Spain Economy Forecast to Shrink in 2012 by Bank of Spain

Spain’s economy contracted in the fourth quarter and will shrink 1.5 percent this year, the Bank of Spain estimated, undermining government efforts to cut the budget deficit amid the second recession in two years.

Gross domestic product fell 0.3 percent in the quarter, the most in two years, and grew 0.3 percent from a year earlier, the Madrid-based Bank of Spain said today in its monthly bulletin.

Economic output may decline this year as unemployment reaches 23.4 percent, returning to growth of 0.2 percent in 2013, the central bank said. The forecasts are based on the premise that the government will adopt additional austerity measures to “strictly” meet its budget goals.

Spain’s new government, in power since Dec. 21, is already showing signs of being split over whether it can meet its pledge to cut the deficit this year by about half. With the highest unemployment rate in the European Union and credit shrinking by the most on record, Budget Minister Cristobal Montoro called yesterday on the EU to ease the deficit goal, contradicting comments by Deputy Prime Minister Soraya Saenz de Santamaria two days earlier.

“Spain is set for a difficult 2012 and is likely to be dragged deeper into the euro-zone debt crisis,” Ben May, a European economist at Capital Economics in London, wrote in an e-mailed note.

Bond Yields

Prime Minister Mariano Rajoy is battling to rein in borrowing costs and convince investors he can repair public finances and restore growth. The yield on Spain’s benchmark 10- year bond was 5.457 percent at 12:00 p.m. today in Madrid, compared with 5.487 percent on Jan. 20.

As the economy continues to reel from the collapse of the property boom in 2008 as well as the fallout from the sovereign debt crisis, Montoro said yesterday that the EU should revise the goal for Spain to cut its budget deficit to 4.4 percent of GDP this year from about 8 percent in 2011. The existing target was made by the previous Socialist government and was based on a forecast that the economy would grow 2.3 percent in 2012.

Deficit-reduction should be “realistic” and take into account the new growth forecasts, Montoro said in comments to La Vanguardia that were confirmed by his spokeswoman. The interview was published after Deputy Prime Minister Soraya Saenz de Santamaria, who is also the government’s spokeswoman, said on Jan. 20 the government is “determined” to meet the goal.

IMF Forecasts

The International Monetary Fund estimates Spain’s economy will contract 1.7 percent this year, according to Ansa news agency, citing an advanced copy of the lender’s World Economic Outlook. Montoro said those forecasts, which are due to be published officially tomorrow, are “realistic.” The government hasn’t made its own growth estimates and plans to adopt whatever figures the European Commission publishes next month.

“The important thing is that brave steps are now taken to allow for a stronger recovery,” Jose Luis Martinez, a strategist for Spain at Citigroup Inc. in Madrid, said in a telephone interview.

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