By Andrew Hay

WEAKER consumer spending and a crumbling construction sector sent Spanish growth to a 15-year low in the second quarter and analysts said the economy was now contracting.

The euro zone's fourth largest economy grew by 0.1 percent on the quarter in the April-June period after expanding 0.3 percent in the first three months of the year, the National Statistics Institute confirmed yesterday.

This is the lowest level since the third quarter of 1993 when quarter-on-quarter growth was flat.

Compared with the previous year, gross domestic product expanded 1.8 percent, its lowest rate in 13 years and down from a revised 2.6 percent in the first quarter, INE reported, confirming a preliminary estimate published on Aug 14.

Spain was the only one of the euro zone's four big economies not to contract during the second quarter but economists said that trend was over.

“Everything is pointing to a mild recession in the second half of the year, the Spanish economy is no longer producing jobs,” said Deutsche Bank economist Susana Garcia.

Spain has suffered multiple economic shocks this year as the collapse of a credit-fuelled housing boom coincided with the global liquidity squeeze and soaring oil prices.

Worst hit is the construction sector which saw investment fall 2.4 percent in the second quarter from a year earlier, marking its first decline in 12 years after chronic overbuilding, INE data showed.

Household spending, which drives two-thirds of the Spanish economy, plummeted to 1.2 percent growth from 2.2 percent in the first quarter and 4.1 percent during the year-earlier period.

Supporting second quarter results was the statistical impact of Spain's external account which normally cuts into growth but added 0.3 of a percentage point due to falling imports. That marked its first positive contribution since the first quarter of 2001 when Spain last suffered a steep slowdown.

With his popularity at its lowest-ever level, Spanish Prime Minister Jose Luis Rodriguez Zapatero has launched a 40 billion euro stimulus package and says measures ranging from tax cuts to low-cost credit will avert a recession.

Corporate Spain is braced for tough times after house prices fell for the first time in a decade between April and June and unemployment rose to the highest level in the euro zone.

Infrastructure and hotel firms like Abertis and Sol Melia have cut profit forecasts amid estimates Spanish unemployment will reach 15 percent in 2009 as Spain suffers its first recession since 1993.

Some analysts fear small- and medium-sized Spanish banks could be next to issue profit warnings given high exposure to property developers.
Foreign firms are feeling the pain with General Motors yesterday saying it would cut production at its Zaragoza plant after Spanish car sales fell 19 percent in the first half of 2008. “The slowdown is sharpening in the area of investments,” said Carlos Maravall at the AFI consultancy.

Zapatero has launched a host of reforms to raise low productivity growth and expects growth to rebound to around 3 percent in 2010. Most analysts see much weaker performance as Spain struggles to retool its economy.

Spain did little to diversify away from construction and consumer spending during 14-consecutive years of growth. The government long thought that Spain's export sector could substitute for construction, but weak competitiveness and falling demand in key markets France and Germany have made that difficult.


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