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But 2011 still looks grim for the region's fourth largest economy with economists dismissing government growth predictions as too optimistic.

Recession Fears Continue In Spain Second Half Of 2010

Spain's battered economy showed signs of recovery in the first half of 2010, but companies and economists fear austerity measures aimed at slashing public debt may bring on a new year-long recession with the key construction sector taking the brunt.

Total profit for the countries' 30 leading companies rose in the first six months from a year earlier, the economy created jobs for the first time in two years from April to June and debt market jitters have calmed.

But any recovery is about to face profound challenges.

"Apart from exports, which will be under increasing pressure in 2011 as austerity measures are wheeled out across the euro zone, I can't see where growth will come from," said Raja Badiani, economist at IHS Global Insight.

There have been encouraging signs of recovery in much of the euro zone, notably in Germany, and upbeat corporate second-quarter profits also boosted confidence.

But 2011 still looks grim for the region's fourth largest economy with economists dismissing government growth predictions as too optimistic.

Official forecasts for Spain, which grew for the first time in two years in the first quarter, sees it shrinking over this year as a whole before growing 1.3 percent in 2011 and near 3 percent by 2012.

However, low government and consumer spending and belt tightening over construction investment will weigh heavily over the next year and Badiani expects quarterly contractions from the third quarter of this year into mid-2011.

After Spain's public deficit jumped to 11.2 percent of GDP in 2009 from a surplus two years earlier, the government plans to save around 65 billion euros this year and next including pay cuts for state workers and a two-point hike for value-added tax.

RBS places the chance of a return to recession at 60 percent, while the International Monetary Fund, which only expects 0.6 percent growth next year and 1.7 percent the year after that, has also said recovery would be weak and fragile.

Spain's battered builders, already the root of the economic slump after the burst of a property bubble, are in the firing line from a big chunk of the government spending cutbacks.

Mid-sized builder Arcion sees a painful year ahead as the government delays or cancels a fifth of its public works contracts to slash 6.4 billion euros in spending.

"The central administration is one of our main clients. We've been growing strongly, but this year and next we'll remain flat or even shrink a little. It's going to be difficult," said Antonio Medrano, chairman of the 24-year-old builder in Valencia on the east coast of Spain.

But the pain will not be restricted to that sector.

Telecommunications giant Telefonica continues to see slumping revenue in Spain and warns consumption could slow, while the euro zone's largest bank Santander and other Spanish banks are now saying bad loans could peak by mid-2011 instead of later this year.

Since the building implosion two years ago, the number of unemployed construction workers more than doubled to nearly 600,000 and the sector has shrunk to 11 percent of the economy from 18 percent.

Unions warn that government cuts in infrastructure spending will put a further 115,000 jobs in jeopardy.

Many contractors fear the cuts are just the beginning from a cash-strapped government desperate to reduce costs.

"The situation is so uncertain right now, it's very worrying," said Medrano, whose Arcion group originally restored ancient Spanish churches and castles but has diversified to larger projects such as highways and bullet train rails.

The other pillar of Spain's economy, private consumption, will also stagnate over the next year with more than 20 percent unemployment, wage cuts, pension freezes, welfare reductions and the tax hikes all bearing down on consumer spending.

Services account for over 60 percent of GDP but with consumers cutting up their credit cards and saving what they earn to pay off high personal debts and build rainy day funds, there is little hope of growth.

Car sales dropped 24 percent in July on cancelled subsidies and the VAT hike and the ANFAC car makes association expects a plunge 30 percent in the second half.

"The sinking of the market expected in the second half of the year is alarming for employment ... and could provoke the disappearance of many small and medium sized companies," ANFAC said.

Retail sales rose in June for the second time this year after 28 straight months of falls as shoppers scrambled to buy large-ticket items before the VAT hike but the second half is expected to see people shun the high street once again.

The tourism sector, which accounts for 11 percent of Spain's GDP, is not faring much better with hotels along the coast near Valencia reporting 2010 as one of the worst since the crisis began, faced with empty beaches and half-filled restaurants.

Most of the 4.6 million unemployed receive government handouts, but jobless benefit lasts for just two years and many on the dole queues are coming close to this aid running out.

With 1.3 million households reporting all members as out of work and almost a quarter of those homes receiving no benefit at all, Spaniards' quiet acceptance of the hardships of recession may turn more desperate as the slump drags through another year.

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