Spain is likely to miss its growth forecasts by a wide margin this year, an official admitted for the first time on Wednesday, after figures showed weaker exports and poor domestic demand caused economic stagnation in the third quarter.
The economy is on track to have grown 0.8 percent year on year in 2011, Economy Secretary Jose Manuel Campa told journalists, though a spokesman said the government was sticking to its official growth forecast of 1.3 percent.
The data we have seen so far in the fourth quarter are in line with what we've seen in the third quarter, so for the full year, year-on-year growth could be around 0.8 percent, Campa said.
That is the same as the Bank of Spain's forecast.
Economists have long doubted Spain could meet its official target, undermining the credibility of the Socialist government's fiscal austerity programme, seen as key to riding out a renewed attack by bond markets.
Spaniards are expected to elect a new government on Sunday but the centre-right People's Party, which has a resounding lead in polls, has said it will continue with austerity measures.
Spain has been under intense pressure from investors to reduce its public deficit from 9.3 percent of GDP in 2010, but most economists expect the government to miss its target of 6 percent this year.
Campa insisted the deficit target remained unconditional and that data until now had shown the government would achieve it. Analysts believe overspending at a regional level could throw the deficit off course despite measures to trim budgets.
The Spanish economy failed to grow in July-to-September from the previous quarter, confirming an earlier estimate, and grew 0.8 percent on an annual basis, revised from a previously reported 0.7 percent, the National Statistics Institute said on Wednesday.
Spain is implementing a programme of deep cuts in public spending to convince financial markets it can put its state debt on a sustainable footing and avoid a bailout like those extended to Greece and Portugal.
But bond markets have shown little faith it can put its house in order, driving its cost of borrowing towards the 7 percent level viewed as unsustainable for public finances.
There's no way out once you start implementing austerity as a uniform policy in Europe. It was fine when we had expansion in Germany, France and Italy because the peripheries could export their way out of effectively recessionary conditions, Citi economist Guillaume Menuet said.
Now you've got budget tightening pretty much everywhere, it's impossible to think those countries can continue to rely on trade as a driver of growth.
Menuet said Citi's central projection is that the economy will shrink by between 0.2 and 0.3 percent on a quarterly basis for the next four quarters at least.
Only a vigorous export market has prevented the country falling back into recession, but the worsening euro zone debt crisis has taken its toll on Spain's main European trade partners, destination for two thirds of its exports.
The contribution of external demand to overall growth dropped to 2 percent from 2.5 percent a quarter earlier, while domestic demand had a negative contribution of 1.2 percent, INE said.
But Economy Secretary Campa said Spain's economic adjustment to imbalances created after the sharp fall in the construction sector continued apace. The country's exporters were adapting well, improving competitiveness, and exporting more to countries in Asia.
The euro zone economy grew just 0.2 percent in the third quarter from a quarter earlier and the European Commission expects the economy of the bloc to shrink 0.1 percent in the last three months of the year against the third quarter.
(Additional reporting by Paul Day; Editing by Catherine Evans)