Spain cuts growth forecast, keeps deficit targets

6th April 2011, Comments 0 comments

Spain cut its growth forecast on Wednesday and revised upwards its estimates for unemployment but said it was still on track to bring its public deficit to within EU limits by 2013.

Finance Minister Elena Salgado said the economy would grow 2.3 percent in 2012 rather than 2.5 percent, and by 2.4 percent in 2013 instead of 2.7 percent due to higher prices for commodities like oil and an expected increase in eurozone interest rates.

For this year, the government kept its forecast for growth at 1.3 percent.

"Internal demand is not growing but external demand is growing more than expected so we can keep our growth forecast," Salgado told a news conference.

The unemployment rate, already the highest among industrialised countries, will hit 19.8 percent this year instead of the 19.3 percent previously forecast.

The rate will ease to 18.5 percent in 2012, 17.3 percent in 2013 and 16 percent in 2014 but the figures are all higher than previously forecast by the government.

"These are figures which are more realistic," Salgado said.

Spain's unemployment rate stood at 20.33 percent at the end of 2010, the highest level in the Organisation for Economic Cooperation and Development.

The nation is battling to douse market fears that it will follow Greece and Ireland in seeking a multi-billion euro bailout from the IMF and the EU by slashing spending and introducing market reforms to boost growth.

The head of the IMF, France's Dominique Strauss-Kahn, said in an interview published Wednesday in Spanish daily El Pais that Madrid has taken the correct financial steps and had no need for international aid.

"I don't believe that the Spanish government needs any type of financial aid," he said.

"I believe that the policies that the Spanish government has implemented, as much on the fiscal side as in the reform of pensions, the labour market or in banking, are the correct policies."

The Spanish economy contracted 0.1 percent in 2010 after shrinking 3.7 percent in the previous year following the collapse of a property boom that had fueled growth for more than a decade.

Spain, Greece and Ireland were the only eurozone economies to shrink last year.

The government's forecasts for economic growth are still below those of the Bank of Spain which warned last month that the country will likely miss its public deficit targets this year and the next.

The central bank predicts the economy will expand by just 0.8 percent this year and 1.5 percent in 2012.

It estimates the deficit will be equal to 6.2 percent of output this year before falling to 5.2 percent in 2012.

The government predicts the deficit will hit 6.0 percent of output in 2011 and 4.4 percent next year before falling to the EU limit of 3.0 percent in 2013.

The European Central Bank is widely expected to raise its key interest rate when it meets on Thursday to keep inflation under control.

The ECB's key rate has been at a record low of 1.0 percent since May 2009 to support growth through the financial and credit crises.

Many economists have warned that a rate increase would put the brakes on growth at a time when many nations on the periphery of the eurozone like Spain are struggling with high debt and weak growth prospects.

A rate increase would raise borrowing costs for those countries when they already have trouble selling debt at affordable rates. It would also increase monthly payments for many homeowners with adjustable-rate mortgages, dampening consumer demand.

© 2011 AFP

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