March 26, 2013 11:15 am

Bank of Spain sees deeper gloom in 2013

Job Centre Spain©Reuters

The Spanish economy will shrink by 1.5 per cent this year and unemployment is set to rise above 27 per cent, the Bank of Spain has predicted.

The central bank’s latest annual forecast leaves little doubt that 2013 will be an even tougher year for Spaniards than last year, with housing prices also heading for yet another sharp fall. The economy will again be marked by weak domestic demand, a fragile labour market and tight financial conditions, the bank said.

The predictions are at odds with the more upbeat economic outlook given by the Spanish government, but are broadly in line with figures provided by the European Commission and the International Monetary Fund. Madrid is currently in the process of revising its official forecasts, and is expected to admit next month that the government forecast of a 0.5 per cent drop in gross domestic product this year is too optimistic.

At the same time, the central bank appeared to lend some support to the government narrative of an economy that has “touched bottom”, and is now slowly starting to recover. Tuesday’s report said that Spanish GDP is likely to stabilise towards the end of 2013, and that the quarterly contraction in demand should “moderate” over the course of the year.

“The Spanish economy could already be emerging from the most acute phase of the current recession,” the bank concluded. It forecast a return to GDP growth of 0.6 per cent next year, but only a very slight drop in unemployment to 26.8 per cent – making 2014 the fifth consecutive year with a jobless rate of above 20 per cent.

Antonio Garcia Pascual, chief southern European economist at Barclays, said the key question facing Spain now was the country’s ability to return to long-term growth: “All the data point in the direction of negative growth but with the pace of contraction decelerating throughout 2013. The big question is what will happen in 2014.”

He added: “The European Central Bank has bought time for countries like Spain and Italy, by ensuring low interest rates and talking down interest rate expectations. The question is how the Spanish government is using this time. Are they using this time wisely by attracting foreign investors and convincing them about Spain’s long-term growth prospects? The answer is not clear. At the moment, I don’t see any big-ticket structural reforms on the agenda.”

The Spanish government pushed through an overhaul of the labour market last year, but critics say the reform did not go far enough in tackling the deep divide between temporary workers and employees on fixed contracts. With an ageing population and close to 6m people out of work, there is also widespread concern among economists over the sustainability of Spain’s pension system and broader social security network.

Spain has been in the grip of an economic and financial crisis for more than five years, brought about by the collapse of the country’s decades-long property boom. At the height of the crisis last June, the government in Madrid was forced to ask for a €100bn EU bailout to rescue local lenders that were caught out by the real estate meltdown.

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