Spain exits recession, raising timid hopes for Europe

MADRID (AFP) - Spain inched out of its two-year recession with timid growth in the third quarter, the country's central bank said on Wednesday, fuelling fragile hopes of a broader eurozone recovery.

News that the zone's fourth-biggest economy may be on the mend followed signs that the bloc was heading out of its five-year crisis, but analysts warned the recovery was still slow and risk-bound.

After nine straight quarters of contraction in the second trough of a double-dip recession, the Spanish economy grew by 0.1 percent, the Bank of Spain said in a report.

The rate at which jobs were being destroyed in the recession, which has thrown millions out of work and driven up poverty, eased to its slowest rate since the start of the crisis in 2008, it added.

"In the third quarter, the Spanish economy extended the gradual improvement that it has been observing since the start of the year." The bank's quarterly estimates are usually confirmed by the government's official figures, due later this month.

The rate of destruction of jobs was 0.1 percent, "the least unfavourable rate since the start of the crisis" that erupted in 2008 with the collapse of a building boom, the bank said.

The jobless rate was a huge 26.3 percent in the second quarter, according to the government's latest figure.

Separately the economy ministry said that Spain slashed its trade deficit in August by 42.5 percent to 1.8 million euros (S$3.06 million).

The government has been trumpeting exports as one of the motors to drive the country out of its slump.

"As the slide in domestic demand peters out, the ongoing surge in exports will drive growth" in Spain, wrote analyst Holger Schmieding of Berenberg bank.

The positive data from Spain - which was a focus of anxieties for the eurozone's stability last year - reflected signs of recovery in European countries hit by the financial crisis, such as Greece, Ireland and Portugal.

Mr Schmieding said this was thanks to the supportive action by the European Central Bank last year.

"The worst is over. One by one, the euro crisis countries are returning to growth after a savage adjustment recession," the analyst wrote on Wednesday.

France, the eurozone's second-biggest economy, has confirmed that it exited recession in the second quarter.

A recent estimate by statistics institutes in France, Germany and Italy forecast that the eurozone overall would return to timid growth of 0.1 percent in the third quarter.

Other analysts warned of tough challenges to the recovery, however, with banks still reluctant to lend.

Spanish unions and the political opposition say ordinary people will continue to suffer from unemployment and public spending cuts.

"We expect private deleveraging together with tight financial conditions and the ongoing adjustment in the housing sector to continue to cap any significant economic growth in Spain in the following years," wrote analysts from Citi bank in a report on Wednesday.

The Bank of Spain said eurozone forecasts indicate that "the recovery will gradually consolidate as internal demand strengthens".

But it cautioned that the recovery was so far "only modest, fragile and subject to downside risks".

Spain's conservative government is forecasting an overall decline of 1.3 per cent output in 2013 before a return to growth of 0.7 per cent over 2014.

It forecasts an unemployment rate of 26.6 per cent his year and 25.9 per cent in 2014.

The International Monetary Fund has warned Spain's rate will stay above 25 per cent until 2018.

Mr Ben May, an economist at London-based research group Capital Economics, wrote in a note: "We doubt that the economy will generate a strong enough recovery to bring the unemployment rate and public debt down significantly over the next couple of years."

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