Spanish growth hits 13-year low

The Spanish economy grew at its slowest quarterly pace in nearly 13 years between January and March, as a tumbling housing market and the global credit crunch brought a sharp deceleration in economic activity.

The economy expanded by 0.3 per cent in the first quarter of this year, compared with 0.8 per cent in the preceding quarter and 0.9 per cent in the same period last year, according to preliminary government data published yesterday. It was the lowest rate since the third quarter of 1995, the national statistics institute said.

The slowdown appears to have caught the recently re-elected socialist government by surprise, even though the Círculo de Empresarios, Spain's biggest business lobby, warned last month about the risks of stagflation - a period of little or no growth with high inflation.

Pedro Solbes, finance minister, recently lowered the official growth estimate for 2008 from 3.1 per cent to 2.3 per cent. But on the basis of the economy's recent performance, even that revised forecast looks optimistic.

Economists are worried about the impact of the slowdown on employment and government revenues. Spain has a fiscal surplus of about €20bn ($31bn, £16bn) - 2 per cent of gross domestic product - which Mr Solbes says he will spend to keep the economy afloat. But revenue collection in the first months of the year has been below expectations.

Between 2004 and 2006, Spain created one-third of all new jobs in the European Union, many of which were filled by Spain's 4.5m immigrants, who make up 10 per cent of the population. Unemployment is now rising as construction and services industries shed jobs - last month it topped 2.3m, 15 per cent higher than a year ago.

Nevertheless, Spaniards can draw comfort from the fact that growth in northern Europe is proving more resilient. Strong growth in this region is good news for Spanish exporters, who rely heavily on the area for orders.

Upbeat data is expected today from Germany, where GDP grew at a faster pace in the first quarter than the 0.3 per cent seen in the final three months of last year, according to analysts.

Overall eurozone growth in the first quarter is likely to have been further boosted by a pick-up in France. That would encourage policymakers' conviction that the region entered the global financial storm in good shape, although indicators point to a slowdown ahead.

Weaker domestic demand is also helping to bring down inflation in Spain, which fell to an annualised rate of 4.2 per cent in April, compared with 4.5 per cent in March. Spanish inflation has always been higher than the EU average.