Spanish Growth Slows as Central Bank Trims 2016 Forecast

  • Bank cuts inflation projection for 2016 conditioned by oil
  • Bank sees Spain missing deficit reduction goal in 2016, 2017

The Spanish economy slowed in the first quarter, the Bank of Spain said Friday as it lowered the growth outlook for the year.

The pace of growth slowed to 0.7 percent from 0.8 percent in the fourth quarter last year, the Bank of Spain said as it cut its annual growth forecast for 2016 to 2.7 percent from a previous estimate of 2.8 percent. That compares to growth of 3.2 percent last year, the fastest pace since 2007.

The revision comes as lawmakers in Spain struggle to form a working coalition government following an inconclusive election in December, resulting in an ongoing political deadlock that could lead to fresh elections in June if no agreement is reached.

“Prolonging that impasse increases the probability of uncertainty affecting the economy,” said Pablo Hernandez de Cos, the bank’s Director General of Economics, Statistics and Research in Madrid, adding that structural reforms and fiscal consolidation measures by the new government -- regardless of its ideology -- remain key for growth.

The projections come a day after Spain said it missed its deficit-reduction target for the eighth consecutive year in 2015. The shortfall came in at 5.2 percent, compared to a European Commission target of 4.2 percent, making it the second-highest differential in the European Union after Greece even as the recovery gained momentum.

The Bank of Spain said it sees the deficit at 4.4 percent in 2016 and 3.4 percent next year. That would put the country in breach of its goal set by the EU of bringing the deficit below 3 percent by 2017.

The Bank of Spain sees consumer prices falling an average of 0.1 percent in 2016, compared to a previous projection for a 0.7 percent increase. The fall is strongly conditioned by the price of oil, the central bank added. Consumer prices should start rising from the second half of this year to reach 1.6 percent growth in 2017.

Meanwhile, unemployment -- stuck above 20 percent since the height of the economic crisis in 2010 -- is expected to continue falling, according to the central bank, which sees job creation rising at “high levels” in relation to GDP growth. Unemployment is seen slightly above 18 percent by the end of 2017.

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