Cuts of two billion euros on the way if growth falls short

The government may have to make an additionaltwo billion eurosin cuts if its forecasts for growth aren't met, according to Economy Ministry officials.

Analysts believe that Spain's budget deficit will grow by two-tenths- from the current 6 percent of GDP to 6.2 percent - if growth doesn't meet the Zapatero administration's projected goal, of 1.3 percent. Market indicators have shown that Spain will only experience 0.8 percent growth, which will also bring on the cuts, say officials.

"Cuts will begin in public investment - first, infrastructure, and then research and education," said Manuel Balmaseda, an analyst with the transnational cement supplier Cemex.

The Bank of Spainlast week announced thatthe Spanish economy had started theyear with "weak" growth driven by the export sector, while domestic demand remained negative.

"These figures are far from the government's growth target, and are clearly insufficient to create jobs"

In its monthly economic bulletin for April released Friday, the central bank calculated GDP posted quarter-on-quarter growth of 0.2 percent in the first quarter, the same rate as in the previous three months. Annual growth, however, accelerated slightly to 0.7 percent from 0.6 percent.

"In the opening months of 2011, the Spanish economy continued growing at a weak rate against the background of the progressive recovery in the world economy," the report said.

The National Statistics Institute (INE) is due to release a flash estimate of first-quarter output on May 13, with a breakdown of the figures on May 18.

The bank said national demand contracted by about the same amount as in the first three months, while the contribution of net trade- exports minus imports- to overall growth was 1.4 percentage points.

The report also noted a moderate pick-up in consumer spending and increased investment in equipment, which went some way toward offsetting the drop in public spending as a result of the government's austerity drive to rein in the public deficit and an ongoing contraction in residential investment.

However, household spending remains overall subdued due to weak sentiment about the domestic economy, a drop in wealth and real income because of high inflation and high unemployment. The INE last Friday reported that the number of people out of work hit a record 4.9 million in the first quarter as the jobless rate rose by almost a full percentage point to 21.3 percent.

"Domestic demand is still largely negative and the only positive contribution comes from exports," Bloomberg quoted, Giada Giani, an economist at Citigroup in London, as saying. "There's been a mix of data recently that suggests the second quarter could be weaker than the first."

The government is targeting GDP growth this year of 1.3 percent, but other experts, including the Bank of Spain, believe the actual figure could be around half of that.

"These figures [from the central bank] are far from the government's growth target, and are clearly insufficient to create jobs," Reuters quoted Emilio Ontiveros, the chairman of the Analistas Financieros Internacionales (AFI) think-tank, as saying.