Spain lowers growth forecast by half point

MADRID (AP) ― Spain lowered its growth forecast for 2011 by half a point to around 0.8 percent Wednesday after official data showed the economy stagnated in the third quarter.

After months of stubbornly sticking to a prediction of 1.3 percent GDP growth for this year, Deputy Finance Minister Jose Manuel Campa said the new quarterly figure meant this was no longer realistic.

The government thus joined many private economists, thinktanks and international financial institutions that have been saying Spain’s economic growth this year would be below 1 percent.

Campa insisted that the government remains committed to reducing its budget deficit to 6 percent of GDP this year from 9.2 percent in 2010, despite the stagnant economy.

The zero growth in the third quarter followed two quarters of modest expansion at the start of the year, and news of it is more bad news for the ruling Socialists ahead of general elections on Sunday. The opposition conservative Popular Party is predicted to win by a landslide.

Spain’s moribund economy, the eurozone’s fourth-largest, and soaring borrowing costs have dominated the election campaign.

In particular, there are worries the country, which has an unemployment rate of 21.5 percent, is getting dragged further into Europe’s debt crisis mire.

The yield on Spain’s ten-year bond ― the country’s key borrowing rate ― climbed to 6.36 percent mid-afternoon Wednesday after initially easing earlier in the day. A rate of 7 percent is considered unsustainable in the long term.

Spain’s Treasury faces a tough test of market confidence Thursday when it auctions up to 4 billion euro ($5.4 billion) in 10-year bonds on the primary market.

The Bank of Spain has said there is still time to meet the government’s goal of reducing its budget deficit to 6 percent of GDP in 2011 but warned fresh austerity measures may be necessary.

Weak growth prospects have been cited by the three top international credit ratings agencies for their recent downgrades of Spain’s sovereign debt.

The Popular Party said Tuesday that Spain had paid 1.5 billion euro in interest on its debt over the past 15 days, canceling out what the Socialist government had saved on its deficit-reducing measure of freezing pensions over the past year.