Bank of Spain disputes government's growth projections

The Bank of Spain on Wednesday said the economy would grow less this year and the next than the government has forecasted, which will cause it to miss its deficit-reduction targets.

In its monthly economic bulletin for March, the central bank estimated GDP would climb 0.8 percent this year, accelerating to 1.5 percent in 2012. That compares with the administration's forecasts of 1.3 percent in 2011 and 2.5 percent in 2012.

As a result, the Bank of Spain believes the government will be able to trim its budget deficit to only 6.2 percent of GDP, compared with a target of 6.0 percent. The bank said the shortfall for next year is expected to narrow to 5.2 percent, well above the government's goal of 4.4 percent.

"The Spanish economic growth scenario for the next two years [...] is characterized by a slow recovery in national demand and a more favorable trend in exports," the report said. The bank estimated exports would grow 8 percent this year, driven by the global recovery.

The government has introduced a battery of unpopular austerity measures to meet its targets, including public-sector wage cuts and a freeze on pensions, while sharply reducing investment in public works. It has also pushed through reforms to the pension system and labor market.

Prime Minister José Luis Rodríguez Zapatero said Wednesday the government plans to introduce legislation in the fall that would limit public spending to nominal growth in GDP to enhance budget stability. In practice this would mean surpluses being used to reduce public debt rather than boost outlays. The new rule will apply to all levels of administration, Zapatero told Congress.

The government is also planning to crack down on under-the-table employment and labor exploitation, and will also go after people who work while claiming unemployment benefits.

The Bank of Spain yesterday warned of a further deterioration in labor market conditions, with over a fifth of the active population out of work. "The unemployment rate [...] may continue to rise in 2011 and will only begin to fall slightly in 2012, in the absence of additional labor market measures," the bank said.

High unemployment is expected to continue to weigh on consumer spending, which is forecast to grow only 0.7 percent — 0.5 percentage points less than last year — due to high debt levels and a loss of purchasing power.

The National Statistics Institute said yesterday retail sales fell 4.5 percent in February after correcting for differences in the number of working days. Sales have fallen every month since June of last year.