Spanish economy seen hit by lower consumption, euro zone slowdown

By Jesús Aguado

MADRID (Reuters) - The Spanish economy is likely to grow much more slowly than expected this year due to weaker investment and private consumption and a slowdown in Europe, the central bank said on Tuesday, expecting further deceleration to 2021.

In its economic outlook for 2019-2021, the central bank put this year's growth at 2%, below its previous estimate of 2.4% released in June and down from last year's recently revised growth of 2.4%, citing also a change in the methodology of how Spain calculates its gross domestic product.

Spain's economy - the euro zone's fourth largest - has consistently outperformed much of Europe since it emerged from a five-year slump in 2013, and the 2019 forecast still points to nearly double the projected 1.1% growth rate in the common currency area.

The Bank of Spain also trimmed its macroeconomic projections to 1.7% growth next year and 1.6% in 2021 from the previous forecast of 1.9% and 1.7% respectively.

"We are especially concerned about the external risks building around the Spanish economy, the potential increase in trade tensions and geopolitical risks," Oscar Arce, the Bank of Spain's director general for economics, told a news briefing, referring to a potential hard Brexit and a trade spat between the United States and China.

A hard Brexit could have a negative cumulative impact of 0.7 percentage points on growth over a five-year period, he said.

Arce did not foresee a recession in Spain under the bank's base case scenario but he would not rule it out in the future if external factors were to worsen.

Among the key risks to the outlook, Arce also cited a potentially weaker recovery in the euro zone than previously expected by the European Central Bank.

"Latest data make us more pessimistic about a recovery in the euro zone," Arce said.

On Monday, a survey showed that the bloc's business growth stalled this month, dragged down by shrinking activity in Europe's powerhouse Germany, which came less than two weeks after the ECB pledged indefinite stimulus to revive the 19-country currency bloc's ailing economy.

The euro zone economy expanded 0.2% in the second quarter, official data showed last month, and the average PMI for this quarter suggests growth could now be weaker.

DOMESTIC CHALLENGES

Arce also pointed out Spain's own political turmoil, which has led to the setting of the country's fourth parliamentary election in four years on Nov. 10. Spain has been rolling over budgets from previous years and various reforms have been stalled.

"Also worth mentioning as a possible risk element is the continuation of uncertainty on the domestic front about the course of main economic policies in this country in the future," he said.

Still, the bank kept its budget deficit forecasts at 2.4% of gross domestic product (GDP) this year and 1.8% in 2020, though it changed its fiscal gap for 2021 to 1.5% from 1.6% previously.

Arce said the main reasons for this year's lower growth outlook were less optimistic projections about gross capital formation's contribution to GDP, now seen at 2.3 percentage points after just over 4 points in June, and private consumption, now at 1 points and down from 1.8 estimated previously.

Gross capital formation largely measures investment by companies.

(Reporting By Jesus Aguado, editing by Andrei Khalip and Gareth Jones)

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