Spain's economic recovery remained fragile at the start of the year, despite a pick up in exports and more people coming to its beaches, and doubts persist over the country's ability to grow fast enough to reduce its debt burden.
In a monthly report the Bank of Spain said the economy would grow by 0.2 percent in the first quarter of the year on a quarterly basis, the same as the last three months of 2010.
Spain must assure markets it is capable of stimulating a weak economy to grow at a decent rate to help meet its tough deficit forecasts for the year and avoid the fate of other struggling economies. But first quarter growth was far from robust, chiming with data showing a fall in industrial output in March on weak domestic demand.
The modest first quarter performance signals that Spain continues to face profound challenges to generate any significant growth in 2011, said Raj Badiani at IHS Global Insight
Exports continued to prop the recovery in early 2011, but they are likely to be increasingly less supportive during the course of the year.
The central bank, which forecasts 0.8 percent growth this year, said the 2011 deficit target of 6 percent of GDP will be met. It also said Spain had further decoupled from other weak euro zone states in the first quarter.
Portugal signed up to a 78-billion-euro international bailout plan on Thursday which will send it into recession for two years with a recovery only likely in 2013.
Markets also believe the Greek economy will not be able to overcome the harsh austerity measures dictated by its own bailout deal, leaving a restructuring of its debts almost inevitable.
Spain already has the highest unemployment rate in the European Union at 21.3 percent in the first quarter and analysts retained doubts over the economy's path.
These data are far from the government's objective for growth this year of 1.3 percent, and are clearly not enough to create jobs, said Emilio Ontiveros, head of consultancy Analistas Financieros Internacionales.
The quarterly growth rate estimated by the bank is in line with the consensus forecast for the official data for the first three months of the year, due on May 13.
Tourism had also helped the economy grow in the first quarter, the central bank said, boosted by instability in north Africa and the Middle East that had forced people to think of alternative destinations for their holidays.
Indeed Ontiveros also estimated that export growth would decline this year, leaving the country more dependent on a pick-up in tourists.
The government reported that tourist spending increased by 6.8 percent year-on-year in February.
The central bank also said that house prices needed to fall further, and that necessary trend had not been helped by people bringing house purchases forward before tax benefits governing house ownership changed at the end of the year.
The Bank also said the government, unions and business groups must reach an agreement over changes to collective wage bargaining, which could threaten to push inflation higher.
Such clauses feed the generation of second round effects, that tend to complicate any pick-up in productivity and job creation necessary for a more solid recovery, the Bank of Spain said.
An agreement is expected this month.
(Additional reporting by Manuel Maria Ruiz; Editing by Toby Chopra)