Recasts, adds Economy Minister quotes, detail, context throughout

By Victoria Waldersee and Jesús Aguado

MADRID, June 29 (Reuters) - Spain forecast on Monday stronger economic growth, narrower deficits and lower unemployment over the next three years than previously expected, as the country continues to outpace a mostly sluggish euro zone.

While peers such as Germany, Italy and France are struggling to reach 1% gross domestic product growth this year, Madrid sees its economy expanding by 2.6%, up from a previous forecast of 2.2%, Economy Minister Carlos Cuerpo told reporters.

"Growth is essentially driven by robust consumption and investment during the 2026-2029 period," Cuerpo said. "This is further supported, on the supply side, by improved employment and increased hourly productivity."

Madrid also raised its 2027 growth estimate to 2.2% from 2.1% and said growth would remain above 2% through 2029.

Cuerpo said second-quarter GDP growth this year would be similar to, or slightly higher than, the first quarter.

The new forecast is needed for the government to submit the 2027 state budget. The ruling leftist coalition has not introduced new budgets in the past three years because it lacks support in a fragmented parliament, instead rolling over the 2023 accounts.

LOWER DEFICITS, UNEMPLOYMENT

The Economy Ministry expects the deficit to narrow to 2.1% of GDP this year from 2.4% in 2025, and to reach 1.8% by the end of next year.

Cuerpo said unemployment would fall from about 10% now to 8.5% in 2029, the lowest since the fourth quarter of 2007 and close to full employment for a country long affected by structural and seasonal job market weaknesses.

"This is a structural gain for our economy, not a bubble such as the one we experienced in 2007," he said.

Cuerpo said the improved indicators also reflected lower wage inequality and a reduced risk of poverty.

However, underlying data shows soaring food and housing prices, slow real wage recovery and a labour market focused on low-productivity services mean many families feel poorer than before inflation peaked in 2022, when pandemic disruption eased.

ANTI-INFLATION MEASURES EXTENDED

Earlier on Monday, the National Statistics Institute published preliminary data showing EU-harmonised inflation was unchanged in the 12 months through May, despite the energy supply crisis triggered by the partial closure of the Strait of Hormuz during the U.S.-Israeli war on Iran .

The data partly reflected anti-inflation measures in a €5 billion ($5.7 billion) package passed in March to counter the impact of the Middle East conflict on local prices, including tax cuts and fuel subsidies.

The cabinet on Monday extended the temporary measures — which were set to expire on Tuesday — by another three months.

Cuerpo said they had cut inflation by one percentage point on average per month between April and June and lowered fuel prices.

But as international prices are expected to fall if the Iran conflict continues to subside, Spain will gradually phase out household fuel tax cuts and subsidies, he said, with a provision that would automatically reinstate them if the war were to reignite.

($1 = 0.8774 euros)