By Tracy Rucinski
MADRID (Reuters) - The Spanish economy grew between April and June at its fastest quarterly rate since before the financial crisis, outpacing the bulk of the euro zone as falling prices help drive a rebound in domestic demand.
After six years of crippling economic downturn marked by soaring unemployment, Spain has begun to recover as labour market reforms gain traction and the state's funding costs continue to fall.
Gross domestic product expanded 0.6 percent in the second quarter from the first, final National Statistics Institute (INE) data showed on Thursday, the fourth consecutive quarter of growth and the strongest since the last quarter of 2007.
A decline in exports was offset by rising internal demand, which grew by 1.9 percentage points quarter-on-quarter.
Meanwhile, inflation data released for August showed EU-harmonised consumer prices in negative territory for the second consecutive month at 0.5 percent year-on-year, the lowest figure in nearly five years.
One analyst said that low inflation could support Spain's recovering economy, keeping wages down and encouraging employers to take on staff while stimulating consumption through competitive pricing.
"Low inflation is not inconsistent with a rebound in economic activity," Citi economist Giada Giani said. "However, a prolonged period of low inflation would be bad for the economy to the extent that it does increase the real burden of debt."
Spain's Economy Secretary Fernando Jimenez Latorre said inflation could remain negative in the next two months but expected consumer prices to end the year in positive territory.
"We are not in a situation that I would classify as deflation," he told reporters, saying that "temporary" declines reflected a fall in energy prices which he saw recovering by year-end.
The government in Madrid has remained optimistic on 2014 growth, even in the context of weakening economies in most of the rest of the euro zone.
Over the first half of 2014, Spain has reported more rapid growth than any other mainland western European economy, and Economy Minister Luis de Guindos reiterated last week a forecast for full-year growth of 1.5 percent.
Year on year growth of 1.2 percent in the second quarter matched the first quarter reading and was the fastest since the first quarter of 2008.
The country is also benefiting fiscally from the euro zone's growth slowdown and concerns over falling inflation, which have fuelled expectations of more policy action from the European Central Bank and, in turn, driven Spain's sovereign borrowing costs to record lows.
The ECB meets next week.
(This corrected version of the story fixes name of analyst in paragraph seven).
(Additional reporting by Sonya Dowsett; Editing by John Stonestreet and Raissa Kasolowsky)