Spain's Runaway Economy Hits the Buffers As Building Boom Stalls

Spain's 10-year economic boom finally showed signs of stalling yesterday as the socialist government of the prime minister, José Luis Rodríguez Zapatero, which faces an election in March, admitted the country faces an uncertain future.

"We face a period of uncertainty and lack of clarity," Pedro Solbes, the finance minister, said yesterday. "This is always bad for the economy."

Mr Solbes was speaking as unemployment figures showed a sharp increase in workers being forced off building sites, amid claims that a housing bubble was set to burst. Vicente Martínez Pujalte, the spokesman for the center-right People's party, said the unemployment figures were a sign that the economy was "running out of gas".

Spain is the only European country to have outranked Britain in terms of rising house prices over the past five years, according to a recent study by the Halifax. Spanish prices doubled in that time, while those in Britain increased by 90%.

An accompanying decade-long building boom, which saw cranes sprout up on urban skylines all over the country, has left Spain's economy heavily dependent on construction. The boom has sucked in workers from around Europe and the developing world, increasing the country's population and making Spain one of the main motors for job growth in Europe. Those workers have spent their pay on buying homes for themselves or on consumer goods, further boosting the economy.

But that process may now reverse as house price increases are slowing and some analysts predict they will begin to fall by the end of the year. Prices of older properties are already dropping in cities such as Barcelona.

British owners of Spanish holiday homes may also see them lose value, as some experts talk of the property market being overvalued by up to 30%.

"Buyers are holding out, waiting to see if house prices will fall," said Javier Morillas, an economist at San Pablo University. "We won't go into recession, but I can see things may start slowing down."

Nervous builders are shying away from new projects and workers are being forced to hang up their hard hats.

Last month's unemployment growth rate was the highest for 11 years and 40% of those who became unemployed in August had come off building sites.

The government said the figures were a "blip" and claimed they were not a change in the overall trend.

With economic growth at 4%, Spain has a long way to go before it declines to the 2.5% average of the rest of the EU. Before the recent upturn in unemployment, it had hit a 29-year low.

But analysts said that a vicious cycle of falling employment and lower consumer spending could set in. This would be further fuelled by higher mortgage interest rates and falling house prices.

"Growing employment has been the great motor behind the economy for a dozen years," said Rafael Pampillón an economist at the Instituto de Empresa, in El Mundo newspaper.

"Spain needs to move towards high and medium technology sectors," he added. "That, unfortunately, is a slow process."