Spain sees economy contracting

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The Spanish government on Friday slashed its economic forecasts for 2009 from growth of 1.0 percent to a contraction of 1.6 percent due to the global financial crisis and warned of dark days ahead for Europe's fifth-largest economy.

MADRID - Unemployment, already the highest in the European Union, will hit 15.9 percent this year, worse than the 12.5 percent forecast in July while the public sector budget deficit will clearly surpass the eurozone limit of 3.0 percent of output in 2009, it said.

The government predicts the deficit will hit 5.8 percent of GDP this year instead of around 2.0 percent as previously forecast.

"The financial crisis that exists at the moment at the global level has changed the scenario very drastically," Economy Minister Pedro Solbes told reporters following a weekly cabinet meeting which approved the new economic forecast.

The government estimates the economy expanded by 1.2 percent last year compared to growth of 3.7 percent in 2007.

The collapse of a decade-long real estate boom due to oversupply, higher interest rates and the international credit crunch has spread to other areas, pushing the Spanish economy to the brink of its first recession since 1993.

Spain's unemployment rate hit 13.4 percent in November, the highest in the 27-nation European Union, according to the bloc's statistics agency Eurostat.

The new government forecasts are in line with predictions for the Spanish economy made last year by the Washington-based International Monetary Fund (IMF) and the Paris-based Organisation for Economic Co-operation and Development (OECD).

The IMF predicts Spain's economy will shrink by at least 1.0 percent this year while the OECD forecasts an economic contraction of O.9 percent in 2009.

Deputy Prime Minister Maria Teresa Fernandez de la Vega warned that "2009 will not be an easy year" but she predicted measures adopted by her socialist government to stimulate the economy will allow Spain to return to growth in 2010 "in force."

The government predicts the economy will expand by 1.2 percent in 2010 and by 2.6 percent the following year.

The unemployment rate will dip to 15.7 percent in 2010 and 14.9 percent in 2011, according to the new government forecasts for the economy.

Prime Minister Jose Luis Rodriguez Zapatero unveiled an 11-billion-euro (14.5-billion-dollar) stimulus package last year, mostly dedicated to public works, that is aimed at fighting unemployment.

The spending on stimulus measures at a time of lower tax revenues due to the economic slump has fueled fears over the state of Spanish finances

Standard and Poor's on Monday to put the country's credit ratings on watch for a possible downgrade, move a that would make raising money in debt markets more expensive.

"The creditwatch placement reflects our view of the significant challenges facing the Spanish economy as it traverses a period of very weak growth," the agency said in a statement.

Spain currently enjoys the top AAA long-term sovereign credit ratings. Only three other western European countries -- Belgium, Italy and Portugal -- do not have AAA ratings.

by Fabien Zamora

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