The Paris-based organization's latest Economic Outlook predicts the Spanish economy will grow by only 0.3 percent next year after contracting in the last quarter of this year. That will push unemployment - already more than double the average in the European Union at 21.5 percent - even higher to an average of 22.9 percent in 2012, with over five million people out of work. The OECD's previous estimate for GDP growth for 2012 was 1.6 percent. The agency also cut its forecast for growth this year to 0.7 percent to 0.9 percent.
"Subdued export prospects and tight lending conditions are projected to keep economic growth low in 2012," the report said. "A further increase in the yields on Spanish government bonds would raise private-sector funding costs and prolong the housing crisis."
Earlier this month, Spain was forced to pay over seven percent for the first time since 1997 to sell 10-year government bonds.
The OECD predicted growth would pick up again to 1.3 percent in 2013, but warned that the government's austerity drive to rein in its budget deficit would also continue to put on a damper on domestic demand.
Despite the weaker growth outlook, the organization said it "assumed" the government will meet its target of reducing its budget deficit from 9.3 percent last year to 6 percent this year, to 4.4 percent in 2012, before bringing it back within the EU ceiling of three percent in 2013.
The incoming conservative Popular Party government on Monday reiterated its commitment to the deficit-reduction goals agreed with the European Commission. "There should be not the least doubt that Spain will meet its commitments," PP secretary general María Dolores de Cospedal said.
In an interview with EL PAÍS the OECD's chief economist Pier Carlo Padoan noted that Spain has made an effort to reduce the shortfall in its finances and suggested the country would have more room for maneuver if it made better use of the value-added tax.
The OECD also highlighted Portugal's battle to control its fiscal deficit as part of its commitments to its EU/IMF 78-billion-euro bailout package as the main reason behind the contraction in its economy this year and the next.
The agency expects GDP to shrink by 1.6 percent this year and 3.2 percent in 2012 before recovering in 2013 when it is set to grow 0.5 percent. In its May forecasts, the OECD said GDP would fall 2.1 percent this year and 1.5 percent in 2012. Unemployment is forecast to rise from 12.5 percent this year to 13.8 percent the next and to 14.2 percent in 2013.
"The economy is expected to contract further through 2012 due to necessary fiscal consolidation, deleveraging and a market slowdown in external demand," the report said.
The OECD said the euro zone was already in recession and predicted devastating effects for the world economy if the single-currency bloc falls apart. "Decisive policies must be urgently put in place to stop the euro-area sovereign debt crisis from spreading," the report said.
The organization called for the European Financial Stability Fund to be strengthened and for the European Central Bank to take a more active role in defusing the crisis.
It estimates euro-zone GDP will contract one percent in the first quarter of this year and by 0.4 percent in the first quarter of next year when output for the full year is forecast to grow only 0.2 percent, down from 1.6 percent in 2011.