Spain's timid economic recovery stalled in the third quarter as the result of government austerity measures, but should soon pick up again, the Bank of Spain said Friday.

The Spanish central bank estimated in its monthly economic report that third-quarter gross domestic product was unchanged from the second quarter. "It's likely the stagnation of the Spanish economy in the third quarter will be transitory," the Bank of Spain said.

Spanish GDP rose 0.2% in the second quarter and 0.1% in the first after six consecutive quarters of contraction. In annual terms, third-quarter GDP rose 0.2%, its first annual increase in eight quarters, the central bank said.

The Bank of Spain's GDP estimates are traditionally very close to, if not the same as, official data from the National Statistics Institute, which will give its first reading of third-quarter GDP on Nov. 11.

Spain is grappling with the collapse of a decade-long construction boom that has sent unemployment spiraling to 20% and punched a large hole in its public-sector accounts. Following Greece's financial meltdown, fiscally frail countries like Spain and Portugal have faced intense pressure from investors and the European Union to rein in their deficits.

Spain responded in May with a series of new austerity measures including public-sector wage cuts and sharp cuts in capital expenditure, and it has allowed all economic-stimulus programs to lapse, like an incentive for new car purchases that ended June 30. These measures came on top of others, already planned, like a two-percentage-point rise in value-added tax, which took effect July 1 and encouraged consumers to bring forward purchases ahead of that date.

The Bank of Spain said these measures caused a contraction in third-quarter consumer spending but that once "the effect of brought-forward purchases is over, it's expected the economy will resume its slow recovery."

Many economists had forecast these deficit-cutting measures could cause Spanish GDP to dip again in the third quarter. The government has ruled out a contraction in output in any quarter of 2010. "This was a slightly better than expected performance after several key indicators appeared to suggest that the economy retreated again in the third quarter," said Raj Badiani, economist at IHS Global Insight. "It appears that another robust export performance helped to stabilize the economy, despite a strong negative impulse from faltering consumer spending."

On the other hand, the Bank of Spain said the government's austerity measures have proved effective in shoring up investor confidence in Spain and that the country had "decoupled from the countries most affected by the euro-area sovereign-debt crisis." The Bank of Spain noted that Spain's IBEX-35 blue-chip stock index rose 17% in the third quarter and that risk premia for government and corporate debt fell sharply.

Source: WSJ