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Spain economy 'to shrink by 0.5%' in 2010
19 February 2010 @ 14:42

The Spanish economy will shrink by 0.5 per cent in 2010 according to Bank of Spain forecasts to be made in public in March, a worse contraction than the current official forecast, newspaper El Mundo  said today.

The forecast revealed by the unnamed sources at the bank compares to the 0.3 per cent contraction estimated by the government, which has been staging road shows in New York and London to reassure investors it will be able to restore the economy to health and cut its bulging budget deficit.

A Bank of Spain official, who declined to be named, said that any officially revised forecast would be revealed only around March time.

"We don't know where they got that figure from," the official said.

But the data, if confirmed, would still be more optimistic than International Monetary Fund forecasts for a fall of 0.6 per cent.

While the difference of 0.2 percentage points between the reportedly imminent Bank of Spain forecast and the government estimate is not large, an increasingly pessimistic outlook would disappoint those hoping for a change to a more positive outlook for the Spanish economy.

Spain's gross domestic product contracted by 3.6 per cent in 2009. It was the last big Western European economy still in recession in the last quarter of 2009, according to data released this week, although there were signs of improvement from domestic demand and exports.

But with unemployment at over 18 per cent, investor worries have centred on whether the government can cut the fiscal deficit to 3 per cent of gross domestic product by 2013 from 11.4 per cent last year.

The spread of Spanish 10-year bonds over benchmark German Bunds spiked to about 100 basis points earlier this month during the nerves caused by Greek debt, although it has since eased to about 77.

The government's €50 billion austerity plan, designed to convince markets it can meet this target, met with scepticism from analysts who complained its assumptions about economic growth were unrealistic.

More painful cuts would need to be made if the deficit is to reach the theoretical European Union limit by 2013, they said.

The government has said that the economy can return to boom-time growth levels of around 3 per cent by 2012, but many analysts say Spain faces long-term stagnation unless it can become more competitive and reform its rigid labour market.

It also faces high household and corporate debt, the legacy of a decade of high current account deficits that fuelled a property boom that even the government now admits was usustainable.

Source: Irish Times

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