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By Jason Webb
MADRID, Oct 31 (Reuters) - Spain's economy contracted 0.2 percent in the third quarter compared with the previous three months, suffering its first quarterly decline since 1993 as a global financial crisis pushed the country towards recession.
The estimate from the Bank of Spain on Friday showed gross domestic product expanded in annual terms in the third quarter, rising by 0.9 percent year-on-year, but the central bank was downbeat about the outlook as it flagged the growing risk of a deeper, more prolonged downturn in the world economy.
Spanish "indicators from the third quarter of 2008 show the correction intensifying, in the context of a profound deterioration in financial markets since mid-September," it said in its monthly report.
Spain, whose decade-long boom fuelled by construction and consumption ended abruptly this year, is now paying the price for overreliance on property and high levels of private sector debt and will slip into recession this year, economists said.
Growth was down from 0.1 percent quarter-on-quarter in April to June. In all of 2007, the economy expanded by 3.7 percent.
Spain will likely have plenty of company in the economic slowdown, with negative quarterly GDP data already announced by countries including the United States, Britain and Ireland.
Spain's property sector in particular has slumped fast, with developer Martinsa Fadesa going into administration and high profile building and infrastructure companies like Sacyr and Ferrovial weighed down by debts worth many times their market capitalisation.
Falling house values, with prices down 7.5 percent over a year for existing homes according to a major property website, are also squeezing banks, who cut mortgage lending by 42 percent in September from a year earlier.
CONSUMPTION LOOKS GRIM
"We were expecting a decline (in GDP) of 0.1 percent and it came out as negative 0.2 percent. It's bad news but we have to see the sector breakdown and we think that consumption is going to give some pretty bad news and show a contraction in the third quarter," said Diego Fernandez of Fortis.
The government is set to announce its own preliminary GDP data on Nov. 14, with more complete data a few days later.
The government, which has launched a 38 billion euro fiscal stimulus programme, said the poor quarterly data was the result of external factors.
"We're going through an economic situation, as everyone knows, which is due to the international crisis and is affecting all countries," Deputy Prime Minister Maria Teresa Fernandez de la Vega told a news conference.
Fortis' Fernandez said the economy could decline by 0.1 percent in the second quarter and barely grow by 0.1 percent in 2009.
"It probably won't be until 2011 that we see a clear improvement," said Fernandez, who said unemployment, which has already risen to 11.3 percent from 8 percent in 2007, would hit 13 percent and perhaps even 16 percent in next year.
"As Spain cannot adjust its exchange rate (because of its euro membership), it is going to have to adjust internal prices ..... It is going to have to lower wages and increase competitiveness significantly," Fernandez said.
Spain's heavy reliance on external financing, due to a current account deficit running at roughly 10 percent of GDP, means that the global financial crisis is biting here hard.
"Here we have the same problems as elsewhere, combined with our external financing needs, which is a problem in the current liquidity drought," said Alfonso Garcia-Yubero from Banif, who saw more vigorous economic growth returning by the second half of 2010.
The Bank of Spain said domestic demand growth slowed to 0.3 percent in annual terms in the third quarter, weighed down by slowing house construction and consumption. It did not give comparative data for the second quarter, but separate government statistics showed growth of 0.1 percent for this period.
Year-on-year Spanish third quarter economic growth fell by 0.9 percentage points from the second quarter, the bank said.
While inflation risks are ebbing in the euro zone as commodity and energy prices ease, the financial crisis posed grave risks to the world economy, the Bank of Spain said.
"This all means that the world economy faces maximum uncertainty over the next few quarters, and increases the risks that the downwards phase of the cycle is deeper and longer," the bank said. (Additional reporting by Manuel Maria Ruiz, Editing by Andy Bruce)