finance24.com/Adrienne Taylor

Spain's economy is growing at twice the rate of its European Union neighbours, its economic surge fuelled by low interest rates and unprecedented demand for property, official data showed.

The economy grew 0.9% in the first quarter of 2005 from the last three months of 2004, and was up 3.3% from the same period a year earlier, according to final calculations, the National Statistics Institute (INE) said.

"Very few (EU) countries have recorded similar growth rates," Labour Minister Jesus Caldera said, predicting that the figures would get even better in the second quarter.

In the fourth quarter of 2004, gross domestic product expanded at a 12-month rate of 3.2%.

First-quarter growth was driven by surging domestic demand, up 5.8% on a 12-month basis compared with 5.5% in the previous quarter, the INE said in a statement.

Growth in the eurozone, which groups 12 EU countries, was 1.4% in the first quarter of 2005 from a year before and 1.7% in the entire 25-nation EU, according to provisional estimates by Eurostat, the EU's statistics arm.

Analysts and international organisations agreed on the reasons for the Spanish surge.

The country benefitted much more than others from low eurozone interest rates, said Henrik Lumholdt, an analyst with Inversis Banco.

Mortgage lending rates currently range between 3.0 and 3.5% in Spain. At the end of the 1980s they stood at around 16%.

The rates drop combined with strong job creation - more than 500 000 in the last year alone - have led to unprecedented demand for property, with construction becoming the motor of economic growth in Spain.

This led Spain's economics ministry to recently revise its statistics for 2004, revising GDP growth up to 3.1% from 2.7%.

Sound budget policy also helped boost the economy's health.

Jose Luis Rodriguez Zapatero's socialist government said last Friday that he was expecting a public deficit of 0.2% of GDP in 2006, against 0.1% this year, a surplus of 0.3% in 2007 and another surplus of 0.4% in 2008.

In marked contrast, neighbouring Portugal plans to adopt austerity measures to control a public deficit which threatens to hit nearly seven percent of output in 2005, more than twice the limit allowed for nations that use Europe's single currency.

The Organisation for Economic Cooperation and Development in its latest survey noted the exceptional growth of the Spanish economy compared to its eurozone neighbours.

But it warned that Spain's relatively high inflation, which stands at 3.5%, the surge in property prices, one of the lowest productivity rates in the EU and unemployment which is still relatively high could combine to undermine growth.