Sept. 2 (Bloomberg) -- Spain's economy, the fourth largest among the dozen countries using the euro, grew at the fastest pace in nine months last quarter as tax cuts boosted consumer spending and falling interest rates encouraged construction. Spain's economy grew 0.7 percent from the previous three months and 2.3 percent from a year earlier, the government said in Madrid. The median forecast of 10 economists surveyed by Bloomberg News was for growth of 0.6 percent in the quarter.
Borrowing costs at the lowest in more than half a century, $3 billion in income tax cuts this year and rising employment helped Spain avoid the contraction suffered in Germany, France and Italy in the period. ACS SA, Spain's fourth-largest builder, said construction profit jumped 33 percent in the first half. ``We'll keep seeing a difference in growth rates between the rest of Europe and Spain because of the strength of the real estate market,'' said Enrique Marazuela, who helps manage $1.1 billion in stocks and Spanish government bonds at Aegon Spain SA. ``The cuts in interest rates are still having an effect.'' Metrovacesa SA and Bami SA, which are merging to form Spain's biggest real estate company, said last week second-quarter profit rose as low borrowing costs continued to spur demand for homes. Construction spending grew 1.2 percent in the quarter and 3.8 percent from a year earlier, the report said. Consumer spending jumped 1 percent in the quarter and 3.2 percent in the year.
Employment Gains
Spain has created about 3 million new jobs since Prime Minister Jose Maria Aznar came to power in 1996 and the unemployment rate has fallen by more than half to 11 percent, still the highest in the European Union. The jump in employment has helped sustain growth and kept consumer prices rising faster than the EU average. Spain's inflation rate in July rose to 2.9 percent by EU standards, a percentage point higher than the average for the euro region.
The faster growth has contributed to Spain's benchmark IBEX index gaining more than most of its European rivals. The IBEX has risen 19 percent this year, more than twice the pace of indexes in the U.K., France and Italy. The yield on Spain's benchmark 4.2 percent bond maturing 2013 has risen 79 basis points from its low for the year reached in June of 3.358 percent. A basis point is 0.01 percentage point. The IBEX was little changed today at 7186.7 and the yield on the Spanish benchmark 10-year bond rose 8 basis points to 4.327 Aznar's has cut income taxes, balanced the budget and changed labor laws to encourage new job creation since taking office in 1996. Aznar yesterday nominated Mariano Rajoy to replace him as candidate for prime minister in elections next year. Given Aznar's record on the economy, Rajoy will probably follow similar policies, executives said.
European Slump
``This government has done a very fair job with the economy, especially when compared to other European countries,'' said Carlo Bonomi, chief executive officer of Service Point Solutions SA, a document publisher, in an interview. If Rajoy wins, ``I expect his government to do the same job.'' The acceleration of growth in Spain contrasts with the three biggest countries using the euro. Germany and Italy both fell into recession in the first half and France's economy contracted 0.3 percent in the second quarter.
``Spain isn't alone in the world,'' said Jaime Hoyos, who helps manage more than 500 millon euros in funds, including Spanish government debt, at Indosuez Fondos SA in Madrid. ``But it's true that if the foreign situation improves, Spain can maintain this rate or grow even faster. Even when the foreign situation was bad, Spain still grew faster than the EU.''
Rate Cuts
To aid the euro region's recovery, the European Central Bank has pared borrowing costs to 2 percent the lowest since at least 1946. The central bank has said it sees ``increasing reason'' to expect a recovery this year.
Signs are increasing that the $8 trillion economy of the euro region may resume growth this quarter after contracting in the second three months. The outlook for European manufacturers improved for a second month in August, to a six-month high, an index compiled by NTC Research showed yesterday. The ECB, whose governing council meets Thursday, will probably leave rates unchanged until at least the middle of next year, a Bloomberg survey of 22 economists showed.//www.bloomberg.com