The Bank of Spain said the euro region’s fourth-largest economy is set to stabilize at the end of the year unless the European Union prescribes stricter austerity.
“The Spanish economy may already be overcoming the most acute phase of its recession,” the Madrid-based central bank said in its monthly bulletin today. It predicts the economy will shrink 1.5 percent this year before growing 0.6 percent in 2014. That compares with a European Commission forecast for a 1.4 percent contraction and growth of 0.8 percent.
While the Bank of Spain said indicators suggest the recession has slowed in the first quarter, Prime Minister Mariano Rajoy is backtracking on a pledge to end a six-year slump in the second half of the year. The government has asked the European Commission to raise its deficit targets before it submits new budget plans through 2014 next month.
Growth may be hurt in the short term if Spain is required to cut its deficit below 6 percent of gross domestic product, even as temporary income-tax increases approved last year should be extended into 2014 to avoid it’s swelling, the Bank of Spain said. The central bank forecasts the nation’s public deficit will narrow to 6 percent of gross domestic product this year from 10 percent last year, including European aid to the banking sector, and remain at 5.9 percent in 2014.
Spain’s medium-term budget plans will be key to boosting investor confidence in the country’s economy, a positive factor for growth, the Bank of Spain said. The plan should include measures to tackle the impact of an aging population on public finances, it said, adding that the country still needs significant fiscal adjustment to stabilize its public-debt load.
The Bank of Spain predicts unemployment will peak at 27.1 percent this year. Domestic demand will drop 3 percent, even as the decline slows in the next quarters, it said. Exports are forecast to rise 3.8 percent in 2013 after a 3.1 percent increase last year.
The Bank of Spain said its forecasts should also be treated with “special caution” given the level of uncertainty regarding Spain’s funding costs in financial markets. It predicts average 10-year borrowing costs will fall to 5.1 percent this year from 5.8 percent in 2012. The central bank updates its economic forecasts once a year.
The yield on Spain’s 10-year benchmark bonds was at 4.93 percent at 1:37 p.m. in Madrid, one basis point higher than its March 15 level, before EU finance ministers sparked market turmoil by agreeing to tax Cypriot bank deposits in exchange for a bailout.
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