MADRID—Spain's economy is growing even faster than previously estimated, according to the second-quarter gross domestic product data released Wednesday, but the country has also taken a perilous step toward deflation as its inflation rate fell 0.3% on the year in July.

GDP growth of 0.6% outstripped the Bank of Spain's prediction last week that GDP may have grown 0.5% on the quarter, and marks one of the strongest performances in the euro zone, putting annual Spanish GDP growth in the second quarter at 1.2%.

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