against the backdrop of a worsening euro zone debt crisis and while trying to stimulate demand in a country where around one in five are out of work.

The bank said 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 information available for the third quarter points to weakness persisting in the middle months of the year, at a time when the euro zone’s sovereign debt crisis worsened,” the report said.

The Bank of Spain said export growth helped gross domestic product rise 0.7 percent in the quarter compared to last year, below the 0.8 percent consensus.

The official National Statistics Institute figures, due Nov.11, almost always match the bank’s estimates.

Worse could come for Spain as the broader euro zone economy loses traction.

“We see very distressed domestic demand in Spain, and coupled with a global slowdown and fall in exports it could trigger a recession starting in the fourth quarter,” said Silvio Peruzzo, economist at RBS. He forecast no growth in the third quarter, followed by a short-lived recession in the next two quarters, which could also affect other euro zone countries.

The Bank of Spain welcomed measures last week by European leaders to try to contain the 17-country bloc’s debt crisis.

“The summit at the end of October has seen an important advance in strategy sufficiently wide-reaching to recover and reinforce the financial stability of the euro area.”

But it said Spain might miss its goal of cutting the public deficit to 6 percent of GDP this year because the country’s 17 regions may not reach their fiscal targets. The public deficit was 9.3 percent in 2010.

“The current trends indicate risks of a deviation from the 6 percent target as a consequence of weakness in tax income and spending, mainly in the autonomous regions,” the report said.

Any overspending could be corrected by the government taking additional steps, and austerity measures in the regions would only bear fruit in the second half of the year.

The central bank urged the government that emerges from Nov. 20 elections to show clearly in the 2012 budget what measures it would take to assure the country hits a deficit target of 4.4 percent for that year.

Polls show the centre-right People’s Party (PP) will likely win the elections with an outright majority. The PP has promised more austerity measures and to cut the public deficit as required.